treat it as such, and not regard it as a pure gamble, as so manypeople are apt to do.If the premise that speculation is a business in itself, those engaging inthat business should determine to learn and understand it to the best oftheir ability, using all the data available. In the forty years that he devoted
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to making speculation a successful business venture, Livermore was stilldiscovering new rules to apply to that business. The stock market is ajourney with no end.On many occasions, Livermore went to bed wondering why he had notbeen able to foresee a certain imminent move, and awakened in the earlyhours of the ensuing morning with a new idea formulated, actually impatient for the morning to arrive in order to start checking over his records ofpast movements to determine whether the new idea had merit. In mostcases, it was far from being 100 percent right, but what good there was in itwas stored in his subconscious mind. Perhaps, later, another idea wouldtake form, and he would immediately set to work checking it over.In time, these various ideas began to crystallize, and he was able todevelop a concrete method of keeping records in such a form that hecould use them as a guide.His conclusion was that nothing new ever occurs in the business oftrading or investing in securities or commodities. There are times whenone should speculate, and just as surely there are times when one shouldnot speculate.There is a very true adage that Livermore loved: “You can beat a horserace, but you can’t beat the races.”So it is with market operations. There are times when money can bemade investing and speculating in stocks, but money cannot consistentlybe made by trading every day or every week during the year. Only the foolhardy will try it.To invest or trade successfully, one must form an opinion as to whatthe 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, rules to follow,but one has to be careful because people are often not predictable—theyare full of emotion—and the market is made up of people. The good speculators always wait and have patience, waiting for the market to conﬁrmtheir judgment.For instance, analyze in your own mind the effect that a certain pieceof news may have in relation to the market. Try to anticipate the psychological effect of this particular item on the market. If you believe it likelyto have a deﬁnite bullish or bearish effect on the market, don’t back yourjudgment—wait until the action of the market itself conﬁrms your opinion. The effect on the market may not be as pronounced as you are inclined to believe it should be. Do not anticipate and move without marketconﬁrmation—being a little late in your trade is your insurance that youare right or wrong.To illustrate further: After the market has been in a deﬁnite trend for agiven period, a bullish or bearish piece of news may not have the slightest
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effect on the market, or it may have a temporary effect. The market itselfat the time may be in an overbought or oversold condition, in which casethe effect of that particular news would certainly be ignored. At suchtimes, the recording value of past performances under similar conditionsbecomes of inestimable value to the investor or speculator.At such times you must entirely ignore personal opinion and applystrict 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.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 isgoing to have a pronounced move, either up or down, and eventually becorrect in one’s opinion, but one will lose money by presuming or actingtoo soon. Believing his opinion to be right, the trader acts immediately,only to ﬁnd that after he has made his commitment the stock goes theother way. The market becomes narrow; he becomes tired and gets out.Perhaps a few days later it begins to look all right, and in he goes again,but no sooner has he re-entered than the stock turns against him oncemore. Once more, he begins to doubt his opinion and sells out. Finally,the move starts up. Having been too hasty and having made two unprofitable commitments, he loses courage. It is also likely that he has madeother commitments and is not in a position to assume more. Thus, by thetime the real move in the stock he jumped into prematurely is on, he isout of it.The point to emphasize here is that after forming an opinion with respect to a certain stock, do not be too anxious to get into it. Wait andwatch the action of that stock for conﬁrmation to buy. Have a fundamental basis to be guided by.Experience proved to Livermore that the real money made in tradingwas in commitments to a stock or commodity that show a proﬁt rightfrom the start.Livermore’s trading operations were mostly driven by Pivotal Pointaction. As already explained, he always attempted to make his ﬁrst tradeat the right psychological time, that is, at a time when the force of themovement was so strong that it simply had to carry through. It simply hadto and did go. But there were many times in his career when, like manyother speculators, he did not have the patience to await the sure thing, because he wanted to have an interest in the market at all times.With all his experience, why did he allow himself to do so? The answer is that Livermore was human and subject to human weakness. Likeall speculators, he permitted impatience to outmaneuver good judgment.Proﬁts always take care of themselves but losses never do.
