Lessons from Legendary Stock Traders: Jesse Livermoore

Jesse L. Livermore was one of the first legendary stock traders. Born in Massachusetts in 1877, Jesse Livermoore has begun his trading career by posting the updated price in a brokerage house, and after a few years started to notice some patterns that repeat themselves in price. He started to trade on his own money in bucket shops (establishments that allow you to bet on a stock going up or down, without actually buying the stock) and was quickly banned from many bucket shops as he was cleaning them out of cash.
It is estimated that in his trading career he won and lost about $1.2 billion dollars in current value, the highest amount ever won by a stock trader who trade only his own money. He shorted the market at 1929, making a huge fortune in a few months. The book ‘Reminiscences of a Stock Operator’ by Edwin Lefevre describes the memories of Jesse Livermoore and his rise to fame and fortune. He also mentions several lessons that every trader should bear in mind:

Tip #1 – “The game does not change and neither does human nature.”
The basic rule is this: the players may change, but human psychology doesn’t change.
The basic mass psychology that leads to support, resistance, chart patterns remains the same and anyone who harnesses the power of chart patterns will have an edge in the markets for years to come. These patterns existed since Jesse Livermoore’s days and still appear to this day, and generate profits for its traders.

Tip #2 – “When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don’t buy long stock on a scale down, I buy on a scale up.”
This is a very important tip, especially for beginners in trading. When you add up to your position, you only to do it if you are in profit!
Never add up to a losing position, hoping it will reverse and you will gain back your losses. This almost always ends up as a huge loss that you may never recover from. If price is in your direction and your position is in profit, you may add up to your position to maximize your profits and squeeze the trend to its fullest. Let me say that one last time: Never add up to a losing position.

Tip #3 - “When it comes to selling stocks, it is plain that nobody can sell unless somebody wants those stocks. If you operate on a large scale you will have to bear that in mind all the time. A man studies conditions, plans his operations carefully and proceeds to act. He swings a pretty fair line and he accumulates a big profit – on paper. Well, that man can’t sell at will.”
This tip is more stock-oriented. When you buy huge quantities of a stock you may be in profit on paper, but when you try to liquidate the position you must find people who will buy it from you. Stock market is a zero-sum game, when you buy someone sells and vice versa. Therefore you should liquidate your position slowly, so it can be absorbed in the market and not causing price to fall.

Tip #4 - “Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.”
Many traders trade from the logic of ‘price is too high and must go down’.
This is NOT a trading methodology and it is pure gambling. Price is never too high or never too low – history shows us that any boundary of price eventually gets broken, and a trader can expect anything to occur at the markets. Therefore you should not short at an uptrend or go long at a downtrend, from a logic that price ‘is too high’ or ‘has been down too much’. Only trade when you have a strong signal that tells you trade is about to reverse.

Tip #5 - Never Listen to Tips
Most tips are not worth listening to and you will not make any profit from 'rumors'.
The only one making profit from rumors is the one that bought the stock before spreading the rumor. For the safety of your capital it is best to ignore rumors and only trade with sound trading logic and a system you can trust.