Trade the Stock Market with 4th Grade Math: In Consideration of Jesse Livermore

November 3, 2013 at 5:52 pm Leave a comment

This publication explains that you only need to know how to handle 4th grade math to manage trading. However, the opposite is true too: If you cannot or refuse to handle 4th grade math, stay out of trading.  

Why to be so provocative?

At times, I am coming across people, who refuse to calculate 2% of $380, however, they feel that there is a way to make money from the financial markets. On my opinion: Trading stocks, commodities, currencies, and treasuries is a nickel and dime business and requires you to apply basic math.  

Trading is a numbers game and for every trade you take, there is a party taking the other side, with an opposite opinion to the one you have:

Party-1 is buying by a perspective of a value gain in the asset they invest in.

Party-2 is selling by the perspective of a future value drop.

Who is right?

Mostly the party, who takes the other side to your trade: Because they are prepared.

However, you can change this correlation at ease: The big money is leaving their traces and we can detect it and beat institutions by speed: Entering and exiting entire positions on the spot. The big money either by regulation or size is unable to do this.

Let us share our little synopsis of the life of Jesse Livermore, who was a great trader and speculator – always willing to learn, study and open to new ideas.  He was dedicated to always gaining an advantage over all other traders and investors. 

The story of Mr. Livermore is a very important and instructive legacy every person, who wants to advance to being a financial market investor, should be exposed to. His teachings all throughout his books and biographies were all about basic trading philosophies, which include:

          trend-following strategies,

          trend-fading strategies,

          deep market analysis,

          following the leaders,

          identifying pivot points,

          and, of course, risk management. 

Besides others, you will find all those elements in NeverLossTrading as an updated form of considering trading psychology and action in the times of computerized investment and high frequency trading.

By his biography, it took Jesse Livermore years to nearly perfect his system and methods, and it required intensive studying and effort in order to execute and to stay disciplined in trading.  NeverLossTrading is providing you a shortcut, so you do not need to build up a trading system on your own.

Jesse Livermore in his writing proclaims:

          The stock market is for neither the lazy nor the uninitiated.

          If one really wants to succeed in making money in the financial markets over the long haul, then one will need to put in the necessary time and effort – not only in the studying of the market, but in the studying of one’s own psychology and tolerances, as well.

Referring to his tragic biography the question comes up: “If Livermore was so great, why did he ultimately lose his fortune during the Great Depression and why was he not able to make a “comeback” again? 

There are many factors that make a person’s life and success and we want to share our interpretation:

Jesse Livermore characterized his way to success was based on the following principles:

          In order to succeed in life, one needs to put in a great deal of time and effort to an endeavor that one enjoys doing. 

          There needs to be an affinity to numbers and a great discipline for keeping records. 

          Things change, and with that, there is always a need to learn and being receptive to new ideas. 

In short: Jesse Livermore was a self-made man. He ran away from home at the age of only 14 and went to work as a quotation boy in Boston.  He quickly learned the art of “reading the tape” and from here, he proceeded to trade in the bucket shops – and was so successful that he was practically banned from trading in Boston. From the bucket shops, he relocated to New York and started trading on the Big Board in the office of E. F. Hutton. This was in the year 1897.  By that time, Livermore had already gained a reputation as the “Boy Plunger” in Boston. He was only 20 years old.

Trading “legitimately” on the NYSE taught Jesse Livermore his first major lesson in how to consistently make money in the stock market.  How?  Within six months of opening his account in a legitimate brokerage firm, he had lost all his money – all $2,500 of it – approximately the equivalent of $100,000 in today’s dollars. 

But this unfortunate development only motivated Livermore to study his mistakes more carefully.  He was able to beat the game in the Boston bucket shops, so why not on the Big Board?

He shared the following experience with us:

          Each trader has to find their own trading style and comfort zone and underlying instruments to trade.

          Different underlying trading instruments like shares, indexes, commodities, currencies have their own dynamics to learn.

          The greatest amount of money is made following the major trends for stocks and commodities, while there are tends and trends in the trend. He had always been able to call significant tops or bottoms in the stock and commodity market and had always been able to initiate positions at the most opportune time accepting the fact that markets move in an up- and down wave- patterns.

