10 Lessons from the Greatest Trader Ever

Thursday, Apr 18 2019 by

Jesse Livermore is an icon on Wall Street and his methods in the stock market were revolutionary. Throughout his career he made and lost fortunes; including a $100 million profit by being short going into the great crash of 1929, this cemented his nickname as the Boy Plunger. Sadly, in 1940 Livermore took his own life. Although tragic, this event is something we can learn from by analysing Livermore's life and methods in detail.

Before discussing the 10 lessons it is important to have a basic understanding of Livermore's trading methods. His method was focused upon identifying pivot points in price for individual stocks. When a stock crossed what Livermore determined to be the pivot point, both for going long or short, Livermore would act decisively. Livermore categorised pivot points into 3 types: 1) breakout; 2) reversal; and 3) continuation. 

When in an open position Livermore shares many key lessons on controlling our own psychology and not being prey to basic human emotions. As Livermore said himself "the human side to every person is the greatest enemy of the average investors or speculator". Livermore's methods of when to enter a stock, and dealing with our own emotions, are applicable to speculators/investors of all time frames.

#1 - "There is nothing new in Wall Street, there can't be because speculation is as old as the hills. Whatever happens in the Stock Market today has happened before and will happen again."

People move markets. The emotions of a speculator 100 years ago are the same as today; hope, greed, fear etc. Livermore was able to identify repeatable patterns of behaviour and profit greatly.

#2 - "Trade only when the market is clearly bullish or bearish"

Livermore understood that when speculating it is a game of probabilities not certainties. Therefore, he would only trade in the direction of the market when the direction was clear - i.e., going short when the general market trend was bearish. By doing so he further stacked the probabilities of a successful outcome on his side. Another key lesson not listed here of Livermore's was patience. Patience to stay with a trade, but also patience to sit on the sidelines in cash when the market is dull/inactive (trending sideways).

#3 - "Only enter a trade after the action of the market confirms your opinion and then enter promptly"

This ties…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


All information is for Educational purposes only. It is not to be taken as buy or sell decisions or financial advice.

Do you like this Post?
35 thumbs up
1 thumb down
Share this post with friends

16 Posts on this Thread show/hide all

dlaw 18th Apr 1 of 16

Good insights. Livermore definitely lived a mammoth rollercoaster of a life!

| Link | Share
tequila1 19th Apr 2 of 16

Thanks, great summary. Look forward to the next article.

| Link | Share
wilkonz 19th Apr 3 of 16

Excellent summary thanks. It defines the difference between speculators and investors. It's worth noting that Jess Livermore bankrupted himself several times despite his undoubted genius. Ultimately he lived off his wife's income and shot himself, regarding himself as a failure both in terms of finance and relationships. Martin Zweig (of the underperforming growth screen) was an ardent admirer of Jess Livermore and made a fortune following Livermore's principles. Livermore also wrote a book on poker which is a fine exposition of statistical understanding. It would seem he saw a close relationship between poker and speculation.

| Link | Share
iwright7 19th Apr 4 of 16

I highly recommend the brilliantly narrated Audible audiobook about Jesse's life and trading which was first published in 1923: Reminiscences of a Stock Operator, by Edwin Lefevre....


| Link | Share | 1 reply
timarr 19th Apr 5 of 16

Reminiscences of a Stock Operator is a great book, required reading for all investors. But I reckon Livermore is yet another example of an outlier: how on Earth do you replicate the ability to short the market the day before the San Francisco earthquake? He did stuff like that all the time.

It might be possible to replicate his rules - maybe - but you can't replicate the man. Like so many great investors he can't be quantified or copied. Mimicked maybe, but only as pale imitations.

And, of course, he was also an example of getting your life / work balance wrong. What's the point in making a ton of money if all you ever do is make yourself and those around you unhappy? But, sadly, genius often comes trailing tragedy.


| Link | Share | 1 reply
jonesj 19th Apr 6 of 16

In reply to post #470641

I'm an investor, not a trader & the two are different.
For example, I would reverse rule 10 and I try not to let investment turn into speculation, mainly because I am no George Soros (not enough talent).

