Stock operator’s reminiscences useful in today’s market
If you ask traders to choose the most influential trading book, more than likely, they’ll mention Reminiscences of a Stock Operator by Edwin LeFevre. This book describes the experiences of one of the world’s greatest stock speculators, Jesse Livermore.

Many of the anecdotal lessons included in the book are well known to experienced traders. For example: the market is always right; don’t over-trade; never argue with the tape; use stop losses, and always trade with the primary trend of the market.

Almost anyone can learn the mechanics of trading. It’s the psychological pitfalls that make trading one of the most challenging activities. No matter your skill level, it’s important to remember and obey the rules of engagement — another word for discipline.

With that in mind, this book contains dozens of important lessons. Here are a few of my favorites:

1. Learn how to lose

Livermore (speaking through the fictional character of Larry Livingston) complains how he’s made a series of trading mistakes that cost him a lot of money, although he wasn’t completely wiped out. The losses, he admits, were painful but educational:

“There is nothing like losing all you have in the world for teaching you what not to do,” he says. “And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.”

After going broke three times in less than two years, Livermore has this advice: “Being broke is a very efficient educational agency.” He says that you learn little from your winners because they often take care of themselves. It’s the losers that will teach you lessons to last a lifetime. And as long as you don’t make the same mistake twice, you always have the opportunity to trade another day.

2. Learn how to sit tight

After a wild and lengthy rollercoaster ride as a speculator, Livermore believes he has found the secret to his success. It’s obvious he’s excited by this discovery, which he eagerly shares:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was 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,” he adds. “I’ve known many [traders] who were right at exactly the right time, and began buying or selling stocks when prices were at the very level that should show the greatest profit. And their experience invariably matched mine; that is, they made no real money out of it. [Traders] who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make the big money.”

3. Learn to take a small loss early

Of all the lessons of the stock market, taking losses is one of the hardest for most people. Maybe it’s the need to be right, or refusing to admit they’re wrong, but many people refuse to sell for a loss. Here’s how Livermore put it: “A loss never bothers me after I take it. I forget it overnight. But being wrong, not taking the loss, that is what does the damage to the pocketbook and to the soul.”

Later, he elaborates what he learned: “Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.”

4. Learn to ignore tips and gifts

If there is anything that Livermore hated, it was tips. He preferred to trade alone based on his own strategies and analysis, but when he did listen to tips, it almost always caused him grief. “Tips! How people want tips!” he noted. “They crave not only to get them but to give them.” Livermore said that trading on tips cost him hundreds of thousands of dollars, especially the kind casually given on the street by uninformed acquaintances. “I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”

Unfortunately, even Livermore was vulnerable to tips from well-meaning friends. “Against ordinary tips you cannot guard. For instance, a lifelong friend sincerely desires to make you rich by telling you what he has done, and that is to buy and sell some stocks. His intent is good. If the tip goes wrong, what can you do?”

In addition to warning people not to trade based on tips, Livermore says you should not use the market to pay for bills or gifts. “There isn’t a [trader] on Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motorboat or a painting. I could build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all the hoodoos in Wall Street, I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.”

5. Study underlying market conditions and trend

Much of Livermore’s success came from observing people, individual stocks, and the overall market. Here’s how he put it: “I have found that experience is apt to be a steady payer in this game and that observation gives you the best tips of all.” And, according to Livermore, “Not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish. And all a [trader] needs to know to make money is to appraise conditions.” The importance of studying general market conditions was one of his greatest discoveries, he claimed.

Livermore also had an Eureka moment when he discovered the value of following the market trend. “Obviously, the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to trade on those lines.”

6. Learn how to buy and sell stocks

Livermore explained some of the methods he used to buy and sell stocks. One of his methods was to buy as soon as a stock made a new high, which he said will almost certainly bring him profits. Later, he elaborates: “I have often said that to buy on a rising market is the most comfortable way of buying stocks. Now, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time.” He adds that he scales into or out of a stock as it rises or falls.

Livermore closely studied prices for clues to market direction. “Prices, as we know, will either move up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance.”

He warns, however, that although this method sounds easy, you always have to guard against your natural impulses: fear; hope; greed, and, most important, a swelled head.

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