studying recordsof stock price movements and how they occur, and by taking the time element carefully into account.Out of it all emerges my theory of “the time element” in trading, whichI regard as the most important factor in successful speculation.You cannot delegate to another the task of keeping your records, ifyou are to follow faithfully my formula for combining the time elementand prices as set forth in subsequent pages.One may form an opinion regarding a certain stock and believe that itis going to have a pronounced move, either up or down, and eventually becorrect in his opinion, but will lose money by presuming or acting on hisopinion too soon.
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The point I would here emphasize is that after forming an opinionwith respect to a certain stock—do not be too anxious to get into it. First,wait and watch the action of that stock or stocks marketwise.Have patience and wait until the stock becomes active, until it makesa new high.There have been many times when I, like many other speculators,have not had the patience to await the sure thing. I wanted to have an interest at all times.I am human and subject to human weakness. Like all speculators, Ipermitted impatience to out-maneuver good judgment.But it was not until I began to take into consideration the time element that my records really became useful in helping me to anticipatecoming movements of importance.Familiarize yourself with a stock, or different groups of stocks, and ifyou ﬁgure the timing element correctly in conjunction with your records,sooner or later you will be able to determine when a major move is due.Try to forget a stock’s past high range and study it on the basis of theformula that combines timing and price.It may surprise many to know that in my method of trading, when Isee by my records that an upward trend is in progress, I become a buyeras soon as a stock makes a “new high on its movement, after having had anormal reaction.”It has always been my experience that I never beneﬁted much from amove if I did not get in at somewhere near the beginning of that move.Just as markets in time will give you a positive tip when to get in—ifyou have patience to wait—they will just as surely give you a tip-off whento get out.Rome was not built in a day, and no real movement of importanceends in one day or in one week. It takes time for it to run its logicalcourse.It is signiﬁcant that a large part of a market movement occurs in thelast forty-eight hours of a play, and that is the most important time to bein it.The Livermore Method, my method, of recording prices in conjunction with the time element is the result of over thirty years of study ofprinciples that would serve me in forming a basic guide for the next important market movement.From the time I started to merge the time element with price movements, my records began to talk to me!When a speculator can determine the Pivotal Point of a stock and interpret the action at that point, he may make a commitment with the positive assurance of being right from the start.
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This again illustrates the rewards that go to the person who has thepatience to wait for and take advantage of the Pivotal Points.By keeping stock price records and taking into consideration the timeelement, you will be able to ﬁnd many Pivotal Points on which to make acommitment for a fast movement.But by being consistent and never failing to re-enter the market againwhenever your Pivotal Point is reached, you cannot help but be in whenthe real move does occur.But careful timing is essential . . . impatience costly.My losses were often due wholly to lack of patience in awaiting theproper time to back up a preconceived opinion and plan.I was often altogether too anxious to convert a paper proﬁt into actualcash, when I should have been patient and had the courage to play thedeal out to the end.I knew when the upward trend had reached its Pivotal Point, I wouldbe given a danger signal in ample time.Certainly success with this plan depends upon courage to act, andact promptly, when your records tell you to do so. There is no place forvacillation.If you are going to wait upon someone else for explanations or reasons or reassurances, the time for action will have escaped.There is folly in trying to ﬁnd “a good logical reason” why you shouldbuy or sell a given stock. If you wait until you have the reason given you,you will have missed the opportunity of having acted at the proper time!
