Lessons from Jesse Livermore Part 2: Stop asking why

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The Lessons from Jesse Livermore Series explores the trading philosophy and trading rules of renowned trader, Jesse Livermore.  Although developed a century ago, Livermore’s ideas have great relevance for today’s traders.

The Message of the Tape

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.

Reminiscences of a Stock Operator
Chapter 1;  page 4; bottom paragraph

The Lesson

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.

Action Activities

  • Reflect on your many past trades where asking why either caused you to miss the move or cause doubt when you were in a trade.  Count the thousands of dollars in either missed chances or botched trades.   I am not preaching here.  Thinking about the money I lost by seeking why makes me sick. 
  • Wholly accept that “asking why” is a losing mindset
  • Gong forward, in real time, try to catch your thought patterns when ask why.  When you catch yourself, make a note in your journal.  When you slip and get all wrapped up asking questions, make a notation.  The more often you catch yourself the more opportunity you’ll have to push down that impulse.

Fun Fact:

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 didn’t 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

Like the Series? 

Here are links to additional installments

Part 2:  Stop asking why   HERE              Part 3: Play a Lone Hand  HERE

Part 4:  A Time for all Things  HERE     Part 5: Expensive Enemies  HERE

Part 6: Commissions Matter  HERE     Part 7: Blown up Accounts  HERE

Part 8: Imaginary Millions HERE            Part 9: Give it Time    HERE 

Part 10: Sit Tight    HERE            Part 11: How to Buy and Sell Stocks   HERE


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