Via Minyanville, we get this good version of Jesse Livermore’s trading rules, considered to be one of the best traders of all time:

Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade –  never when it goes against you.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.

Lesson Number Four: Let profits ride until price action dictates otherwise.

“It never was my thinking that made the big money for me. It always was my sitting.”

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position.

Lesson Number Five: Buy all-time new highs.

The psychological merits of buying all-time or 52-week highs are immense and shouldn’t be discounted as a part of your overall strategy.

Lesson Number Six: Use pivot points to determine trends.

When going long, traders are continually looking for confirmation by assessing the strength of a move. Higher highs and higher lows are a solid indicator that a current uptrend is merely taking a slight pause, and the odds of higher prices are in their favor. These same pivot points are integral to drawing support and resistance lines to give traders their line in the sand. Taken together, trend lines and pivot points can enlighten a trader to a change in momentum, which may change the character of a trade.

Lesson Number Seven: Control your emotions.

Our goal as traders should be to also make a critical yet honest assessment of the areas we can improve so the bottom line will support our claims of truly being seasoned traders. Adhering to the time-tested rules of Jesse Livermore would be a great start for anyone.

The full article is here.


Seven Trading Lessons from a Legend
Quint Tatro
Minyanville, OCT 29, 2009 2:15 PM

Category: Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Livermores Seven Trading Lessons”

  1. jc says:

    OT – It’s the jobs, stupid! I see the C bailout is reaping dividends!
    DETROIT — Chrysler Group LLC confirmed Saturday about 23,000 hourly workers will receive buyout offers as the auto maker continues trimming jobs amid planned plant closures and falling product demand.

    Employees have until Nov. 13 to accept the offer, Chrysler said in a statement. Special programs are also being offered at factories that are being closed as part of the bankruptcy process. The dates for those programs vary.

    Separation dates are at the discretion of the company.

    The buyouts come as Chrysler prepares to reveal its five-year product plan to the public during a press conference at its Auburn Hills, Mich.-based headquarters Wednesday. Chief Executive Officer Sergio Marchionne is expected to address how Chrysler will survive while it attempts to deliver new products to the market.

  2. jc says:

    More can kicking. What inning is this game?
    Federal bank regulators issued guidelines allowing banks to keep loans on their books as “performing” even if the value of the underlying properties have fallen below the loan amount.

    The volume of troubled commercial real-estate loans is skyrocketing. Regulators said that the rules were designed to encourage banks to restructure problem commercial mortgages with borrowers rather than foreclose on them. But the move has prompted criticism that regulators are simply prolonging the financial crisis by not forcing borrowers and lenders to confront, rather than delay, inevitable problems.

  3. BR,

    these types of Posts are really worthwhile. they show, w/minimal reflection required, how much BS is shoveled, to ‘the typical “investor”‘, by the WireHouses/MSM..

    as ex. MutFund ‘di-’-vestors should wonder why they’re paying such large Fees for the Huge Turnover that the ‘avg. fund’ exhibits..
    i.e. 0.13% avg ann. ret. (5 yr.)
    past that, to extend on Lesson Two, I’m still not sure why more peep don’t fade Puts to initiate ‘Long’ positions..

    if your entry point is Correct, one has the Premium to discount additional Longs, if it isn’t, you have the Premium, as margin for error, to cover the position–shorting the underlying..

    it’s odd that most people think ABS has something to do with ‘anti-lock’ brakes, rather than ‘Always Be Selling’’s easier to Harvest what’s, already, there..yes, read: Option Selling.

  4. jc says:

    US pumping more into GMAC while CIT goes under with $2.3B taxpayer loss.
    There’s still no rhyme or reason to these bailouts.
    I think the CIT failure could have a langer than expected impact on small businesses and employment, ya know…

  5. jc,

    re: “More can kicking. What inning is this game?”

    this version of the Sport is going to make Cricket look like a Jai-alai Match..

  6. jc,

    re: “There’s still no rhyme or reason to these bailouts.”

    if you want to rip another hole into what’s left of U.S. independent businesses (CIT BK), and cover-up ~50+ years of grave sins, of all stripe (GM/ChryCo Bailouts)..

    you may find the lyrics for this Season of Treason..