CHAPTER 10
Summaryof LivermoreTrading Rules
D
on’t concern yourself with why things are happening only observe what is happening. The reasons why will eventually berevealed to you—by then it will be too late to make money! Themove will be over.Learn from your mistakes, analyze them. The trick is not to repeatyour mistakes, which meant to Livermore you had to ﬁrst understandthem—ﬁnd out what went wrong with the trade and don’t repeat the samemistake again.Place as many factors in your favor as possible. Livermore wassuccessful when all the factors were in his favor, and he concluded thatthe more factors he could think of the more successful he would be.No trader can or should play the market all the time. There will bemany times when you should be out of the market, sitting in cash, waitingpatiently for the perfect trade.Determine the direction of the overall market. Livermore referredto this as the Line of Least Resistance. He did not use the terms “bull” or“bear” for a very speciﬁc reason: he felt these terms caused a mind set toform: the market is in a Bullish Trend or the market is in a Bearish Trend.This in turn caused the trader to have a mindset that would anticipate thedirection of a trade or the direction of the market—a deadly and dangerous thing to do.Don’t try and anticipate what the market will do next—simply gowith the evidence of what the market is telling you—presenting to you.Experience has proved to me that the real money made in speculating has157
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been in commitments in a stock or commodity showing a proﬁt right fromthe start.Proﬁts always take care of themselves but losses never do. Thespeculator should insure himself against considerable losses by taking theﬁrst small loss. In so doing, he keeps his account in order so that at somefuture time, when he has a constructive idea, he will be in a position to gointo another deal, taking on the same amount of stock as he had when hewas wrong.As long as a stock is acting right, and the market is right, do not bein a hurry to take a proﬁt. You know you are right, because if you werenot, you would have no proﬁt at all. Let it ride and ride along with it. Itmay grow into a very large proﬁt, and as long as the action of the marketdoes not give you any cause to worry, have the courage of your convictions and stay with it.Do not have an interest in too many stocks at one time. Rememberthat it is dangerous to start spreading out all over the market. It is mucheasier to watch a few than many. I made that mistake years ago and it costme money.A successful speculator remains a constant student of three things:1. Market timing—When to enter and when to exit a market trade–
when to hold ‘em when to fold ‘em, as Livermore’s friend and PalmBeach Casino owner Ed Bradley used to say.2. Money management—Don’t lose money—don’t lose your stake, yourline. A speculator without cash is like a store owner with no inventory. Cash is a speculator’s inventory, his lifeline, his best friend—without it you’re out of business. Don’t lose your line!3. Emotional control—Before you can successfully play the marketyou must have a clear, concise strategy and stick to it. Every speculator must design an intelligent battle plan, customized to suit hisemotional makeup, before speculating in the stock market. Thebiggest thing a speculator has to control are his emotions. Remember, the stock market is not driven by reason, logic, or pure economics, but by human nature which never changes. How can it change?It’s our nature.You can’t tell if your judgment is right until you put your money onthe line. If you don’t put your money on the table you can never testyour judgment, because you can never test your emotions. And I believe itis emotion, not reason that dictates the direction of the stock market, justlike most important things in life: love, marriage, children, war, sex, crime,passion, religion. It is rarely reason that drives people.
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This is not to say things like sales, proﬁts, world conditions, politics,and technology do not play a part in the ultimate price of a stock. Thesefactors eventually come to bear, and the price of the stock market and theindividual stocks may reﬂect them, but it is always emotion that carriesthe extremes.The market moves in cycles. I believe in cycles, in life cycles andmarket cycles. They are often extreme, hardly ever balanced. Cycles comelike a series of ocean waves, bringing the high tide when things are goodand, as conditions recede, the low tide appears. These cycles come unexpectedly, unpredictably, and they have to be weathered with temperance,poise, and patience-good or bad. The stock market is a study in cycles,when it changes direction it remains in that new trend until the momentum weakens—a body in motion tends to stay in motion—remember,don’t buck the trend—don’t ﬁght the tape. The skillful speculator knowsthat money can be made no matter what the market conditions, if a speculator is willing to play both sides of the market, as I was.
SHORT LIST OF LIVERMORE MARKET RULESI long ago realized that the stock market is never obvious. It is designed tofool most of the people, most of the time. My rules are often based onthinking against the grain, against human nature:• Cut your losses quickly;• Be sure to conﬁrm your judgment before you take your full position;• Let your proﬁts ride if there is no good reason to close out theposition;• The action is with the leading stocks, these can change with everynew market;• Keep the number of stocks you follow limited in order to focus;• New all-time highs are possible signals of valid break-outs;• Cheap stocks often appear to be bargains after a large drop. They often continue to fall, or have little potential to rise in price. Leavethem alone!• Use Pivotal Points to identify trend changes and conﬁrmations intrends;• Don’t ﬁght the tape!Play both sides of the market. In a free market system, Prices ﬂuctuate!They never go up all the time, and they never go down all the time. This isgood for the alert speculator, since either side of the market can be played.
