Lessons from Jesse Livermore Part 12: Knowing when you’re wrong and how to get out

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“Lessons from Jesse Livermore” unpacks the many lessons provided by Jesse Livermore in “Reminiscences of a Stock Operator”

Jesse on Buying Stocks, knowing when you’re wrong, and how to get out

“It was an old trading theory of mine that when a stock crosses 100 or 200 or 300 for the first time the price does not stop at the even figure but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you a profit. Timid people don’t like to buy a stock at a new high record. But I had the history of such movements to guide me.”

“Anaconda opened at 298 and went up to 302¾, but pretty soon it began to fade away. Also, the rest of the market was not acting just right for a further rally. I made up my mind that if Anaconda went back to 301 I must consider the whole thing a fake movement. On a legitimate advance the price should have gone to 310 without stopping. If instead it reacted it meant that precedents had failed me and I was wrong; and the only thing to do when a man is wrong is to be right by ceasing to be wrong. I had bought eight thousand full shares in expectation of a thirty or forty point rise.  It would not be my first mistake; nor my last.

Sure enough, Anaconda fell back to 301. The moment it touched that figure I sneaked over to the telegraph….and I said to him, “Sell all my Anaconda, eight thousand full shares at the market” .  I said it in a low voice.

What happened shows you that I am right in never trading at limits. Suppose I had limited my selling price to 300?  I’d never have got it off. No, sir! When you want to get out, get out.

Lefèvre, Edwin. Reminiscences of a Stock Operator (A Marketplace Book) (p. 67). Wiley. Kindle Edition.

Key Points and Takeaways

Round numbers often act as magnets for stocks. As a stock moves higher toward $100 or any round number, especially if it has never been there before, the stock tends to be sucked higher.  Once at the threshold, it is common for price to consolidate for a good while just below the new high water mark.  Once price punches through the psychological barrier, it should run quickly higher.  If price limps through resistance, the breakout is to be doubted or as Jesse describes it, a “fake move”.

+ Timid people shy away from buying at new highs.  I too see this all the time. Many traders like to buy at new lows ( to get  a deal )  and try to call tops or short at the highs ( because it’s too expensive or has an outrageous valuation.   This is wrong minded thinking in my op.  Buy strength and sell weakness is what works. Stocks can always go both higher than you expect and lower than what you expect.  Once you enter a position, always set a stop and honor it.  When you are either buying or selling insist that the reason you exit a position is because of a technical event like a trendline break.  This takes your emotions out of the equation and bases your decisions on price action.

+ When its time to get out, hit the bid.  How many times have you or those in your trading circle lamented that they either could not get filled at a particular price after spending all afternoon jockeying between the bid and ask? As an options trader it is my experience that when a position is going against you, you’re simply not going to get an optimal fill. Furthermore, the longer you F around with it, the more you lose.  Do as Jesse suggests, when its time to exit, hit the bid, be done with it and stem your losses.  While we are at it, how many times have you heard traders say ” I would have had a nice win but I could not get a fill”.  When a set up presents itself and its go time, are you seriously going to mess around trying to save a penny or three trying for the best fill?.   Get in when it’s time to get in.  If a major advance is in the offing you won’t care or even remember the few cents extra it took to get in at the right time.

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