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The speculator has to insure himself against considerable losses bytaking the ﬁrst small loss. In so doing, he keeps his account in order, sothat at some future time, when he has a constructive idea, he will be in aposition to go into another deal, taking on the same amount of stock as hehad when he was wrong.The speculator has to be his own insurance broker, and the only wayhe can continue in business is to guard his capital account and never permit himself to lose enough to jeopardize his operations at some futuredate when his market judgment is correct.There are deﬁnitely certain times when a reversal in trend rally getsunder way, and at this time an astute trader can devise a speciﬁc method(rules) to use as a guide, which will permit him to judge correctly whento make his initial commitment. Successful speculation is not a mereguess. To be consistently successful, an investor or speculator must haverules to guide him. Certain guides that one trader, such as myself, utilizesmay be of no value to anyone else, so the trader may want to create hisown combination of methods to trade the market. Independent thinkingwas Livermore’s hallmark, and there are many ways to successfully tradethe stock market.No guide to trading can be 100 percent right. So, if a stock does notact as you anticipated, you must immediately determine that the time isnot yet ripe and close out the commitment.Perhaps a few days later your guide indicates you should get in again,so back you can go, and perhaps this time it is 100 percent correct. Livermore was convinced that anyone who will take the time and trouble tostudy the market carefully should in time be able to develop a guide thatwill aid him in future operations or investments.Livermore said, “A great many traders keep charts or records of averages. They chase them around, up and down, and there is no questionthat these charts of averages do point out a deﬁnite trend at times. Personally, charts have never appealed to me. I think they are altogether tooconfusing. Nevertheless, I am just as much of a fanatic in keeping recordsas other people are in maintaining charts. They may be right, and I maybe wrong.“My preference for records is due to the fact that my recordingmethod gives me a clear picture of what is happening. But it was not until I began to take into consideration the element of time and timing thatmy records really became useful in helping me to anticipate comingmovements of importance. I believe that by keeping proper records andtaking the time element into consideration, one can with a fair degree ofaccuracy forecast coming movements of importance. But it takes patience to do so.“Familiarize yourself with a stock, or different groups of stocks, and
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if you ﬁgure the timing element correctly in conjunction with yourrecords, sooner or later you will be able to determine when a major moveis due. If you read your records correctly, you can pick the leading stockin any group.“Traders must keep their own records. Don’t let anyone else do it foryou. You will be surprised how many new ideas you will formulate in sodoing; ideas which no one else could give you, because they are your discovery, your secret, and you should keep them your secret.”
CHAPTER 9
LivermoreQuotes—Trading Truths
J
esse Livermore is perhaps the most quoted trader in stock market history.The extensive quote section that follows has been organized bycategories that align with the structure of this book. They should be helpful to all traders.
ANTICIPATIONBy constant effort I was able to bring my records into a co-ordination thataided me to a surprising degree in anticipating coming movements.To invest or speculate successfully, one must form an opinion as towhat the next move of importance will be in a given stock.In order to anticipate correctly, one must have a deﬁnite basis for thatanticipation.It was not until I began to take into consideration the time elementthat my records really became useful in helping me to anticipate comingmovements of importance.Just as soon as you familiarize yourself with the actions of the past,you will be able to anticipate and act correctly and proﬁtably upon forthcoming movements .I do know a basis for anticipating future movements and if anyone willstudy these records, keeping them themselves, they cannot fail to proﬁt byit in their operations.
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This sense of knowing when you are wrong even before the markettells you becomes, in time, rather highly developed. It is a subconscioustip-off. It is a signal from within that is based on knowledge of past marketperformances. I am always suspicious of this inner mind tip-off and usually prefer to apply the cold scientiﬁc formula. But the fact remains thaton many occasions I have beneﬁted to a high degree by giving attention toa feeling of great uneasiness.This curious sidelight on trading is interesting because the feeling ofdanger ahead seems to be pronounced only among those sensitive to market action, those whose thoughts have followed a scientiﬁc pattern inseeking to determine price movements.From these records one can visualize a map useful in determining theapproach of important price movements.