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The market goes up a third of the time, sideways a third of the time,and down a third of the time. If a trader only takes long positions he is outof the play two-thirds of the time. Going short of stocks can be very profitable for the astute trader.Cut Losses Quickly. Never sustain a loss of more than 10 percent ofyour invested capital. This Livermore learned in the bucket shops wherehe worked with 10 percent margin and was automatically sold out if theloss exceeded the 10 percent limit. This is also a money management rule.Wait until all the factors are in your favor before making a trade—follow the Top Down Trading rules. The big money is made by the sitting—the waitin’—not the thinking. Once a position is taken, the nextdifﬁcult task is to be patient and wait for the move to play out. The temptation is strong to take fast proﬁts or cover your trade solely out of fear oflosing the proﬁt on a correction. This error has cost millions of speculators millions of dollars. Be sure you have good clear reasons to enter atrade, and be sure you have good clear reasons to exit your position. It isthe big swing that makes the big money for you.Play the market only when all factors are in your favor. No personcan play the market all the time and win. There are times when you shouldbe completely out of the market.Cover your losses quickly, without hesitation.The only thing to dowhen a person is wrong is to be right, by ceasing to be wrong. Don’t wastetime, when a stock moves below a mental-stop, sell it immediately.Study the stocks like you would study people. After a while their reactions to certain circumstances become predictable, and useful, intiming the stock’s movement. Stocks often act like human beings, expressing different personalities: aggressive, reserved, hyper-high-strung,direct, logical, predictable, unpredictable.Stocks are never too high to begin buying or too low to begin selling short.Failure to take the opportunity to get out of large illiquid positionswhen the opportunity presents itself can cost.Failure to take advantage of a serendipitous act of good luck in thestock market is often a mistake.Don’t anticipate! Wait for market conﬁrmation! In a marketmoving sideways in a narrow channel where stock prices are essentially stagnant, there is a great danger in trying to predict or anticipatewhen, and in what direction the market will move. You must wait untilthe market or the stock breaks out of this sideways channel in either direction. Never argue with the tape. Follow the line of least resistance.Follow the evidence.The answer always lies in what the tape says, not trying to ﬁgureout the why. Do not spend a lot of time trying to ﬁgure out what moves
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the price of a particular stock. Rather, examine the tape. Behind all majormovements in the stock market there is an irresistible force, which willmost likely be revealed later. That is all the successful speculator needsto know.The stock market goes up, down and sideways. You can makemoney on the up side or the down side-you can buy long or sell short. Itshould not matter to you what side of the market you are on. You must beimpersonal. When the market goes sideways and you are confused, takea vacation.Beware of the one-day reversal. When the high of the day is higherthan the high of the previous day, but the close of the day is below theclose or the low of the previous day and the volume of the current day ishigher than the volume of the previous day, beware!If the stock you traded is going in the opposite direction than youexpected, sell it quickly. It means your judgment was wrong—cut yourlosses quickly.Study the action of a stock that has made a severe break in price, aprecipitous drop. If the stock does not rebound quickly it will mostlikely fall away further—there is an inherent weakness in this stock, thereason will be revealed at a later time.The market is operating in future time. It has usually already factored in current events.A change in trend, if caught, yields the most rewards. It is the inception of a basic movement, the Pivotal Point, a change in trend, whichindicates whether to buy or sell.Pivotal Points are an essential timing device, a trigger that revealswhen to enter, and when to exit the market. There are two kinds of Pivotal Points: The Reversal Pivotal Point and the Continuation Pivotal Point.The Reversal Pivotal Point is deﬁned as the perfect psychological time atthe beginning of a major market move, a change in basic trend. It doesnot matter if it is at the bottom or top of a long-term trending move. Itmarks a deﬁnite change in direction. The Continuation Pivotal Point conﬁrms the move is underway—it is a natural consolidation before the nextmove upward. Be alert—major Pivotal Points can often be accompaniedby a heavy increase in volume.At the end of a bull market, watch for wild capitalizations, goodstocks selling at 30, 40, 50, 60 times their annual earnings. These willbe the same stocks that had normally traded at 8 to 12 times earnings.Beware of wild speculative stocks that take off for no real reasons,except that they are trendy, in-favor stocks.New highs are very important for timing. A new all-time high canmean that the stock has broken through the overhead supply of stockand the line of least resistance will be strongly upward. The majority of
