Do What Jesse Livermore Didn’t Do
Four months ago, I talked about a classic trading book, Reminiscences Of A Stock Operator. The book is a classic because of all the nuggets in the form of quotes a trader can extract.
In Reminiscences of a Stock Operator, a 1923 biography of Livermore by Edwin Lefèvre, Jesse Livermore lived during the crash of 1929 era and made $100 million…that’s over one billion in today’s dollars. However, five years later, he filed for bankruptcy and later committed suicide. In a little to his wife he wrote:
Things have been bad with me. I am tired of fighting. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me.
In trading and more importantly in life, we succeed through our failures. Thus, I want to focus on why Jesse ultimately failed as a trader.
Jesse made most of his money within a 14 years span, but loss all of it in five years due to poor risk management. Successful traders don’t worry about how much they can make, they worry about how much they can loss on any one trade. Before entering a trade, you should know at what price you are right (profit target), but more importantly, at what price you are wrong, so you can get out of the trade and preserve your capital.
In trading you have to cut your losses short and let your winners ride, but Jesse let his losses run at times.
I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
At times, Jesse put way more than he should have on any one trade and when you do this, you can make quick money, but can also lose quick money. Jesse made $3 million after the crash of 1907. But within the next five years he was broke and had to declare bankruptcy for the first time in 1915. A golden rule in trading is to risk no more than 2% of your account on any one trade.
Having a trading plan and being able to follow is what separates the successful traders from the traders that fail. In the book he said he had trouble following his own rules and advice and lost money when he didn’t follow his own plan.
What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play.
If one is able to learn from Jesse’s failure above, one is 50% there from becoming a successful trader. The other 50% is conquering the psychology of trader which is what I tend to focus on the most nowadays and even wrote about it several months ago. To this day, I refer to the post below when I have a bad trading day/week and need a remember what it's going to take to be a part of the 5% of traders that succeed.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
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by rollandthomas
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