Reminiscences of a Stock Operator Ch. 7 page 71 paragraph 3
"People don’t seem to grasp easily the fundamentals of stock trading. I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. 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."
"after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch. "
"Suppose he buys his first hundred, and that promptly shows him a loss. Why should he go to work and get more stock? He ought to see at once that he is in wrong; at least temporarily."
"Remember that stocks are never too high for you to begin buying or too low to begin selling."
Said another way, Livermore is telling us not to add to losers. When building a long position you want to be adding at higher and higher prices. Same holds true if playing on the short side. Add to positions at lower and lower prices.
When placing your first trade on a stock, you are expecting a move in a profitable direction. If the stock does not confirm the preferred direction right away, you have no basis to add to the position. Wait for the stock to confirm your thesis before making any further transactions. If the stock moves against you and takes out your stop, exit the position and re-assess.
Although adding to losers has never really been one of my major pitfalls, I have done it in the past. On those occasions I have lost money. Adding to losers is a manifestation of an unwillingness of the trader to admit they are wrong.
With many stocks at all-time highs it is also fruitful to be reminded that stocks are never too high to begin buying; they can go higher. A stock at an all-time high has no inherent overhead resistance; no trapped longs at higher prices eager to sell. The same can be said of the overall market.
Thank you for reading; Hope it helps and see you next time.