Book Recommendation: How to Trade in Stocks…by Jesse Livermore

December 26, 2009 in Education

Click here to buy from Amazon

People who know me will know that I seldom read books, so when I pick up a book, it has to be a damn good one.

Jesse Livermore is perhaps the most celebrated-greatest trader of all time. I believe that there are some other ‘greatest’ trader as well, but Jesse Livermore is the most well-known one among all. During the crash of ’29, he made a few million within a day. He was called “Boy Plunger” or sometimes “The Great Bear of Wall Street”. You can read more about Livermore here.

Let me tell you more about what you can get out from the book. In the book, Livermore shares his principles and methods in trading. Fundamentally, he is a swing trader in today’s context – his positions are preferably short-term, although sometimes he takes longer term trades(but he never daytrades). His approach is a top-down market-industry-stock-approach, which explains why he was able to anticipate a crash in 1907 and 1929.

Much of Livermore’s methodology are based on the concept of “Pivotal Points” – nothing like pivot points, but tipping points of the market when it either breakouts or doesn’t. When the price of the security(either stocks or commodities) reaches a pivotal point, he waits for the breakout and then enters. He stresses that, in any situation, you must not anticipate the move no matter how sure you are but instead wait for the breakout to happen.

The amazing thing about Livermore’s method is that he doesn’t use any charts, but based his analysis entirely on numbers. He says that charts “are too noisy”. To think that today, we use charts together with indicators, while this guy made his millions without even a chart. Perhaps he has his own unique representation of the price in his mind which only he understands.

But his approach is widely used even till today. First, start with the market. Observe where the market is going. Once the market gives a signal, go to the industries that are showing the same pattern. Then zoom down to the leaders of that industry. At any point of time, he tracks at least 2 stocks, even though he’s only trading one of them. He believes that stocks in the same industry will move together, so u must always be aware of the big picture.

The execution of the trades is what separates him and other traders. His only indications of entry and exit are price and volume. He would record down pivotal points as they form, then pay attention to price and volume when the price goes back to that pivotal point. The pivotal point signifies a high-probability, low-risk point where once you enter, you’re in profit. If you are not in profit after entry, the point is rendered useless and you are wrong in your trade. This is where cutting losses comes in.

He stresses that this pivotal point analysis can only come with experience, because sometimes “feeling” and “intuition” are needed. He also emphasized that every trader must find their own pivotal points.

The book offers very insightful perspective to the market, money management and human psychology. Even if you’re a daytrader trading with indicators, this book will also offer you some insights to fine-tune your entry and exit criteria. If you are a long term investor, you will also benefit from knowing when is the right time to enter the market to maximize your profit target and unnecessary losses.

In conclusion, this is a must-read for all traders and investors. It doesn’t matter if you’re a long-term or short-term trader, bull or bear, fundamentalist or technician, master or novice, you will have alot to learn from the greatest stock trader of all time.

Advertisement