Jesse Livermore Trading Method

 

Jesse Livermore is a legendary stock-market trader who made a fortune by short-selling during the American stock market crashes of 1907 and 1929. Jesse Livermore became world-known through the book written by journalist Edwin Lefèvre “Reminiscences of a Stock Operator (1923)”.

 

Jesse Livermore Rules

Livermore used to say: "Whatever happens in the stock market today has happened before and will happen again”

Here are some key rules by Jesse Livermore:

1. Markets are never wrong opinions often are. Back your judgment and don't trust your opinion, until the action of the market itself confirms your opinion
2. Few people ever make money on tips, beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket
3. Money is made by sitting, not trading. It takes time to make money. Don't give me timing; give me time
4. Buy right, sit tight. Big movements take time to develop. Men who can both be right and sit tight are uncommon
5. Money cannot consistently be made by trading every day or every week during the year
6. Nothing new ever occurs in the business of speculating or investing in securities and commodities
7. Never average losses
8. The human side of every person is the greatest enemy of the average investor or speculator. Wishful thinking must be banished

 

 

The Breakout Pattern

One of Livermore’s key patterns involves trading breakouts after long market ranges. The longer the market had stayed in the range the more significant the breakout. The combination of price patterns and volume could provide confirmation for executing trades. These are some key signs for entering positions:

• Waiting for pivotal points to enter the market
• The first few bars after the break should move in the same direction as the breakout
• The volume must increase during the breakout
• After the breakout, a retracement (Normal Reaction) is likely to occur. In this case, the volume must be decreased
• When the Normal Reaction is complete, the trend should continue in the same direction as the breakout, and volume must increase once again

If there are any noticeable deviations from the above breakout pattern, it is a sign that the pattern is likely to fail.

Chart: Example of a Breakout Pattern

 

The One-Day Reversal Patterns

The one-day reversal pattern was considered a significant signal by Jesse Livermore. There are the bullish and bearish reversals:

□ Timeframe: Daily chart

□ Confirmation: Volume

(A) One-Day Bullish Reversal:

Conditions:

(i) The close of the daily candle is higher than the close of the previous candle

(ii) the intraday low of the daily candle is lower than the intraday low of the previous candle

(iii) the volume of the signal candle is higher than the volume of the previous candle

This pattern produces a short-term buying signal.

(B) One-Day Bearish Reversal:

Conditions:

(i) The close of the daily candle is lower than the close of the previous candle

(ii) the intraday low of the daily candle is higher than the intraday low of the previous candle

(iii) the volume of the signal candle is higher than the volume of the previous candle

This pattern produces a short-term selling signal.

 

 

Selective Trading and Confirmation

Jesse Livermore argued that before opening any position, the market must first confirm and support any thesis. The market has to confirm the trade before the full size of the trade is executed. He used to say that ‘Markets are never wrong – opinions often are’. That means we must not trust our own opinions until the price action confirms these opinions.

Here are some more tips according to Mr. Livermore:

• Trade only if there are real opportunities in the market
• Use price patterns, as historically, the market tends to repeat
• Don’t overtrade, and don’t trade every day
• Use pivotal points to trade
• Follow the trend and run your profits (It takes time to make big money)
• Don't average down your losses

 

■ Jesse Livermore Trading Method and Rules

G.P. for TradingCenter(c)

 

Resources:

• How to Trade in Stocks, Jesse Livermore (1940)
• Reminiscences of a Stock Operator, Edwin Lefèvre (1923)