Lessons from a Legendary Millionaire Trader

Trading tips that have endured the test of time

Stock ticker machine, like the ones used by Jesse Livermore.
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Jesse Livermore is an icon in the world of stock trading. While trading his own account, he made more than $100 million dollars during the 1929 stock market crash. That equates to a billion dollars or more in today's currency, depending on which index you use, and he wasn't a hedge fund, nor was he trading other people's money.

A Quick Biography

Jesse Livermore was born in 1877, and even though technology has changed a lot since his time, his book How to Trade in Stocks, and the book which chronicles his early trading career (his name is changed in the book) Reminiscences of a Stock of Operator by Edwin Lefevre, still offer a ton of valuable insight to traders. 

Jesse Livermore ultimately became a swing trader and longer-term trader, but he started out as a day trader, and this is where he made his first fortunes. The following five tips were offered by Jesse and day traders can surely use them. This trading advice may be almost 100 years old, but it's as relevant as the day it was conceived. One of his well-known quotes follows:

"Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills."
Jesse Livermore

The 5 Trading Lessons

Lesson 1. Only buy strong stocks in a bull market and only short weak stocks in a bear market.

Bull and bear markets happen when stock prices are rising or falling overall, respectively. Stocks, as a whole or market, are represented by a major index, such as the S&P 500 in the U.S. Therefore, when this index is in an uptrend, focus on taking long trades in the stocks which are strongest. When the index is in a downtrend, focus on taking short trades in stocks that are the weakest. 

You shouldn't be making these trades arbitrarily, they need to be based on a sound trading strategy. The above just helps you figure out which stocks to trade. 

Lesson 2. If you don't have a trade setup, don't trade.

Developing a strategy and a trading plan takes time and work, but once in place all you need to do is follow it. If the market isn't providing trade setups based on your trading plan, then you shouldn't trade. 

"It was never my thinking that made the big money for me, it always was sitting."

Lesson 3. Trade with stop loss orders, and know what that level is before you take a trade.

Any trade could be a loser, no matter how good it looks at the outset. Always use a stop loss order, and make sure that it gets you out of the trade if the stock drops to your stop loss price level. Successful day traders don't waffle about when they should exit. They know when, where and how they're going to get out before they even place the trade. 

Lesson 4. Don't average down. 

Averaging down is when you add money to a losing a position. If you already have a full position (the maximum size position your trading plan allows) then adding to that position when it's losing money is a significant lapse in discipline. Averaging down can deplete your capital very quickly, especially if done multiple times, as the price keeps going against you.

"I have warned against averaging losses. That is a most common practice.
Great numbers of people will buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred shares, making a price of 48.5 on all.
Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares and having the worry double when the price hits 44?"

Lesson 5. Don't follow too many stocks. 

Don't dilute your focus and efforts by following too many stocks. Instead, focus on trading the strongest stocks in a bull market and the weakest stocks in a bear market. This limits the number of stocks you trade to a handful. Any more than that and it becomes hard to track them all and trade them adequately. The more stocks being watched the more likely it is you'll miss the important moves you're waiting for.

Trading Successfully

Jesse Livermore was an extremely successful trader, but he also experienced the downside by losing and regaining his large fortune several times. He blamed his losses on just two things he had overlooked:

  • He had not fully formulated his trading rules
  • He did not follow his rules

These two problems still likely cause traders to incur losses today, as they always have. Livermore was a big proponent of developing a trading system and making sure to stick to it when actually trading.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.