BUYINGDo not buy a stock because it has had a big decline from its previous high.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 hada normal reaction.I never buy on reactions or go short on rallies.Each succeeding purchase must be at a “higher price” than the previous one.When your chosen stock reaches the point you had previously decided it should reach if the move is going to start in earnest, that is thetime to make your ﬁrst commitment.So it is plain to see why your friend, the industrialist on the inside, caneasily tell you when to buy. But he cannot and will not tell you when tosell. That would be equivalent almost to treason to his associates.
GROUP ACTION/LEADERSThat break-out to a new high movement (the stock will be selling in newhigh territory) should continue strong for a few days with only minor dailyreactions. Sooner or later it will reach a point where it is due for anothernormal reaction. When it (the normal reaction) occurs, it should be on thesame lines as the ﬁrst reaction, because that is the natural way any stockwill act when it is in a deﬁnite trend.
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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.What I wish to impress upon you is the fact that when you clearly seea move coming in a particular group, act upon it.Have patience and wait. In time you will get the same tip-off in othergroups that you received in the ﬁrst group.If you cannot make money out of the leading active issues, you are notgoing to make money out of the stock market as a whole.In the course of time new leaders will come to the front; some of theold leaders will be dropped. It will always be that way as long as there is astock market.Remember the leaders of today may not be the leaders two yearsfrom now.It is when you set down prices in your record book and observe thepatterns that the prices begin to talk to you.I would explain that I do not take the action of a single stock as an indication that the trend has been positively changed for that group.
LOSSESTraders often hesitate as a stock declines, and during that period of hesitation they watch the market go many points against them.Proﬁts always take care of themselves, but losses never do.The speculator has to insure himself against considerable losses bytaking the ﬁrst small loss.It would be simple to run down the list of hundreds of stocks, which,in my time, have been considered gilt-edge investments, and which todayare worth little or nothing.Thus, great investments tumble, and with them the fortunes of socalled conservative investors in the continuous distribution of wealth.I believe it is a safe statement that the money lost by speculationalone is small compared with the gigantic sums lost by so-called investorswho have let their investments ride.A good trader will, by acting promptly, hold his losses to a minimumand await a more favorable opportunity to reenter the market.It is foolhardy to make a second trade, if your ﬁrst trade shows youa loss.“Never average losses.” Let that thought be written indelibly uponyour mind.
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But it is not necessary to lose your money, once you have acquired it,if you will hold fast to sound principles.Every time I lost patience and failed to await the Pivotal Points andﬁddled around for some easy proﬁts in the meantime, I would lose money.My loss was due wholly to lack of patience in awaiting the proper time toback up a pre-conceived opinion and plan.The market will tell the speculator when he is wrong, because he islosing money.When a trader ﬁrst realizes he is wrong, that is the time to clear out,take his losses, study the record to determine the cause of the error, andawait the next big opportunity.
MARKET ACTIONMarkets never stand still.They are very dull at times, but they are not resting at one price. Theyare either moving up or down a fraction.At the beginning of the move you will notice a very large volume ofsales with gradually advancing prices for a few days.Never be afraid of the normal movement. But be very fearful of abnormal movements, it is similar to a major change in personality.Short-term traders are often so engrossed with the minor ups anddowns that they miss the big movements.Almost invariably the vast majority have commitments on the wrongside when the broad trend swings are well under way.The speculator who insists on trying to proﬁt from daily minor movements will never be in a position to take advantage of the next importantchange marketwise when it occurs.Real movements do not end the day they start. It takes time to complete the end of a genuine movement.Don’t back your judgment until the action of the market itself conﬁrms your opinion. . . .Markets are never wrong —opinions often are.You will notice I always tried to make my ﬁrst trade at the psychological time, that is, at a time where the force of the movement was so strongthat it simply had to carry through.Your trade may grow into a very large proﬁt, and as long as the actionof the market does not give you any cause to worry, have the courage ofyour convictions and stay with it.I do not use the words bullish or bearish in deﬁning trends of the market because I think so many people when they hear the words bullish or
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bearish spoken of marketwise immediately think that is the course themarket is going to take for a very long time.Well-deﬁned trends of that kind do not occur very often—only once inabout four or ﬁve years— but during that time there are also many welldeﬁned trends which last for a comparatively short time.I consequently use the words “Upward Trend” and “DownwardTrend,” because they fully express what is going on at that speciﬁctime.The Livermore Stock Trading Method, my method, of recording pricesin conjunction with the time element is the result of over thirty years ofstudy of principles that would serve me in forming a basic guide for thenext important market movement.Frequently I had observed that when a stock sold at 50, 100, 200 andeven 300, a fast and straight movement almost invariably occurred aftersuch points were passed.Bear in mind when using Pivotal Points in anticipating market movements, that if the stock does not perform as it should, after crossing thePivotal Point, this is a danger signal that must be heeded.I learned the main thing was to watch the follow-through as it crossedthrough the Pivotal Point.I knew that in due time, when the upward trend had reached its Pivotal Point, I would be given a danger signal in ample time.Whenever the market does not act right or in the way it should, that isreason enough for you to change your opinion and change it immediately.
