Lessons from Livermore: Follow the Leaders

In this edition of “Lessons from Livermore” Jesse details why traders should “Follow the Leaders”

Lessons from Livermore     “Follow the Leaders”

Excerpt is from “How to Trade in Stocks”   by Jesse Livermore                               1966 edition of the 1940 Classic

Excerpt originally posted by John Boik via Twitter

Unpacking the Wisdom

In my opinion Jesse Livermore has the uncanny ability to pack a massive amount of wisdom and actionable information into very few works. When I look at my original copy of “Reminiscences of a Stock Operator” I’d have been better off highlighting the unimportant passages than the important ones. I’d have saved several highlighters!  Let’s add some color to the ideas

After a string of successes, remain vigilant

How many times have you had a string of nice wins, then given it all back?  Yeah me too; we’ve all been there. After a string of wins we are brimming with confidence and think “I’ve finally figured it out“.  Then you lever up, lose your trading discipline and then before you know the gains are gone. In my experience, when I start feeling really good about either a massive win, or string of massive wins is that I get afraid, very afraid.  Double down on your process and discipline and leave nothing to chance. The market can and will take it all away if you are not careful.

Stop asking “Why?”

Asking too many questions in regards to stock movement will either get you into trouble or at the very least, keep you out of productive trades. The period we are living in now is a good example. No sane person would think the stock market “deserves” to be trading at current levels with the economy operating near Great Depression levels and with 20M ++ people out of work. Yet here we are.  Thinking too much is one reason why highly educated, book -smart people often make horrible traders. They try to link logic to stock moves and from my experience stock moves often have little to do with logic.  Follow another one of Jesse’s quotes “what the dickens does it matter”  That about sums it up.  Who cares if the reason is earnings, insider buying, Fed liquidity or that there will be a full moon next week. All you should care about is the movement of the stock; not the whys and what fores

I wrote a whole blog post on this topic. You can find it HERE

Follow the path of least resistance

The movement in individual stocks is largely dictated by the direction of the broad market indexes. In a rising market most stocks will be rising. In bear markets, most will be falling. It sounds simplistic but it works. Sure you can short a bad stock in a bull market and find some success, but these situations are fewer and farther in between. Sticking with the trend will be an easier trade. And by the way, this holds true for any time frame. If you are a day trader trading the 5 min chart and the 30 min chart is in an uptrend, any short you take on the 5 min chart is a counter trend trade. You’d be way better off taking only longs and looking for dips to buy than trying to short those pull backs.  Stick with the trend.

Don’t fight the trend  

It is an amazing fact that quite a large number of traders repeatedly try to short stocks in strong up trends or worse at / near all -time highs or buy stocks at 52 week lows.  It is a very expensive habit ( ask me how I know ). I think there is some dynamic or allure of being the trader who calls the top tick or bottom tick in a stock. I think it has to do with proving that you were right kind of thing. Resist that temptation. Trends can and do go farther than you may expect. There is a good axiom in the trading world that will serve you well.  Buy Strength; Sell weakness.   There is also this quote from Livermore that holds truth.

The first eighth and the last eighth are the most expensive eighths in the world for any trader”

The big money is made staying long or short in the meat of the trend, not in calling tops or bottoms

Focus trumps breadth

I know a guy who only trades 40 stocks. Because of this he knows them like the back of his hand. They are spaced across sectors and have a specific criteria he has created for inclusion. From time to time he will drop a couple if they get soggy and replace them with more active stocks. Because of the focus, he rarely will “miss the move”.   Another way you can gain focus is to be an expert on one type of price pattern or technical set up. If you get good at trading one particular set up, you can make a fine living. These focused approaches end up being a lot better than scouring Twitter or Facebook to find the hottest stock and chasing your tail all over the place. Give it some thought.

Pulling it all together 

Livermore provides a mountain of practical knowledge in his books. I highly suggest you dig into them. It is remarkable to me that his observations of the market of 100 years ago still hold. THese books could have been written yesterday. Human emotions don’t change. As far as his advice in today’s column, I can assure you that if you truly take them to heart and apply the principles to your trading, your performance will improve. Let me know how it goes. I am interested in your success !

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