  7. Tom_Davis says:

    Good advice, if you can stick to it. Jesse was not so strong on #7, control your emotions. In 1940 he committed suicide in the Sherry Netherland Hotel in NYC.

  8. hue says:

    Livermore sure is a legend, Reminiscences of a Stock Operator is a great read.

    He shorted the market in1929, not much is known in the 30s. By 1938 or so, he was broke and he put a gun to his head. Livermore went boom and bust many times, made millions and lost millions when millions were huge.

    Lesson #8 survive the cycles

  9. ben22 says:


    no doubt, great book.

    I think thought, the lesson, knowing Livermore’s history, is to in fact follow your own rule-book.

    In this case #’s 1 and 7 apply.

  10. ben22 says:

    I think though……doh

  11. b22,

    couldn’t you, just, feel the impending “Livermore died broke”-post?

    way to deliver!

  12. Upandaway says:

    Not to mention, totally and utterly false.

    From Wikipedia:

    “Although untouchable trusts and cash assets at his death totalled over $5 million, Livermore had failed to regain his trading confidence before his death. A lifelong history of clinical depression had become the dominant factor in his final years.”

    But I guess that’s a too humdrum an explanation for some people…

  13. call me ahab says:

    it could be all edited down to one rule-

    “control your emotions”

    hue- see that GW thread from the other night continued to draw a crowd of posters- re Beringia- it’s still there- underneath a shallow sea-

    continental drift takes millions of years- at least from what i remember from my Geology class in college-

    it’s all good though- we want the same things- albeit for different reasons

  14. catman says:

    I will take number four with everything on it…

  15. hue says:

    should have said earlier, not much is known about Livermore’s activities in the 30s.

    most things in life are easier said than done. you can’t be a great trader or investor without going bust, at least a few times. lessons aren’t learned without failure. in my case, i keep repeating them.

    trading confidence and all, Livermore, had no formal education (didn’t go to high school) and lived a great life — trading, boat loads of money, women etc. …

    ahab, all good. we can agree to disagree captain ;-)

  16. hue says:

    “Although untouchable trusts and cash assets at his death totalled over $5 million”

    oh, that’s what you mean about totally and utterly false.

    what i know about Livermore is from Reminiscences and from a biography by Richard Smitten.

    Wiki quotes Smitten:

    Through unknown mechanisms, he yet again lost much of his trading capital, accumulated through 1929. Thus, on March 7, 1934, the bankrupt Livermore was automatically suspended as a member of the Chicago Board of Trade. It was never disclosed to anyone what happened to the great fortune he had made in the crash of 1929, but he had lost it all.

    so if Wiki says he had $5M when he died in that hotel, then it must be true. everything in Wiki is true.

  17. hue says:

    so somehow during the Great Depression, Livermore was able to find capital, and trade and build his trading assets back up to $5M, then commits suicide. he might be the first and only self made millionaire to kill himself with millions in the bank.

  18. WaveCatcher says:

    Maybe Livermore hadn’t found the holy grail, but he passed on some awesome trading rules.

  19. DL says:

    Trading rules that are effective when the VIX is at 20 aren’t necessarily the same as those that are effective when the VIX is at 60.

  20. hue says:

    i’m not dissing Livermore by any means. he’s a great trader, it’s just troubling for a market genius to end up that way. it’s hard to walk away, even when you’ve made it. the market will humble everyone. look at Galleon. there will be another bubble, no matter how many new laws are passed or old laws enforced.

  21. bergsten says:

    Ahab (again) beat me to it. Lesson seven should have been lesson one.

  22. Space_Cowboy_NW says:

    “The more you know, the less you understand” – Tao Le Ching -

    Who also said…..

    “In dwelling, live close to the ground.
    In thinking, keep to the simple.
    In conflict, be fair and generous.
    In governing, don’t try to control.
    In work, do what you enjoy.
    In family life, be completely present.”

  23. I believe I read somewhere that he set up the trusts at either the urging or for the benefit of his last wife because he didn’t trust himself with the money.