MONEY MANAGEMENTThe speculator has to insure himself against considerable losses by takingthe ﬁrst small loss.The speculator has to be his own insurance broker, and the only wayhe can continue in business is to guard his capital account and never permit himself to lose enough to jeopardize his operations at some futuredate when his market judgment is correct.Therefore the investor must guard his capital account just as the successful speculator does in his speculative ventures.When you are handling surplus income do not delegate the task toanyone.So, at the risk of repetition and preaching, let me urge you to avoid averaging down. I know but one sure tip I got from a broker. It is your “Margin Call—When the margin call reaches you, close your account—nevermeet a margin call.” You are on the wrong side of the market.
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A person engaged in the business of speculation should risk only alimited amount of capital on any one venture.Cash to the speculator is as merchandise on the shelves of the merchant.A speculator should make it a rule each time he closes out a successful deal to take one-half of his proﬁts and lock this sum up in a safe deposit box.The only money that is ever taken out of Wall Street by speculators isthe money they draw out of their accounts after closing a successful deal.The only time the average speculator can draw money from his brokerage account is when he has no position open or when he has an excessive equity.Money in a broker’s account or in a bank account is not the same as ifyou feel it in your own ﬁngers once in a while.When a speculator is fortunate enough to double his original capital he should at once draw out one half of his proﬁt to be set-asidefor reserve.In consideration of these general trading principles it should be saidthat too many speculators buy or sell impulsively, acquiring their entireline at almost one price. That is wrong and dangerous.Having made that commitment, decide deﬁnitely the amount ofmoney you are willing to risk should your calculations be wrong.
PROFITSAfter attaining a goodly proﬁt, you must have patience, but don’t let patience create a frame of mind that ignores the danger signals.But if you pay attention to them (danger signals) consistently, in thelong run you will proﬁt immensely.If you have timed the movement correctly, your ﬁrst commitment willshow you a proﬁt at the start.From then on, all that is required of you is to be alert, watching for theappearance of the danger signal to tell you to step aside and convert paperproﬁts into real money.The speculator who insists on trying to proﬁt from daily minor movements will seldom be in a position to take advantage of the next importantchange marketwise when it occurs.Experience has proved to me that the real money made in speculatinghas been in commitments in a stock or commodity showing a proﬁt rightfrom the start.
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As long as a stock is acting right, and the market is right, do not be ina hurry to take a proﬁt.You know you are right, because if you were not, you would have noproﬁt at all.It may grow into a very large proﬁt, and as long as the “action of themarket “does not give you any cause to worry, have the courage of yourconvictions and stay with it.Incidentally, every time I lost patience and failed to await the PivotalPoints and ﬁddled around for some easy proﬁts in the meantime, I wouldlose money.You will discover that proﬁts made in this way are immensely moregratifying than any which could possibly come from the tips or guidanceof someone else.The fact that your trades “DO” show you a proﬁt is proof you are right.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.