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people, when they see that a stock has made a new high, sell it immediately, then look for a cheaper stock.Top Down Trading—follow the trend—check the main market. Thespeculator must know the overall trend of the market before making atrade—the line of least resistance. Know if this line of least resistance isupward or downward. This applies to both the overall market and individual stocks. The basic thing you need to know before making a trade iswhich way the overall market is headed, up, down, or sideways. You haveto decide this ﬁrst before making a trade. If the overall trend of the marketis not in your favor, you are playing at an extreme disadvantage, remember, go with the ﬂow, bend with the trend, do not sail into a gale, and mostof all . . . don’t argue with the tape!Group action is a key to timing. Stocks do not move alone whenthey move. If U.S. Steel climbs in price, then sooner or later Bethlehem,Republic, and Crucible will follow. The premise is simple: If the basic reasons are sound why U.S. Steel’s business should come into favor in thestock market, then the rest of the steel group should also follow for thosesame reasons.Trade the leading stocks in the leading groups—as the leaders goso goes the entire market. Buy the strongest market leader in an industry group.Watch the market leaders, the stocks that have led the charge upwards in a bull market. When these stocks falter and fail to make newhighs, it is often a signal that the market has turned. Conﬁne your studiesof stock market movements to the prominent issues of the day, the leaders. If you cannot make money out of the leading active issues, you arenot going to make money out of the stock market. That is where the action is and where the money is to be made. It also keeps your universe ofstocks limited, focused, and more easily controlled.Before you buy a stock, you should have a clear target where tosell if the stock moves against you, a ﬁrm stop. And you must obeyyour rules!Buy small positions, probe ﬁrst, to test your judgment before youcommit to a large position. A successful market trader must only bet onthe course of highest probabilities. Do not establish your full position allat one time—use probes to conﬁrm your judgment and timing and to ﬁndthe line of least resistance. The probe approach is also a major factor inMoney Management.The trader must react quickly to the unexpected, which is never predictable. If it is a windfall, grab it. If it is bad news, hit the road, anddon’t look back or hesitate—sell out the position.Beware after a long trend up when volume gets heavy, and stockschurn. This is a clue, a red-alert warning that the end of the move is
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near. This is also a possible indication of stocks going from strong handsto weak hands, from the professional to the public, from accumulationto distribution. The public often views this heavy volume as the mark ofa vibrant, healthy market going through a normal correction, not a topor a bottom.Follow money management rules:Establish stops! The speculator should have a clear target where tosell if the stock moves against you. This is essential on the ﬁrst buys—trailing stops can also be used as the stock moves, although I always didthese with trailing mental stops. And you must obey your rules! Never sustain a loss of more than 10 percent of your invested capital. Losses can betwice as expensive to make up. I learned this in the bucket shops workingwith 10 percent margin. You were automatically sold out by the bucketshops if the loss exceeded the 10 percent limit.Never sustain a loss of more than 10 percent of invested capital.The 10 percent loss rule is an important rule for managing money. Asnoted, this is also a key timing rule. If you lose 50 percent, you must gain100 percent to break even.Livermore 10 Percent Loss TableStarting PositionAmountLostRemainder$1000$ 80$920100900200800300700400600500500
% Loss8.010.020.030.040.050.0
% toRecover Loss8.711.125.042.866.6100.0
Never meet a margin call and never average down in your buying.Turn paper proﬁts into “real money” periodically. Take a percentof your winnings and put them in a safe place, like the bank or bonds, oran annuity. Cash was—is—and always will be—king.Always have cash in reserve. Cash is the ammunition in your gun.My biggest mistake was not in following this rule more often.Examine and understand the dimension of time:Don’t be in a hurry. The successful investor is not invested in themarket all the time—there are many times when you should be completely in cash. If you are unsure of the direction of the market, then stayout and wait for a conﬁrmation of the next move.Use probes to establish your full position. After an initial probe, donot make a second move until the ﬁrst probe shows you a proﬁt. Do notestablish your full position all at once, wait until your ﬁrst trades, your
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early probes, have shown you a proﬁt, then go ahead and ﬁll out your fullposition. To be precise: First establish 20 percent of your planned positionon the ﬁrst purchase, 20 percent on the second, 20 percent on the third.Wait for a conﬁrmation of your judgment—then make your ﬁnal purchaseof 40 percent. Consider each of these purchases, or probes, a crucial factor in establishing the overall position. If at any time the stock goesagainst you, then wait or close out all your positions, never sustainingmore than a 10 percent loss of invested capital.Sell the losers, let the winners ride, provided all the factors arepositive.
