Have you heard the name Jesse Livermore before? If you’re a day trader, then you have him to thank. He was born in the 1800s and survived the stock market crash in the 1920s. He was born in Massachusetts but had a turbulent life that ended tragically—however, his knowledge of trading lives in helping traders learn.
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Who Is Jesse Livermore?
Legendary trader Jesse Livermore is arguably the best stock trader to have lived within the last century. Few stock trading books have had the influence and lasting popularity as this trading classic: Reminiscences of a Stock Operator.
This book was written almost 100 years ago and is just as relevant now as it was then. This blog will provide insight into Livermore’s life, stock trading beliefs, and how those beliefs translate to the modern-day trader.
Jesse Livermore led a life of brilliance and excess. Surrounded by the glitz and glamour of Wall Street, mistresses, scandals, money, and bankruptcy included, Livermore was a legend. He lived big and made millions during the crash of 1929.
But by 1934, Livermore would have depleted the $100 million fortune he earned on the stock market just five years earlier. He declared a third bankruptcy, went through his second divorce, and committed suicide in 1940. All of this aside, his trading lessons live on and are just as relevant today as they were years ago.
Jesse Livermore lived in the era of telegrams, ticker machines, floor traders, and manually updated quote boards. Fast forward a century, we have smartphones, instant information at your fingertips, high, high-frequency trading, and just about any data you want to see to make an educated investment decision.
Therefore, you’re not alone in thinking his book should be obsolete. But Livermore himself points out people do not change. The same forces of fear and greed are still evident today. People will try all sorts of trickery to get your money, some resorting to desperate measures. The message is that peopl’speople’s emotionstowards money remain the same as they did ages ago. And not surprisingly, those same emotions move the markets today.
5 Minute Summary
- Trend confirmation: He never trades against the trend, as the pivotal point reversal indicates.
- Careful entry: He only entered the market when a sound breakout appeared.
- Let the winner ride: He held onto his position until the symptoms of weakness appeared.
Livermore provides us with numerous lessons. First and foremost, he pointed out that stocks decline much faster than they climb. I agree with that; the fall from grace is swift. And you should, therefore, never average down losses.
He suggests halting half of your profits once you have doubled your original capital. But perhaps more importantly, give yourself time, be patient, and don’t over-trade; it will lead you to the poor house.
A History of Livermore’s Journey
Jesse Livermore was always fascinated by the markets and spent much of his time in the bucket shops of New England trying to understand them. He soon developed the skill of being able to read the tape. Helping him to remember the patterns for each stock, he would write his theories into a notebook.
Soon after, he realized he could predict the movement of a stock based on its previous price pattern. At just 14, it was not long after that he placed his first trade and became a full-time trader.
Livermore had a quantitative approach to price action, which would be familiar to most modern-day traders, like those in the Bullish Bears’ futures room. Price action is king in our Futures room.
Jesse Livermore Technical Trader
Initially, he was a purely technical trader. His system gave predictions for the short-term stock price movement. However, his trading style refined over the years as he continuously studied the markets. At 21, Livermore amassed the equivalent of $686,000 and was banned from the bucket shops. This led him to the proper brokerage accounts in New York, where he knew his price action system could beat the markets.
However, he soon realized his plan was not profitable outside the bucket shops. The transaction costs and delays of brokerages meant he couldn’t buy or sell quickly enough like before. He continued trading in New York, but before the end of the year, compounded by excessive use of leverage, his trading account slowly declined. He was eventually wiped out and declared broke.
Livermore later said the game taught me the game and didn’t spare me the rod while teaching. Despite his losses, Livermore knew his scalping strategy worked in the bucket shops due to the favorable transaction costs and quicker trade execution speeds. He later traveled to St. Louis under a false name. And began to rebuild his accounts. Afterward, once again making a considerable amount of money in the bucket shops, he decided to test his luck again in New York, where he knew real wealth was possible.
Jesse laid several wrong bets during his second about in the Big Apple, which almost wiped him out once again. He refers to those losses as tuition fees and says nothing is like losing all you have in the world to teaching you what not to do. And when you know what not to do not to lose money, you begin to learn what to do to win—wise words from a wise man.
$3 Million in Profits
From 1916 through most of 1917, the Dow Jones lost approximately 40% of its value. At the start of the year, Livermore was bullish like everyone else but gradually moved to the bearish side. He noticed previous leading stocks had stopped rising, a key indicator that the market was at a turning point. And finally, the bear market began, and he doubled down on short positions. During this time, he took $3 million in profit.
He points out that the bear market conditions can start long before prices fall. In this case, it is wiser for the trader to wait for prices to fall before entering a large short position. Buyers should not be long or short unless the market action confirms otherwise. You must be dynamic enough to switch your opinion toward the market activity.
COURSE |  |  |  |
|---|---|---|---|
| DESCRIPTION | Learn how to read penny stock charts, premarket preparation, target buy and sell zones, scan for stocks to trade, and get ready for live day trading action | Learn how to buy and sell options, assignment options, implement vertical spreads, and the most popular strategies, and prepare for live options trading | How to read futures charts, margin requirements, learn the COT report, indicators, and the most popular trading strategies, and prepare for live futures trading |
| INCLUDED | Daily watch lists • Trade rooms • Trading scanners • Discord • Live streaming Day Trading > | Daily watch lists • Trade rooms • Options scanners • Discord • Live streaming Options > | Futures target levels • Trade rooms • Real time teaching • Discord • Live streaming Futures > |
The Wisdom of Jesse Livermore
Lesson Number One: Cut your losses quickly. Before entering a trade, you need to know when you will exit. Waiting to exit a position when it’s going against you is not a winning strategy.
