Lessons From Legendary Millionaire Trader

Trading tips that have stood the test of time

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Stock ticker machine, like the ones used by Jesse Livermore. Getty Images

Jesse Livermore is an icon in trading. Trading his own account he made more than $100 million dollars during the 1929 stock market crash. That equates to more than a billion dollars today, and he wasn't a hedge fund or trading other people's money. 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 (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. Here's five tips day traders can use; advice that's almost a 100 years old but is as relevant as the day it was conceived. 

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

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

Bull and bear markets are when stock prices are rising or falling overall, respectively. "Stocks," as a whole, 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 (See How to Screen For Strongest Stocks in Strongest Sectors video). When the index is in a downtrend, focus on taking short trades in stocks that are the weakest.

 

These trades aren't made arbitrarily, they should be based on a strategy. The above just helps us 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 we need to do is follow it. If the market isn't providing trade setups based on our trading plan, then we 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 stop loss level is hit. Successful day traders don't waffle about when they should exit. They know when, where and how they're going to get out before the trade is placed. 

Lesson 4. Don't average down. 

Averaging down is when you add 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 capital very quickly, especially if done multiple times and 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 follow 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 (see What to Focus On As a New Trader video). 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.