With a long term mindset, I struggled to get anything out of Jesse Livermore's book and have not yet finished it. I have been though approximately 60 books on investing and finance, with about 10 more awaiting reading.
I'm interested to know what other long term investors got out of this book. If the answers are good, maybe I need to be having another look.

| Link | Share | 2 replies
aflash 20th Apr 7 of 16

Thank-you Jcorsellis,

It is an excellent summary. It sent me back to the texts to see if I could add some 'lessons'. In the end I only came up with expansion on some of the points you make which shows the quality of your post.
Perhaps I can start with #10 which has been questionned in the comments.
Livermore writes: 'How often have you heard an investor say I do not have to worry about fluctuations...when I buy stocks, I buy them for an investment and if they go down, eventually they will come back.'
He then lists major companies whose shares declined to cents over time. From the turn of the century until the books were published there were a lot of drawdowns.
'From my viewpoint the investors are the big gamblers. They make a bet, stay with it and if it goes wrong, they lose it all. The speculator might buy at the same time... but if intelligent ...will recognize the danger signals. By acting promptly he will hold his loss to a minimum and await a more favourable opportunity to re-enter the market.
'When I see a danger signal handed to me, I do n't argue, I get out', 'the first loss is the best loss', 'no excuses when wrong, just admit it, clear out, try to keep smiling, study the record to determine the cause of error.'

Then comes the situation that works:
''After forming an opinion do not be too anxious to get in. Do n't trust your opinion until confirmed by the action of the market.If timed correctly it will show profit at start.

He writes that: there are only a few times a year when you should allow yourself to make any commitment. In the interim letting the market shape itself for the next big movement.  'Money cannot consistently be made'..each of us has the weakness of wanting to have an interest in every jackpot.

Surprisingly he did not use charts but noted price movements 'keeping proper records & by taking the time element into consideration.' Unfortunately he does not expand on what he means by the time element although he explains his system of columns with one upward price point and two secondary ones then one downward price point and two more in that direction.

Speculation is a business ... if you cannot make money out of the leading active issues then you are not going to make money...Wishful thinking must be banished,....so many nuggets.

| Link | Share
wilkonz 20th Apr 8 of 16

In reply to post #470646

I'm interested to know what other long term investors got out of this book. If the answers are good, maybe I need to be having another look.

Whether one is a long term investor or a short term trader / speculator it is always useful to understand the behaviour of the market. Livermore's expositions on the subject are clinical. But it is important to realise he was only interested in short term price moves and wasn't bothered about long term value.

Some of the rules that Jack has kindly listed for us apply to investors as well as speculators.

Rule 4 - get rid of losers and persist with winners (even investors buy the wrong share sometimes and need to recognise the mistake and get out)

Rule 5 - never average losses

Rule 6 -- focus on a few shares not many

Rule 7 - analyse your mistakes

Rule 8 - have rules

Rule 9 - keep a clear mind (alcohol is one of the biggest losers on Wall St)

Investors will differ from speculators in their hunt for bargains (bottom fishing). Shrewd investors try to find good companies with low prices in bear markets and sell when the stock have risen above intrinsic valuation in bull markets. Whereas speculators tend to go with the flow - hoping they get their timing right for jumping on and off the bus.

| Link | Share | 1 reply
iwright7 20th Apr 9 of 16

In reply to post #470646

I wouldn't want to sit and read Reminiscences of a Stock Operator either, but the audiobook is easy listening and exceptionally well narrated. I must have played it 3 or 4x on long journeys over the last 5 years.  Whilst Jesse was undoubtedly a gifted "trader", there are one or two snippets in the book that hold true for "investors" too.....

