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What I Learned From The Greatest Stock Speculator In History

David Goodboy

In this modern age of instant market access, high-frequency trading and real-time news, there really is nothing new under the sun.

The stock market still goes up and goes down, investors still make and lose money, and the basic market dynamics between a buyer and a seller remain the same. Many market lessons taught a century ago still ring true today.

One of the most influential and successful stock market speculators of all time is the legendary Jesse Livermore. Many lessons can be learned from both his successes and failures, which were epic in scale. He made and lost several fortunes over his career, and his life ended tragically.

Livermore was keenly aware of his own shortcomings. Although this knowledge wasn't enough to save him, the wisdom he shared with the world is as much worth heeding today as it has ever been. Let's take a closer look at the man once called the "Speculator King" and one of his powerful investing strategies.

Fortunes Won, Fortunes Lost
Jesse Livermore's dad wanted him to be a farmer, but this born investor knew from a very early age that his calling was the stock market. After he left home at 14, his mathematical ability and love for the market landed him a job as a quotation changer at a stockbroker's office in Boston. He started dabbling in the market by risking his salary in the off-exchange stock-trading parlors known as bucket shops. Think of modern-day off-track betting facilities -- but stock prices, rather than horses, are used as betting tools. His math-oriented brain quickly began to discern repeating patterns in the stock prices.

  Jesse Livermore is one of the most influential and successful stock market speculators of all time.  

By the time Livermore was 21, this skill had earned him enough money to move to New York City, where this young financial wizard turned his full attention to the legitimate markets. Quickly building a reputation as a master stock trader, he earned around $3 million shorting stocks during the 1907 crash. 

Despite his success, he was forced to declare bankruptcy after losing 90% of the $3 million he made during the 1907 crash. This was mostly due to a single trade in cotton in which he broke his personal investing rules by continuing to buy the commodity as it was dropping in price.

Starting again with a greatly diminished portfolio, he was able to ride the World War I-driven bull market to another large trading stake. His legendary status was cemented when he successfully shorted stocks during the great crash of 1929, earning over $100 million.

Although he had great success, he also had his demons. Being married three times -- the third to a woman whose previous four husbands had committed suicide -- clearly shows a personal life in serious disarray.

By 1934, this once-mighty fixture of the financial markets was broke again, and his membership to the Chicago Board of Trade was automatically revoked due to lack of capital.   

Finally, in 1940, a lifelong battle with depression ended in his suicide in a coatroom at a New York hotel. Despite claiming to be completely broke, this investment wizard is said to have left $5 million in cash and trusts at his death. Much more important than his money, however, is the timeless wisdom Livermore left for all investors.

The Most Important Rule
Today, 73 years after his death, investors still follow the investing wisdom he left for the ages in his book "How to Trade in Stocks," as well as in "Reminiscences of a Stock Operator," a fictionalized account of his life. I strongly recommend these books to anyone interested in the building blocks of investing.

The primary lesson I learned from Livermore's writings is simple yet profound. He taught to look for obvious trends in price, set a price level on the chart (which he called pivot points), then buy or sell the stock depending on how price acted once it hits the pivot point.

Pivot points are the same thing as the support and resistance levels that I talk about in my articles. In fact, Livermore's idea on how to trade pivot points has had a profound influence on the way I approach the market. It is the basic idea behind my Channel System for entering trades and longer-term investments. This tactic, although perhaps older than Livermore himself, still continues to be a steady source of profits for many traders. 

Here's how it works: Imagine a stock's pivot point to be at $25. Once price hits $25 on the way up, you wait for price to break through the line for a certain number of ticks. You could wait for price to hit $25.50 then enter your position long. On the other hand, if price hits the $25 pivot or resistance point and starts falling, you would enter short at $24.50 in the anticipation that the down move will continue.

Livermore's investing tactic is the building block of multiple different strategies. Here is an example using Rite Aid (RAD)

Livermore likely would have seen a pivot point in the double bottom formed in March and April. He would have entered on the bounce off this level, potentially doubling his money. The current pivot point/support level is at $2.80. Livermore would probably wait for the bounce to be confirmed at $3 prior to entering the trade.

Risks to Consider: Just because you are using the same pivot points that you believe Jesse Livermore would have used is in no way a guarantee of profits. Remember, prices can do anything, regardless of pivot points. Money management rules are the key to making the system work. Livermore was a huge proponent of letting winners run and cutting losses. If prices move against your position after you enter a trade based on a pivot point, close the position after the support or resistance at the original pivot point fails. You can always re-enter the trade later.

Action to Take --> Make it a point to read Livermore's books and try to incorporate his ideas into your investment philosophy. I elaborated on just one of his trading tactics -- his books delve into many more. There are many life lessons, positive and negative alike, to learn from his experience. Livermore said that every time he failed, it was because he broke his own rules. Take this wisdom to heart.

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