SHORTINGMany have lost their capital funds by selling a stock short after a long upward movement, when it “seemed too high.”I never buy on reactions or go short on rallies.I found it was an easy matter for me to turn around and get out of aposition, when vitality was lacking after a stock crossed the Pivotal Pointand there were many occasions when I reversed my position and wentover to the short-side.That same rule should be applied in selling short. Never make an additional sale unless it is at a lower price than the previous sale.This illustrates the value of having a short interest in speculative markets because the short interests become willing buyers when they covertheir shorts, and those-willing buyers, the short sellers, act as a muchneeded stabilizer in times of panic.
STOCKSStocks, like individuals, have a character and a personality. Some arehigh-strung, nervous, and jumpy—others are forthright, direct, logical.
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A skillful trader comes to know and respect individual securities.Their action is predictable under varying sets of conditions.When a stock gets into a deﬁnite trend, it works automatically andconsistently along certain lines throughout the progress of its move.Then what I term a “Normal Reaction” will occur. On that reaction thesales volume will be much less than on the previous days of its advance.To invest or speculate successfully, one must form an opinion as towhat the next move of importance will be in a given stock.Familiarize yourself with a stock, or different groups of stocks, andif you ﬁgure the timing element correctly in conjunction with yourrecords, sooner or later you will be able to determine when a majormove is due.When a stock starts sliding downward, no one can tell how far it willgo. Nor can anyone guess the ultimate top on a stock in a broad upwardmovement.
TRADING/SPECULATIONI do not say that danger signals are always correct, no rules applying tostock ﬂuctuations are 100 percent right.When I see a danger signal handed to me, I don’t argue with it. I getout! A few days later, if everything looks all right, I can always go backin again.Every judicious speculator is on the alert for danger signals.Curiously, the trouble with most speculators is that something insideof them keeps them from mustering enough courage to close out their badcommitment when they should.Again let me say, the human side of every person is the greatest enemy of the average investor or speculator.What I am trying to make clear to that part of the public which desiresto regard speculation as a serious business, and I wish deliberately to reiterate it, is that wishful thinking must be banished.The speculator who insists on trying to proﬁt from daily minor movements will never be in a position to take advantage of the next importantchange marketwise when it occurs.I make speculation a business. I would be a failure if I were in the confusion of things and let myself be distracted by minor changes. I like to beaway where I can think.The game of speculation is the most uniformly fascinating game in theworld. But it is not a game for the stupid, the mentally lazy, the man of in-
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ferior emotional balance, or for the get-rich-quick adventurer. They willdie poor.I have come to the conviction, however, that larger numbers of peopleinterested in stock-market investment and speculation would be willing towork and study to attain sensible results, if they had a guide or signpostpointing the right direction.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 further, let me warn you that the fruits of your success will be in direct ratio to the honesty and sincerity of your own effortin keeping your own records, doing your own thinking, and reaching yourown conclusions.You cannot wisely read a book on “How to keep ﬁt” and leave thephysical exercises to another.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 somany 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 determine to learn and understandit to the best of their ability with informative data available.My theory and practical application have proved to my satisfactionthat nothing new ever occurs in the business of speculating or investing insecurities or commodities.There are times when one should speculate, and just as surely thereare times when one should not speculate.There are times when money can be made investing and speculatingin stocks, but money cannot consistently be made trading every day orevery week during the year.To invest or speculate successfully, one must form an opinion as towhat the next move of importance will be in a given stock.No one man, or group of men, can make or break a market today.Experience has proved to me that the real money made in speculatinghas been in commitments in a stock or commodity showing a proﬁt rightfrom the start.It is a human trait to be hopeful and equally so to be fearful, but whenyou inject hope and fear into the business of speculation, you are facedwith a very formidable hazard, because you are apt to get the two confused and in reverse positions.The speculator has to insure himself against considerable losses bytaking the ﬁrst small loss.The speculator has to be his own insurance broker, and the only wayhe can continue in business is to guard his capital account and never
