Reminiscences of a Stock Operator
Chapter 2; page 14; paragraph 3 continuing on page 15
" I proved it. Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose. I was no exception, was I ?" ...
"Of course I let the craving for excitement get the better of my judgment. ... The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."
"A stock operator has to fight a lot of expensive enemies within himself."
Let's start with the last quote first. For my money, no truer words have ever been spoken about the market.
Listen folks, I will tell you this as plainly and as clearly as possible. The entire game of becoming a successful stock operator revolves around your willingness and capacity to identify and control the enemies within yourself, whatever they may be.
The reason most folks, including myself, run into trouble is because the expensive enemies are running free. They undercut everything we are trying to acheive. It's also true that these enemies are difficult to tame and harder still to kill.
For example: There was a time in my trading life where I though I really had a gambling problem. As Jesse put it "craving excitement". I was over-trading and losing but not stopping. It's funny too. In my life outside of trading, true gambling holds little appeal. A weekend in Vegas might include dropping $200 into some slot machines, but nothing more. It holds no fascination for me.
But yet, there it was. I had to take a serious look at it. It was hard and agonizing. Regardless of what I called it, the over -trading was ruining me. It took me a long time ( months and months ) but i finally instituted rules that did not allow me to put on a trade the same day i got a bright idea. I imposed a 24 hour trading moratorium between trade idea and trade execution. If I had a bright idea today and it still seemed like a bright idea in 24 hours, I'd give myself premission to make the trade. In the scheme of things, 24 hours doesnt make a hill of beans difference to a swing trader or his results. It turned out that after 24 hours a lot of those bright ideas didnt seem too smart just a day later. Another thing I did was limit my open positions to a certain number. If i was maxed out on open positions and i had a new idea, my rule set forced me to close something else. Another self imposed rule to slow me down.
The process was hard and tedious and i didnt adhere to my rules 100% of the time at first. But over time, I licked the problem and have become a better trader for it.
The afflictions that derail traders today are the same ones that derailed Livermore a hundred years ago. Those enemies are alive and well; they dwell within us all. We aren't different.
Lastly....dont underestimate the power of these enemies. Killing them is the hardest work you will ever do. THat's why 90% of traders dont even bother trying.
Happy Hunting and Good Trading.
If you have any questions or get stuck, I'm here to help. Reach out any time.
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Reminiscences of a Stock Operator
Chapter 2; page 14; paragraph 2
"I told you I had ten thousand dollars when I was twenty, and my margin on that Sugar deal was over ten thousand. But I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game—that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily—or sufficient knowledge to make his play an intelligent play."
Have the patience to stick to your game plan! Livermore points out that when he was patient waiting for his particular set up and stuck to his game plan that he had a solid winning record. Precedents favored his intelligent play.
Having patience to wait for your preferred set up and sticking to one's game plan seems so obvious that it is almost a throwaway line in any conversation about becoming consistently successful in trading. In my experience, often the simplest of statements are the most difficult to execute. As traders we want to trade. As a result we often manufacture set ups that are not there. If we do find a prime set up and take a trade, more times than not, we undercut ourselves by not sticking to our trading plan ( if we even bother to have a plan or to write it down ). Maybe you have found that to be true as well.
It takes real work to crystallize one's "go-to" set-ups and then wait patiently for them to present themselves. Once presented it takes discipline to stick to the plan, even when the trade does not pan out and the plan calls for taking a small loss.
Happy Hunting and good Trading
Reminiscences of a Stock Operator
Chapter 1; page 7; paragraph 2
"I didn’t have a following. ( within the brokerage houses ) I kept my business to myself. It was a one-man business, anyhow. It was my head, wasn’t it? Prices either were going the way I doped them out, without any help from friends or partners, or they were going the other way, and nobody could stop them out of kindness to me. I couldn’t see where I needed to tell my business to anybody else. I’ve got friends, of course, but my business has always been the same—a one-man affair. That is why I have always played a lone hand."
Humans are social animals. They enjoy interacting with other people. That is the reason why Facebook can go from an idea in 2003 to 1.2B users in 2016. The recent political season brought tribalism into the spotlight. Are you a Republican or a Democrat? Mainstream centrists need not enter the conversation.
What does this have to do with trading? Quite a bit actually. Look at the popularity of StockTwits, Seeking Alpha, and other popular investing websites that have a heavy dose of social integrated into them. Trading chat rooms and Twitter add a whole new dimension. Lots of traders spend a lot of time on these sites and in the chat rooms. Are you a Bull or a Bear? blah blah blah. I wont condemn these sites universally because there are kernels of good information to be found, but there are many traps. It is so easy to be sucked into endless debates the neither proove anything nor gain anything either. Its also very easy to be sucked into group think. I discussed in an earlier post how I got sucked into the bear camp earlier this year. It caused me not to trust my bullish charts; It was an expensive lesson.
