Lessons from Jesse Livermore pt. 11: How to Buy and Sell Stocks

The Lessons from Jesse Livermore Series explores the trading philosophy and trading rules of renowned trader, Jesse Livermore.  Here Jesse Livermore explains how to buy and sell stocks.

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.”

The Lesson
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.

Actionable Activities

  • Review your trading history.  Do you typically add to losers?   Thing about the why’s and what- for’s  that went along with that decision making path.  Were you trying to protect your ego and not be wrong?    Were you excited because now you can “get a better deal” on your favorite stock?    Examine those thought patterns closely.
  • Do you routinely ignore your stop?   or Maybe you don’t use stops at all.  A stop is simply a line in the sand at a certain price level that lets you know you are wrong.  Ignoring stops, while not as bad as adding to losers, is a great way to lose money.
  • Examine your thoughts about buying all-time highs.   Does it bring fear that you are making a mistake or make you feel stupid because you’re not getting a deal?   Work to overcome that fear.   Maybe one way to look at it is this.    Look at a chart of your favorite high flyer.  Say it is at $200.   Well,  $50 was once an all-time high, as was $125 and $175.   Many traders thought along the way that those prior levels were too expensive to buy and they were wrong.   All you can do as a trader is make an informed decision based on your process, then set a stop and honor it.

Thank you for reading; Hope it helps and see you next time.

Like the Series so far?  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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