    I have a difficult time going with the ‘great trader’ analogy because of where he ended up. I still think there was a fatal flaw in his trading that led him to where he ended up because he kept on ending up there. It wasn’t once it was a few times that he wiped himself out

    He had tremendous trading talent but he might have been too much of a gambler and maybe didn’t handle the money management side of the discipline well. If he had created cash flow outside the market he would probably have done better

    It is better to be well disciplined in money management in the market and not talented than vice versa IMO. At least you will be able to stay in the game compounding your growth

  24. recommender11 says:

    Livermore was manic-depressive, that’s why he killed himself, not because he lost money. He had made and lost 3 or 4 fortunes in his life, and it had never bothered him before.

  25. SteveC says:

    It’s time for people to stop idolizing this guy. Sure he knew a few things about trading, however most people could not trade over the long haul only by following these lessons. Most of what he did was by instinct, and yes, there are a few traders who are instinctively good. The cold reality is he was a compulsive gambler with few friends that eventually committed suicide. Not a role model for me.

  26. ZackAttack says:

    Bipolar + good cash management would be a rare combination in the world.

    My experience, even medicated bipolars have impulse control issues. Unmedicated ones are unmanageable.

  27. jus7tme says:

    I’m not so sure these rules apply for the small-time speculator.

    Was Livermore not a big-time speculator that actually moved the market himself with his trades?
    If you have enough funds to do that, then the rules may apply to some extent. Also, you need a compliant general public that is prone to momentum speculation to follow you along. Do you have that righrt now?

  28. hue says:

    i never claimed to know why Jesse offed himself. Smitten in his research could not find much details about his trading activities in the 30s. but it can’t be good on your psyche when you lost your millions for the nth time, especially after nailing the 29th crash, whether you’re bipolar or manic depressive or not.

    i don’t think Livermore was like a Soros. but he could spot trends and understood market dynamics. like if he had a huge position in Piggly Wiggly at 50 and needed to unload. he would use a little money to buy driving the stock up the 60, then started selling. suckers jump in to buy thinking they got a bargain, buying it all the way down. if he just dumped his position at 50, he would not have been able to sell it at 50. hedgies do that today. nothing is new.

    he was so good at trading when he was young that many of the bucket shops back then wouldn’t let him trade, once they recognized him.

    Lesson 3, about market leaders, he said you only trade the leaders, like Cisco and Intel during the Nasdaq’s run. he would probably say that this market is not a bull, since the new leaders cannot be the old leaders. the best lesson is knowing when not to trade, to sit and watch, the hardest lesson of all.

  29. The problem is trading is a little more sophisticated than rules of thumb.

    For example, on rule #1 I agree with the premise of the rule. But different markets require setting stops differently. For example, in a trending market, tight stops work and cutting quickly is a good formula. In sideways markets, stops need to be more flexible or you get hacked to death.

    I love buying 52 week highs. But, the caveat is that this works when the market is in bull mode (above 50 and 200 day averages might be an objective standard). When things start getting soft, a lot of these 52 week highs fail at a very high rate (like now).

    So yes, generally good rules. But some flexibility is required.


  30. hue,

    this: “the best lesson is knowing when not to trade, to sit and watch, the hardest lesson of all.”
    might be the wisest thing I’ve /heard/ from you..

    w/that, remember “Trends remain, until they don’t.”

    or, differently, “Fractal saturation can be a Big B..”
    as intro.

  31. hue says:

    MEM, thanks. objects in motion, stay in motion. but i have to admit fractal geo, econ is above my pay grade. i’m struggling with just being an arm chair central banker and old fashion economist (if there is such an animal.) too many metrics to grasp these days to trade.

  32. youcontroltheink says:

    Ahab: 11:15am Spot on.

    it could be all edited down to one rule-
    “control your emotions”

    How could that be said any better?

    Bows to Ahab and his cursed wale.

  33. hue, if you start with the Art side of it, it may become clearer, see

    btw, w/this: “arm chair central banker”, does that include being able to hypothecate Currency from thin-air?
    ( ;

  34. hue says:

    nah, i like to hypothecate some currency into my bank accounts.

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