....After spending many years in Wall Street ..., I want to tell you this: It was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!  It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it. Those men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.

....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.

| Link | Share
rpannell 20th Apr 10 of 16

I suspect that Mark Minervi and Jesse are both saying the same thing:
Wait for a trend to be in the right direction (3 upward moving averages in MM's case)
Wait for a pivot point
Jump in
Ride the wave
Jump out quickly if you have made a mistake

Nothing is new in investment / speculation as human physiology has stayed the same.

| Link | Share | 1 reply
jonesj 20th Apr 11 of 16

In reply to post #470666

"Some of the rules that Jack has kindly listed for us apply to investors as well as speculators.
Rule 4 - get rid of losers and persist with winners (even investors buy the wrong share sometimes and need to recognise the mistake and get out)
Rule 5 - never average losses
Rule 6 -- focus on a few shares not many
Rule 7 - analyse your mistakes
Rule 8 - have rules"

Rules 7 and 8 are probably applicable for everyone
On the other hand, people like Warren Buffet and Seth Klarman tend to recommend the exact opposite to Rules 4 and 5, after double checking the investment thesis.

Finally, if everyone adopts a particular strategy, then it will cease to outperform.

| Link | Share | 1 reply
wilkonz 20th Apr 12 of 16

In reply to post #470701

Agreed there are always exceptions. But even Warren Buffett sells his losers - Tesco cost him about $250 million before he got rid of it. And he's not above a bit of quiet trading - recent sales of airlines and Phillips 66. (He calls airlines 'terrible investments'.) Most famously of all, he ditched Berkshire Hathaway as a textile company after 20 years of losses - but he did keep the name.

| Link | Share
coniston 20th Apr 13 of 16

Thanks JC.
Paul Tudor on Reminiscences page 399 is an excellent addition to the book.
Q.Livermore/Livingston lays down numerous rules during the book. Do you ever think about these particular insights as you manage your own trades today, or are there any phrases or anecdotes that linger with you more
than the others?.
Jones. There are two rules from this book by which I now live during these later stages of my constitution. First is the tenet "The trend is you friend",which is repeated often......but not often enough.You will simply never make any money unless you begin & end every trading thought with that in mind.Second..".sell down to the sleeping point".

| Link | Share
Firtashia 21st Apr 14 of 16

In reply to post #470681

Rpannell, yes, in his book “ Trade Like A Champion” Minervini frequently makes reference to Livermore & his trading techniques, especially pivot points.

This is a super article and there are lots of really good Livermore quotes offered here. My two favourites are

“There is a time to go long, a time to go short, and a time to go fishing”     &

“The pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes”

| Link | Share
Nick Ray 21st Apr 15 of 16

It's important to realise that Livermore was an unashamedly outright trader/speculator. His rules tend to move the market away from efficiency, which means that they are inherently unstable. (Compare with the QVM/GARP type of  "buy good quality stocks but don't overpay" rules which increase efficiency and reduce volatility.)

When you trade using rules of the Livermore kind you set yourself in competition with the rest of the market. It is hard work and rule 10 ("Don't become an involuntary investor") is crucial because you are using rules which do not work over long time-frames - precisely because of the anti-efficiency nature of them.

Also, because they are inherently predatory, they need a decent number of herbivores to feed off in the market! And it is easy to accidentally become the prey instead of the predator. In fact it helps to actively recruit more food. I think a latter-day Livermore would add a few social media based rules to his list:

  • Have accounts on Twitter/ADVFN/LSE. Words like "lucky", "happy", "money", or "wealth" are good to include in your username.
  • Always post your buys after you make them. But never ever post your sells even after they are made.
  • Post frequently, but never read or act on anything anyone else has written. You don't know who is playing the same game that you are!
| Link | Share
Patxi 25th Apr 16 of 16

In reply to post #470626

The audio book version is also available on Spotify, meaning it is free to listen to...


| Link | Share

Please subscribe to submit a comment

Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis