How to Trade Stocks With Livermore
Jesse Livermore was considered the greatest trader of the early 20th century. He made and lost millions on at least 3 occasions that led to his personal bankruptcy. William LeFevre has profiled Livermore in the book "Reminiscences of a Stock Operator." The book detailed his meticulous trading system that called for using "price and time element."
Other People Are Reading
Instructions
-
-
1
Be disciplined and trade on your own data and research. Collect historical data and plot on a paper log your date and price information. Look for 2 patterns. Define the long trend by using a 200-day moving average. Then, plot a 10-day moving average. Continue to trade in the direction of the 200-day trend as long as the 20-day trend is above the 200-day average.
-
2
Use volume to confirm the long-term trend. Volume is harder to measure but, in a rising trend, volume declines as a stock rises and volume declines as a stock drops. Stocks that are bottoming have little volume. When they return to the 200-day moving average, volume will rise.
-
-
3
Trade stocks with a plan. A plan includes both a strategy to buy and sell securities and a money management plan. Livermore's plan used a money management plan with great leverage. Buy an additional position in a stock trend every 10 percent of gain. Continue the leverage process so as not to exceed 5 times or above the initial 50 percent gain.
-
4
Use protective stop losses for every position taken. Livermore was careful to use protective losses or absolute sell points to minimize losses when instituting a trade. Every added position had a stop loss not to exceed 5 percent of the cost of the position. Use extreme discipline to leverage. Know that Livermore's biggest losses came from not following his own rules. Understand that with most traders it was not the number of losses but the size of the losses. It was the leverage used in successful trades turned bad that caused Livermore's bankruptcy. Be disciplined or don't be a trader.
-
5
Know that Livermore's trading system used what is now called "swing trading." Swing trading is used for trading commodities as well as stocks. Commodities trade on supply and demand. Stocks are affected by both industry trends, the general direction of the stock market and are not as trendy as commodities.
-
6
Start a swing trade by looking for securities that have stopped falling in price and are moving sideways in low volume. The object is not to pick the bottom price of the drop, but the point where the security forms a rounded cuplike pattern with increasing volume. Security begins to level off. By then, the correction is largely satisfied.
-
7
Enter a swing trade when the tail, or handle, coming off the rounding process dips slightly on low volume. The decline should not be more than 1/2 the length of the cup before rising. The purchase is made as the handle begins to trade above the cup. Look for a burst of volume at the same time. This buy point exists until the handle is more than 5 percent above the cup.
-
8
Exit a stock swing pattern less systematically. Livermore, having margined his initial holdings several times over and carrying margin debt, had trouble closing positions. Prices should be volatile but volume in the uptrend will tend to diminish. On days the stock is down, volume will be greater than the days the stock is up. These are called "distribution days" and several of these days within a short period of time should flash warning signs that large owners of stock are selling and that stocks should be exited. Understand that even Livermore did not seem to be able to follow his own rules, something he readily admitted to in his biography.
-
9
Know that most traders place too large a bet when investing in a stock. Never risk more than 2 percent of your total capital on any 1 trade. Never lose more that 8 percent of the invested amount on any one trade. If traders hit a string of losses, their capital is greatly diminished. Know that the same string of losses when margined is financially and psychologically more difficult. Thus, slight downturns in price, even if temporary, had strong effects on trading profit. Avoid leveraging if it detracts from your trading discipline.
-
1
References
Resources
- Photo Credit http://www.sxc.com/gunnar3000