          Time to execution:  Jesse Livermore was handed down the ultimate lesson in the art of execution during the final day of the Northern Pacific Corner on May 9, 1901.  Livermore had anticipated a huge downside move in the morning and a subsequent one-day upside reversal.  He was right, of course, but he ultimately lost his entire stake of $50,000 that day.  Because of the huge volume during that day, the tape was nearly two hours behind; his brokers (who were very able) did place an order to short U.S. Steel and Santa Fe in the morning, but those orders did not get executed until two hours later.  By then, both Steel and Santa Fe had already fallen by over two dozen points.  When Livermore ultimately covered, he did so at levels that were two dozen points higher.  This one-day plunder cost him his entire stake, which took him a long time to build up. Hence, we proclaim for everybody who is serious in being a financial market investor to use a modern real time platform with instant execution. A phone call to a broker, being put on hold and executing at the wrong time might have the same detrimental effects as described. 

          Reading the market and price action: While his tape-reading skills were still important, they were not as important as studying the fundamentals of each company and the credit conditions of the stock market and the economy.  His first successful “raid” on the stock market based on his sound, fundamental studies occurred during the Panic of 1907.  As credit conditions tightened and as a number of businesses and Wall Street brokerages went bankrupt during the summer, Livermore could sense that something was wrong – despite the hopes of the public evident in the still-rising stock market.  Sooner or later, Livermore concluded, there will be a huge break of epic proportions.  Livermore continued to establish his short positions, and by October, the decline of the stock market started accelerating with the collapse of the Knickerbocker Trust in New York City and Westinghouse Electric.  J.P. Morgan eventually stepped in to avert the collapse of the banking system and the New York Stock Exchange, but only after Livermore managed to make more than one million dollars by shorting the most popular stocks (and covering on a plea from J.P. Morgan himself) in the stock market. Our days we prepare with the key news events, market evaluation and a trading platform setup that alarms us clearly, when market dynamics change.

To succeed in the financial markets methods of producing gains in up, down and sideways markets are essential. What made Livermore so successful during the first thirty years of the 20th century was this: Not only was he multi-talented in the traditional sense (his skills in analyzing long-term trends and fundamentals were as good as his skills in tape-reading and in day trading), he was also multi-talented in the sense that he was able to evolve with the market very successfully.  He had always been flexible in either trading the long side or short side – and he was also able to sit out in a market that was devoid of activity as well.

Another lesson to learn: Do not depend on analyst’s opinions or “insider information.” Focus on what the charts tell you. Common information is mostly wrong and does not make successful trades.  Livermore learned this lesson the hard way. Livermore had always been skeptical about the dependability on “insider information.”  After all, why would top management tell outsiders that he was selling shares in his own company because he thinks business will be bad going forward (these were the days before insider-trading was made illegal)?  Telling outsiders would only add more selling pressure to the stock, and vice-versa.  Livermore got his first real lesson sometime after he closed out his profitable short position in Union Pacific right before the 1906 San Francisco Earthquake.  After three days of tape-watching, he concluded that the shares of Union Pacific were being accumulated.  He started to accumulate shares in Union Pacific as well – only to be stopped by Ed Hutton, the great New York financier and owner of the E.F. Hutton brokerage house, and a personal friend.  Hutton told Livermore that he had inside information and that the insiders have set up a pool and were dumping shares to him at a furious rate.  Sooner or later, Union Pacific is going to tank.  Despite his own beliefs and the reinforcements of all those beliefs from years of tape-watching, Livermore liquidated his 5,000 shares of Union Pacific at $162 – making only $10,000 in the process.  The next day, the company announced a 10% dividend and the shares shot up by an additional ten points.  What was the opportunity cost?  $50,000 in additional profits, which would be equivalent to over one million dollars today.  Livermore did not get upset or emotional, but after this incident, he swore that he will never listen to insider information again and that he will only trust his tape-watching skills and instincts from now on.