SUMMARY OF FIVE KEY MONEY MANAGEMENT RULES•••••
Protect your capital—use probing system to buyObserve the 10 percent bucket shop ruleKeep cash in reserveStick with the winners—let your proﬁts ride—cut your lossesTake 50 percent of your big winnings off the table
EMOTIONAL CONTROLEmotional control is the most essential factor in playing the market.Never lose control of your emotions when the market moves against you.And never become elated with your successes to such a degree that youthink the market is an easy way to make money. Never ﬁght the tape—thetape is the truth . . . seek harmony with the tape.Don’t anticipate! Wait until the market gives you the clues, the signals, the hints, before you move. Move only after you have conﬁrmation.Anticipation is the killer. It is the brother to greed and hope. Don’t makedecisions based on anticipation. The market always gives you time. If youwait for the clues, there will be plenty of time to execute your moves.All stocks are like human beings, with different personalities: aggressive, reserved, hyper, high-strung, direct, dull, old fashioned, futuristic,logical, illogical. Study the stocks as you would study people; after awhile, their reactions to certain circumstance become predicable. Sometraders limit their trading to stocks in speciﬁc price ranges.Do not spend a lot of time trying to ﬁgure out why the price of a particular stock moves. Rather, examine the facts themselves. The answerlies in what the tape says, not trying to ﬁgure out why, and most importantly—never argue with the tape.
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A stock trader can be convinced to move away from his own convictions by listening to the advice of other traders, persuaded that his judgment may be faulty. Listening to others may cause indecision and badjudgment. This indecision may cause a loss of conﬁdence, which may wellmean a loss of money.Tips come from many sources—from a relative, a loved one, a palwho has just made a serious investment himself and wants to pass on hisexpected good fortune. They also come from hucksters and criminals. Remember: All tips are dangerous—take no tips!Remove hope from your trading lexicon. Hoping a stock will do something is the true form of gambling. If you do not have good solid reasons tohold stock positions, then move on to another more logical trade. Wishinga stock up, or down, has caused the downfall of many stock market speculators. Hope walks along hand in hand with greed.Always be aware of your emotions—don’t get too conﬁdent over yourwins or too despondent over your losses. You must achieve poise, a balance in your actions.Nothing ever changes in the market. The only thing that changesare the players, and the new players have no ﬁnancial memory of the previous major cycles, like the Crash of 1907, or the Crash of 1929, becausethey have not experienced them. It may be new to the speculator—but it’snot new to the market.Always have a method of speculating, a plan of attack. And alwaysstick to your plan. Do not constantly change your plan. Find a methodthat works emotionally and intellectually for you, and stick to thatmethod—stick to your own customized rules.The speculator is not an investor. His object is not to secure asteady return on his money over a long period of time. The speculatormust proﬁt by either a rise or fall in the price of whatever he has decidedto speculate in.Play a lone hand. Make your decisions about your own money byyourself. Be secretive and silent in your stock trading. Do not discloseyour winners or your losers.The successful investor is not invested in the market all the time—there are many times when you should be completely in cash. If youare unsure of the direction of the market, wait.It takes four strong mental characteristics to be a superior markettrader:• Observation: the ability to observe the facts without prejudice;• Memory: the ability to remember key events correctly, objectively;• Mathematics: an easy facility with numbers, at home with digits;• Experience: to retain and learn from your experiences.
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Livermore believed that subliminal messages, apparent impulses,were nothing more than the subconscious mind talking to him; callingup his experiences, his years of trading. On occasion, Livermore wouldlet his inner-mind lead him, even if he didn’t know exactly why at thetime. Livermore believed Aristotle, who said, “We are the sum total ofour experience.”Emotions must be understood and harnessed before successful speculation is possible:Greed is a human emotion deﬁned by Webster’s dictionary as the excessive desire for acquiring or possessing, a desire for morethan one needs or deserves. We do not know the origin of greed,all we know is that it exists in every person.Fear lays ready to appear in a single heartbeat, and when it does, ittwists and distorts reason. Reasonable people act unreasonablywhen they are afraid. And they get afraid every time they start tolose money. Their judgment becomes impaired.Hope lives hand in hand with greed when it comes to the stock market. Once a trade is made, hope springs alive. It is human natureto be hopeful, to be positive, to hope for the best. Hope is important to the survival of the human race. But hope, like its stockmarket cousins, ignorance, greed, and fear, distorts reason. Hopeclouds facts, and the stock market only deals in facts. Like thespinning of a roulette wheel, the little black ball tells the outcome—not greed, fear, or hope. The result is objective and ﬁnalwith no appeal . . . like nature.Ignorance. The market must be studied and learned, not in a casualway, but in a deep knowledgable way. Like no other entity, thestock market, with its allure of easy money and fast action, induces people into the foolish mishandling of their money. The reverse of ignorance is knowledge, and knowledge is power.The stock market is never obvious. It is designed to fool most of thepeople, most of the time. Livermore’s rules are often based on thinkingagainst the grain.You should not be in the market all the time. There are times youshould be out of the market, for emotional as well as economic reasons.When the tape doesn’t agree with your decision to buy or sell, waituntil it does. Never try to rationalize your position with what the tapeis saying.Do not give or receive stock tips, just remember: In a bull marketstocks go up-in a bear market they go down. That is all anyone needs toknow, or for you to tell them.
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Do not break your rules. A stock speculator sometimes makes mistakes, and knows that he is making them, but proceeds anyway, only toberate himself later for breaking his own rules.Never become an involuntary investor by holding a declining stock.Never buy a stock on reactions, and never short a stock on rallies.Do not use the words bullish or bearish. These words ﬁx a ﬁrm market direction in the mind for an extended period of time. Instead, use Upward Trend and Downward Trend when asked the direction you think themarket is headed. Simply say: “The line of least resistance is either upward, or downward at this time, as I did.”Speculation is a business, and like any other business it takes hardwork and diligence to succeed.
CONCLUSION“There is nothing new on Wall Street or in stock speculation. Whathas happened in the past will happen again, and again, and again.This is because human nature does not change, and it is humanemotion that always gets in the way of human intelligence.Of this I am sure.”—Jesse Livermore
CHAPTER 11
LivermoreSecretMarket Key
T
he Livermore Market Key section in this book is exactly as itwas written in the 1940 version, originally published by Duell,Sloan and Pearce (New York). All explanatory charts have alsobeen added in their original condition. This section of the book contains reprints of his actual worksheets; complete with Livermore’s ownday-to-day comments on his system as it applied to actual market actionin speciﬁc stocks. The only change has been to replace color with blackand-white designations. What were originally blue numbers now appearblack; the original red numbers are black and boxed; and what wereblack numbers are black and circled. Red double underscores now appear black and dashed, while the black double underscores haven’tchanged.The prudent stock market student, after reading and studying thissection, will observe that some of the numbers used by Livermoreas examples are difﬁcult to follow. We have attempted to understandthese various examples, even so far as going to the second edition,which was published in 1966 by Investor’s Press, Inc. (Palisades Park,N.J.). Our objective was to see if there were any problems with the actual worksheets that we may not have noticed in the original 1940 published version.There were no discrepancies—this is exactly as Livermore presentedhis Market Key Theory.
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The Livermore Market KeyMany years of my life had been devoted to speculation before itdawned upon me that nothing new was happening in the stock market,that price movements were simply being repeated, that while there wasvariation in different stocks the general price pattern was the same.The urge fell upon me, as I have said, to keep price records that mightbe a guide to price movements. This I undertook with some zest. Then Ibegan striving to ﬁnd a point to start from in helping me to anticipate future movements. That was no easy task.Now I can look back on those initial efforts and understand why theywere not immediately fruitful. Having then a purely speculative mind, Iwas trying to devise a policy for trading in and out of the market all thetime, catching the small intermediate moves. This was wrong, and in timeI clearly recognized the fact.I continued keeping my records, conﬁdent that they had a genuinevalue which only awaited my discovery. At length the secret unfolded. Therecords told me plainly that they would do nothing for me in the way ofintermediate movements. But if I would but use my eyes,