I could go on and on about the evils of spending a lot of time in these places, but I will jump directly to Livermore's conclusion. Trading is a one-man business. Your trades wont be helped by the opinion of others, but your mindset may well become polluted by them. And, does anyone really care if you are long $FB or $GPRO?
Use the web to seek true knowledge; it can be a useful tool for you. Just remember that trading isnt a social club. Can you imagine a Market Wizard logging into StockTwits to post their latest trade? Can you imagine them wasting even 5 minutes debating their trade with a 43 year old, nameless person that is likely trading a paper account from their Mom's basement? Its silly when you think of it that way.
Reminiscences of a Stock Operator
Chapter 1; page 4; bottom paragraph
The Message of the Tape: The fluctuations were from the first associated in my mind with upward or downward movements. Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it today, at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now—not tomorrow. The reason can wait. But you must act instantly or be left. Time and again I see this happen. You’ll remember that Hollow Tube went down three points the other day while the rest of the market rallied sharply. That was the fact. On the following Monday you saw that the directors passed the dividend. That was the reason. They knew what they were going to do, and even if they didn’t sell the stock themselves they at least didn’t buy it. There was no inside buying; no reason why it should not break.
The human brain is inherently curious. From a young age the child asks "Mommy, why is the sky blue?' As we enter school, we are encouraged to ask why. To discover, explore, and explain. The pupils who can answer the whys most often and the most correctly win; and that's the problem. We as traders carry this mindset into the market and we lose. We lose opportunities as we ponder the meaning and reasons for a stock cratering or rocketing higher. We lose capital as trades go against us while we do nothing but grasp at possible reasons and conclude"nothing has changed". "There is no good reason for the pull back; I will hold my long position and wait for the inevitable come back". You lose as you wait.
As Livermore points out "what the dickens does it matter?" Do you want to make money or impress your friends with your pontifications and postulations about what the market is doing? Maybe you absolutely need a reason before you pull the trigger. Either way, that mental exercise will hold you back. As Livermore says "the reason can wait".
Training oneself not to ask why is a big challenge. It goes against everything we've been taught and a lifetime of experiences. We ask why about everything. Have you ever asked a lover "why do you love me?" Does it matter if they love your body, or your mind, or your humor, or your friendship? Really, does it matter why? In my experience, its best to simply accept and cherish the fact that someone loves you; it is no small thing. The same is true for stocks. Cherish the fact a stock you are watching is breaking out. Check your charts; check them twice. If you see the move; take the trade and set your hard stop. In 2 weeks or 2 months you'll know the reason why, and in the mean time, you'll be putting coin in your pocket.
When the CME / CBOE actually had humans in the trading pits of Chicago, those traders predominately came not from Harvard Business School, but from the streets in and around Chicago. Guys with a High School degree or less. Trading was their ticket out of tough factory work. They went into battle each day knowing how their commodity behaved. They traded on price action on the tape. They didnt have a computer model predicting that it would rain next week on the corn fields of Iowa. Anybody that hesitated to "ask why" was run over by a freight train. In short, very few of these guys were book smart. I think that was a real advantage. What they were good at is reading the message of the tape.
Watch the movie Floored: Into the Pit on YouTube and see for yourself
"Reminiscences of a Stock Operator" by Edwin Lefevre recounts the fabled trading life of Jesse Livermore who is widely regarded as belonging to the pantheon of great Wall Street traders. The book has had and continues to have a profound impact on my trading.
In this series, I will go through the book, page by page, and unpack the lessons Livermore offers. Where applicable, I will offer examples from my own trading experiences. I hope the effort reveals aspects of trading that help you move the ball in your own trading.
Let's start with this:
"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, nor for the get-rich-quick adventurer. They will die poor." Jesse Livermore. "How to Trade in Stocks" paragraph 1 page 1
Upon a first reading of the above, I would venture to say that 98% of all readers would say "That's not me". They'd say I'm not stupid nor am I lazy. I possess good emotional balance and I am not looking for a get rich quick scheme. In short, "I'm good to go". Onto the next paragraph.
Juxtapose those thoughts with the fact that 90% of would- be traders fail. People's image of themselves and actions they take are often very different from one another. I include myself in that population. When I began my trading journey I wanted to parlay my nest egg into a fortune and the faster the better. I found that I was book smart but market stupid. I also wrestled with emotional demons as trades played out both for and against my position. I never imagined trading would be as hard as it has turned out to be. I believe many of you have had similar experiences. Additionally, deep down we crave and often seek a short cut. My in-box is filled on a daily basis with promises of the secret sauce. I know those ideas sell very well. They offer we traders a short cut. How many times do you secretly wish for a short cut? Take a hard look at it.
The answers to the above couldn't be more important. As Livermore points out, misguided traders die poor. Statistics tell us that the pile of dead trader bodies is quite large. What makes you think you will be one of the 10% that make it out alive?
Till next time, Happy Hunting and Good Trading