Trust in yourself and what you see on your charts and forget or do not even expose yourself to expert opinions. Use stops that get you out of so a single trade cannot hurt your capital and keep you in business. Do not try to be right, accept when you are wrong and move on. This was a hard lesson to be learned for Jesse Livermore.  Soon after the Panic of 1907 – when Livermore was trading successfully at a peak level and had made a small fortune by nearly cornering the cotton market.  Some weeks before, a man named Percy Thomas (who was also known as the “Cotton King”) had gone bankrupt in trying to corner the Cotton market, and hearing Livermore’s exploits. Mr. Thomas would seek him out and ask Livermore to be his partner.  Livermore refused to be Thomas’ partner since he had always played a lone hand.  However, Thomas was a man of knowledge (particularly in the cotton market, of course – where he supposedly had “spies” that would report crop conditions and the like to him as soon as they could) and a great charmer, and Livermore was soon put under his spell.  Prior to Livermore meeting Thomas, Livermore was short cotton.  After a month of listening to Thomas and falling under his spell, Livermore covered his short position and went long.  This was the beginning of Livermore’s downfall.  With his judgment clouded, Livermore continued to average down on his long position even as Cotton fell.  He even sold out his profitable wheat position in order to maintain his margin requirements in cotton and to even buy more cotton on the way down.  After realizing what had happened, Livermore soon sold out – with a stake of only $300,000 left – 10% of what he had only some months ago.  Livermore sold his apartment and his yacht and tried to recoup his losses in the stock market.  By this time, however, his emotions were running wild and his trading skills were shot.  Soon thereafter, Livermore was broke once again – not only losing his remaining stake of $300,000 – but now, he was in debt to the tune of over one million dollars.  Livermore would ultimately establish himself once again, but this lesson further reinforced his beliefs that he should always play a lone hand, and that he should never tell anyone what he was doing or ask otherwise.

Jesse Livermore has been able to successfully trade the stock and commodity markets over a period of more than thirty years not only because of his intelligence, cool-headedness, trading skills, and his far-sightedness.  He was also eager to learn something new every day.  He was also flexible – whether on the long or short side or just being in cash.  He figured out when there were opportunities in the stock market, and figured out what strategy to adopt and when there were opportunities or not.  

Let us put his forte in front of our trading and learn to be careful in position sizing and clear commitment to exit the markets when we are wrong without getting hurt. NeverLossTrading incorporates all those elements and considers them in day-, intraday- and long-term-investment.

The financial markets from their beginning and still today are an exclusive club dominated by intuitional investors (only brokerage firms are allowed to trade, so you and I need a third party to do so). Institutional investors are big companies like Goldman Sachs, JP Morgan, ING, Barclays Bank and many more. Those institutions have to execute their orders in an organized fashion. To do so, they build up systems and compile orders with clear instructions where to buy and where to sell. How else would the communication between the headquarter and a floor trader work?

Many people think that employed floor traders would act on their own decision and with that make it all happen. If they could do this on their own and make a fortune for their employers, would they stay for a salary?

As a result, we investigated the way Institutional Investors organize their system of order execution and follow their footsteps.

A key question often asked: “But what if the institutions trade against you.” The volume of orders a small investor can place in the market is so minuscule and does not matter in the big scheme of things, where Goldman Sachs fights Deutsch Bank and UBS (Switzerland) on a currency- or stock trade.

In our studies, we display on a chart where crucial price levels are and in advance decide if we go with or against the overall market trend at those predefined levels that automatically appear on our graphs.

Combining all this we find answers to: Why Do Prices Stop and Turn at Certain Points by evaluating?

NLT Indicators and Jesse Livermore

Our trading system works with various securities: Shares, Indexes, Commodities, Currencies, Treasuries, and their derivatives: Options and Futures: We always trade in relation to the psychology and action of people, however, we found common denominators which help to synthesize what is going on in a particular investment instrument or in the overall market.

We teach NeverLossTrading in four mentorship classes. Check our two examples:

NLT Top-Line: Our laser sharp trading suite, which includes market scanners installed on you computers to always stay on top of the markets real time.

NLT HF-Stock Trading: Focus is the stock market investor, trading for high short term returns off daily and weekly charts, by trading selected shares base on own analysis and our constant market feedback reports.

Each of our systems runs independent and all systems can be combined to obtain multilayer market information. for more information or call: +1 866 455 4520

If you are not already part of our FREE webinars and newsletters…sing up here.

Entry filed under: Day Trading, Financial Market Investment, Investor Education, Price Prediction, Stock Market, Technical Analysis, Trading, Trading Education. Tags: , , , , , , .

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