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The Success Secrets of a Stock Market Legend

Jesse Livermore was a loner, an individualist-and the most successful stock trader who ever lived. Written shortly before his death in 1940, How to Trade Stocks offered traders their first account of that famously tight-lipped operator's trading system. Written in Livermore's inimitable, no-nonsense style, it interweaves fascinating autobiographical and historical details with step-by-step guidance on:

• Reading market and stock behaviors
• Analyzing leading sectors
• Market timing
• Money management
• Emotional control

In this new edition of that classic, trader and top Livermore expert Richard Smitten sheds new light on Jesse Livermore's philosophy and methods. Drawing on Livermore's private papers and interviews with his family, Smitten provides priceless insights into the Livermore trading formula, along with tips on how to combine it with contemporary charting techniques. Also included is the Livermore Market Key, the first and still one of the most accurate methods of tracking and recording market patterns

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How to Trade in Stocks

McGraw-Hill

Contents

Chapter One

CHALLENGE OF SPECULATION

THE game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor.

Over a long period of years I have rarely attended a dinner party including strangers, that someone did not sit down beside me and after the usual pleasantries inquire:

"How can I make some money in the market?"

In my younger days I would go to considerable pains to explain all the difficulties faced by the one who simply wishes to take quick and easy money out of the market; or through courteous evasiveness I would work my way out of the snare.

In later years my answer has been a blunt "I don't know."

It is difficult to exercise patience with such people. In the first place, the inquiry is not a compliment to the man who has made a scientific study of investment and speculation. It would be as fair for the layman to ask an attorney or a surgeon:

"How can I make some quick money in law or surgery?"

I have come to the conviction, however, that larger numbers of people interested in stock-market investment and speculation would be willing to work and study to attain sensible results, if they had a guide or signpost pointing them in the right direction. And it is for them that this book is written. It is my purpose to include some of the highlights of a lifetime of speculative experience—a record of some of the failures and successes and the lessons that each has taught. Out of it all emerges my theory of "time element" in trading, which I regard as the most important factor in successful speculation.

But before we go any further, let me warn you that the fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.

You cannot wisely read a book on "How to keep fit" and leave the physical exercises to another. Nor can you delegate to another the task of keeping your records, if you are to follow faithfully my formula for combining Timing, Money Management, and Emotional Control, as set forth in subsequent pages. I can only light the way, and I shall be happy, if through my guidance, you are able to take more money out of the stock market than you put in.

In this book, I present to that portion of the public, which at times may be speculatively inclined, some points and ideas which have been garnered during my many years as an investor and speculator. Anyone who is inclined to speculate should look at speculation as a "business" and treat it as such and not regard it as a pure gamble as so many people are apt to do.

If I am correct in the premise that speculation is a business in itself, those engaging in that business should be determined to learn and understand it to the best of their ability with informative data available. In the forty years, which I have devoted to making speculation a successful business venture, I have discovered and am still discovering new rules to apply to that business.

On many occasions I have gone to bed wondering why I had not been able to foresee a certain imminent move, and awakened in the early hours of the ensuing morning with a new idea formulated. I was impatient for the morning to arrive in order to start checking over my records of past movements to determine whether the new idea had merit. In most cases it was far from being 100% right, but what good there was in it was stored away in my subconscious mind. Perhaps, later, another idea would take form and I would immediately set to work checking it over.

In time these various ideas began to crystallize and I was able to develop a concrete method of keeping records in such a form that I could use them as a guide.

My theory and practical application have proved to my satisfaction that nothing new ever occurs in the business of speculating or investing in securities or commodities. There are times when one should speculate, and just as surely there are times when one should not speculate.

There is a very true adage: "You can beat a horse race, but you can't beat the races." So it is with market operations. There are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading every day or every week during the year. Only the foolhardy will try it. It just is not in the cards and cannot be done.

To invest or speculate successfully, one must form an opinion as to what the next move of importance will be in a given stock. Speculation is nothing more than anticipating coming movements. In order to anticipate correctly, one must have a definite basis for that anticipation, but one has to be careful because people are often not predictable—they are full of emotion—and the market is made up of people. The good speculators always wait and have patience, waiting for the market to confirm their judgment. For instance, analyze in your own mind the effect, marketwise, that a certain piece of news which has been made public may have in relation to the market. Try to anticipate the psychological effect of this particular item on the market. If you believe it likely to have a definite bullish or bearish effect marketwise, don't back your judgment "UNTIL THE ACTION OF THE MARKET ITSELF CONFIRMS YOUR OPINION." The effect marketwise may not be as pronounced as you are inclined to believe it should be. Do not anticipate and move without market confirmation—being a little late in your trade is your insurance that you are right or wrong.

To illustrate further: After the market has been in a definite trend for a given period, a bullish or bearish piece of news may not have the slightest effect on the market, or it may have a temporary effect ... the market itself at the time may be in an overbought or oversold condition, in which case the effect of that particular news would certainly be ignored. At such times the recording value of past performances under similar conditions becomes of inestimable value to the investor or speculator.

At such times you must entirely ignore personal opinion and apply strict attention to the action of the market itself. "Markets are never wrong—opinions often are."

The latter are of no value to the investor or speculator unless the market acts in accordance with his ideas.

Timing—No one man, or group of men, can make or break a market today. One may form an opinion regarding a certain stock and believe that it is going to have a pronounced move, either up or down, and eventually be correct in his opinion but will lose money by presuming or acting on his opinion too soon. Believing it to be right, he acts immediately, only to find that after he has made his commitment, the stock goes the other way. The market becomes narrow; he becomes tired and goes out. Perhaps a few days later it begins to look all right, and in he goes again, but no sooner has he re-entered it than it turns against him once more. Once more he begins to doubt his opinion and sells out. Finally the move starts up. Having been too hasty and having made two erroneous commitments, he loses courage. It is also...