Lesson Number Two: Confirm your judgment before trading a larger-than-average position. In other words, start small, gradually scale into your winning position, and buy in the direction of your winning trade. Never add to a losing position; don’t average down your losses.
Lesson Number Three: Watch leading stocks for the best action. Livermore knew that the trending stocks made money. Watch them and watch for bank moves.
Lesson Number Four: Don’t prematurely exit out of your winning positions. Let profits ride until price action dictates otherwise. Remember, patience equals profits.
Lesson Number Five: Buy all-time new highs. Don’t discount the merits of buying all-time or 52-week highs. One of the best ways to make money in the stock market is to buy the break out of all-time highs from long-term consolidation of a price range.
Lesson Number Six: Use pivot points to determine trends.
Lesson Number Seven: Control your emotions. We talk about this often in the Bullish Bears trade rooms.
1. Why Patience Is Important
Livermore made his reputation as a shortseller during the Panic of 1907. Before the panic hit the roads of Wall Street, he had been selling short following his views of the market and general economy. He watched as the situation gradually got worse, and he stayed short.
At the bottom of the market, Livermore finally took his profits and made his first million-dollar gain. According to a nifty inflation calendar I found online, $1,000,000 in 1900 is equivalent in purchasing power to about $31,140,714.29 today, an increase of $30,140,714.29 over 121 years. The dollar had an average inflation rate of 2.88% per year between 1900 and today, producing a cumulative price increase of 3,014.07%.
But perhaps more importantly, he realized he had finally learned to trade intelligently and patiently. Can you say that for yourself?
2. Learn From Defeat as Well
Another key lesson learned by Jesse Livermore is that there is as much to learn from victory as from defeat. The learning process isn’t restricted to lessons about making money but also to lessons about avoiding the loss of money. He alludes to keeping losses small and allowing your winners to run, a common principle preached by modern-day traders.
No matter how robust the strategy may seem, money is often lost through no fault of the speculator from developments nobody can foresee—referring to them as inconveniently timed storms. A backup plan for unforeseen events is paramount to limit market exposure and aid your psychology.
One of Livermore’s favorite tactics was to buy at the point of least resistance. His rationale? No matter how high the prices, the market can always go higher. Equally, no matter how cheap the price may seem, it can still go lower.
3. Livermore Pivotal Point Theory (PPT)
Reversal Pivot Points: According to Livermore, reversal pivotal points are “the perfect psychological time to mark the beginning of a new move, representing a major change or reversal in a primary trend.”
But how do you confirm it’s a true market reversal? Luckily, Jesse gave us some cues:
- The rally should be an intermediate trend (not a minor trend) with a volume increase
- The following correction (intermediate trend) is not retraced below the rally’s starting point.
- A few weeks later, an even bigger rally followed.
- This time, the volume of the subsequent rally was significantly higher than in previous days.
- This subsequent rally breaks the trendline of a previous bear market.
The rally I mentioned above is what Livermore called a pivotal reversal point because it marks the return of large amounts of money back into the market.
4. Continuation Pivotal Points
This is the time to focus on trend re-entry. Likewise, a reversal pivotal point marks a trend reversal, whereas a continuation pivotal point confirms that the trend continues.
Once we see a breakout of the previous bear market trendline, typically, we see consolidation or accumulation in the market. All of this is in preparation for a lift in price.
You should enter at this breakout of the consolidation phase or pivot point.
Most importantly, as we see in a reversal pivotal point, a true breakout is only confirmed with volume.
Buying at a consolidation breakout is one of the greatest secrets in trading stocks. It can help maximize your profits and minimize your risk at the same time.
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5. The Symptoms of Weaknesses
The symptoms of weakness tell you when to exit the market.
Symptom 1: Failed Rallies—–After an overall head is formed, the subsequent rallies often end with weak momentum, fail to make a new high, and volume decreased.
Symptom 2: High-End Price Consolidation (Distribution)—–The volume during this period is very high. After distribution, the price would break down, and a downtrend formed.
Notice how the buy and sell actions are at a whole number of junctions. And at these junctions, there are periods of consolidation before a breakout. Additionally, he notes only stocks of interest showing high volume should be considered. Livermore says that this is the primary characteristic.
“The ONLY stocks of interest to the speculator are the ACTIVE stocks, to which volume is an evident, obvious, primary characteristic.” The traders reading this will know this theory has stood the test of time and is the foundation used today by some of the world’s best traders – including Mark Manervy, perhaps the most successful stock trader of the modern era.
Final Thoughts: Jesse Livermore
Over his entire legendary career, Jesse Livermore obtained two important insights into trading. Firstly, he often lost when he entered a position before a pivotal point was formed, and secondly, big money could only be made by capturing big trends.
Thus, he developed the discipline to avoid any personal opinion until a pivotal point appeared and to hold onto his positions until the market showed the symptoms of weakness.
Jesse Livermore’s legend lives on today through the work of many others. And he is undoubtedly the most influential trader of our time. We can learn a lot from him, so we follow his wisdom at Bullish Bears. Check out another legendary stock market personality from Massachusetts, “The Witch of Wall Street. “
