Jubilee Prosperity

Livermore Trading Rules

• Buy rising stocks and sell falling stocks.
• Do not trade every day of every year.
• Trade only when the market is clearly bullish or bearish.
• Trade in the direction of the general market.
• If it’s rising you should be long, if it’s falling you should be short.
• Co-ordinate your trading activity with pivot points.
• Only enter a trade after the action of the market confirms your opinion and then enter promptly.
• Continue with trades that show you a profit, end trades that show a loss.
• End trades when it is clear that the trend you are profiting from is over.
• In any sector, trade the leading stock – the one showing the strongest trend.
• Never average losses by, for example, buying more of a stock that has fallen.
• Never meet a margin call – get out of the trade.
• Go long when stocks reach a new high.
• Sell short when they reach a new low.
• Don’t become an involuntary investor by holding onto stocks whose price has fallen.
• A stock is never too high to buy and never too low to short.
• Markets are never wrong – opinions often are.
• The highest profits are made in trades that show a profit right from the start.
• No trades or rules deliver profit 100 percent of the time.
• Cutting smaller losses rigorously saves money for the big moves.
• The big moves occur outside or opposite mass public opinion.

As a serious footnote to these insights and rules, Jesse Livermore made and lost significant fortunes, going bankrupt several times in his life.

Mr Livermore claimed lack of adherence to his own principles and rules was the main reason for his losses after making his fortunes before the 1907 and 1929 crashes.

JL observed crashes and panics were a faster roller coaster on the way down than up because margin calls and lack of credit led to forced liquidations and further faster falling prices.

We saw this in the crashes of 1966, 1974, 1987, 2002 and 2008.

After the crashes and reflex recoveries, a period of flat prices without trends did not profit JL’s trend following system.

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This entry was posted on Tuesday, March 9th, 2010 at 7:08 pm and is filed under Market Psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.