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permit himself to lose enough to jeopardize his operations at some future date when his market judgment is correct.Successful speculation is not a mere guess.To be consistently successful, an investor or speculator must haverules to guide him. Certain guides that I utilize may be of no value to anyone else.One of the primary “DON’T’S” is—one should never permit speculative ventures to run into investments. Don’t become an “InvoluntaryInvestor.”There is always the temptation in the stock market, after a period ofsuccess, to become careless or excessively ambitious.One major mistake of all speculators is the urge to enrich themselvesin too short a time.Often for people who enter the speculative ﬁeld 25 percent is nothing. They are looking for 100 percent. And their calculations are faulty;they fail to make speculation a business and run it on business principles. The lesson here again is that speculation itself is a business andshould be so viewed by all.Do not permit yourself to be inﬂuenced by excitement, ﬂattery ortemptation.The speculator wants to trade and the broker not only is willing, buttoo often encourages over-trading.The uninformed speculator regards the broker as his friend and issoon over-trading.Never make any trade unless you know you can do so with ﬁnancialsafety.Whenever I have had the patience to wait for the market to arrive atwhat I call a “Pivotal Point” before I started to trade; I have always mademoney in my operations.I found it was an easy matter for me to turn around and get out of aposition, when vitality was lacking after a stock crossed the Pivotal Pointand there were many occasions when I reversed my position and wentover to the short-side.Nevertheless, there are other ways by which one can determine Pivotal Points.You will derive from successful trades based on your own judgment asingular pleasure and satisfaction.If you make your own discovery, trade your own way, exercise patience, and watch for the danger signals, you will develop a proper trendof thinking.Few people ever make money by trading on the occasional tips or recommendations of others. Many beg for information and then don’t knowhow to use it.
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Nevertheless, in making speculation a business, one automaticallykeeps an eye on all markets for the big opportunities.It would not surprise me if the persons who in the future follow mymethods of keeping these records get even more out of them thanI have.Someone else, however, may develop from this basic method newideas which, when applied, will enhance the value of my basic method fortheir purpose.In consideration of these general trading principles it should be saidthat too many speculators buy or sell impulsively, acquiring their entireline at almost one price. That is wrong and dangerous.It was too depressing, a mood not conducive to the clear thinkingthat is required at all times in the ﬁeld of speculation . . . to allow myself to become angry and disgusted with the cotton market just becauseI had used bad judgment was not consistent with good speculativeprocedure.I have long since learned, as all should learn, not to make excuseswhen wrong. Just admit it and try to proﬁt by it. We all know when we arewrong.The market will tell the speculator when he is wrong, because he islosing money.Bear in mind that of the millions who speculate in all markets only afew devote their entire time to speculation.Beware of inside information . . . All inside information!It cannot be said too often that in speculation and investment, successcomes only to those who work for it.No one is going to hand you a lot of easy money.And if there was any easy money lying around, no one would be forcing it into your pocket.I hold the ﬁrm belief that the future successful careful investor willonly operate at the psychological time and will eventually realize a muchlarger percentage out of every minor or major movement than the purelyspeculative-minded operator ever did.The intent is to catch the major moves, to indicate the beginning andthe end of movements of importance.
VOLUMEIn a day or two activity will start again, and the volume will increase. If it isa real movement, in a short space of time the natural, normal reaction willhave been recovered, and the stock will be selling in new high territory.
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WHAT TO TRADEI mean, do not have an interest in too many stocks at one time. It is mucheasier to watch a few than many, ten at the most—ﬁve is better. Deﬁnitelyit is not safe to try to keep account of too many stocks at one time. Youwill become entangled and confused.Conﬁne your studies of movements to the prominent stocks ofthe day.Try to analyze comparatively few groups. You will ﬁnd it is mucheasier to obtain a true picture that way than if you tried to dissect thewhole market.Commodities frequently offer attractive Pivotal Points.
TIMING WHEN TO TRADEAnd that is where the “time element” comes in. Don’t let the stock go staleon you.You have had patience to stay with the stock all during its naturalprogress. Now have the courage and good sense to honor the danger signal and step aside.A trader cannot be successful by speculating every day or every week;there are only a few times a year, possibly four or ﬁve, when you shouldallow yourself to make any commitment at all.If you have timed the movement correctly, your ﬁrst commitment willshow you a proﬁt at the start.Remember this: When you are doing nothing, those speculators whofeel they must trade day in and day out, are laying the foundation for yournext venture.Such weaknesses can be corrected by keeping and