Jesse Livermore's Trading Method

 

Jesse Livermore was a legendary stock trader who made a fortune by short-selling during the American market crashes of 1907 and 1929. He became world-famous through the book Reminiscences of a Stock Operator (1923), written by journalist Edwin Lefèvre.

 

Jesse Livermore's Key Rules

Livermore used to say: "Whatever happens in the stock market today has happened before and will happen again."

Here are some key rules from Jesse Livermore:

1️⃣ Markets are never wrong; opinions often are. Back your judgment and don't trust your opinion, until the action of the market itself confirms your opinion

2️⃣ Few people ever make money on tips; beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket

3️⃣ Money is made by sitting, not trading. It takes time to make money. Don't give me timing; give me time

4️⃣ Buy right, sit tight. Big movements take time to develop. Men who can both be right and sit tight are uncommon

5️⃣ Money cannot consistently be made by trading every day or every week during the year

6️⃣ Nothing new ever occurs in the business of speculating or investing in securities and commodities

7️⃣ Never average losses

8️⃣ The human side of every person is the greatest enemy of the average investor or speculator. Wishful thinking must be banished

 

The Breakout Pattern

One of Livermore’s key strategies involves trading breakouts after long periods of market consolidation. The longer the market stays in a range, the more significant the breakout. Using price patterns together with volume can help confirm trade entries. Here are some key signs for entering positions:

• Wait for pivotal points to enter the market.

• The first few bars after the breakout should move in the same direction as the breakout.

• Volume should increase during the breakout.

• After the breakout, a retracement (Normal Reaction) is likely. During this, the volume should decrease.

• Once the Normal Reaction is complete, the trend should resume in the breakout’s direction, with volume increasing again.

• Any noticeable deviation from this breakout pattern is a sign that the pattern may fail.

Chart: An example of a Breakout Pattern

 

The One-Day Reversal Patterns

The one-day reversal pattern was considered an important signal by Jesse Livermore. There are two types: bullish and bearish reversals.

□ Timeframe: Daily chart

□ Confirmation: Volume

(A) One-Day Bullish Reversal:

Conditions:

(i) The close of the daily candle is higher than the close of the previous candle

(ii) the intraday low of the daily candle is lower than the intraday low of the previous candle

(iii) the volume of the signal candle is higher than the volume of the previous candle

This pattern generates a short-term buying signal.

(B) One-Day Bearish Reversal:

Conditions:

(i) The close of the daily candle is lower than the close of the previous candle

(ii) the intraday low of the daily candle is higher than the intraday low of the previous candle

(iii) the volume of the signal candle is higher than the volume of the previous candle

This pattern generates a short-term selling signal.

 

 

Selective Trading and Confirmation

Jesse Livermore believed that before opening any position, the market must first confirm and support your thesis. The trade should only be executed fully once the market confirms it. He often said, “Markets are never wrong – opinions often are,” meaning we should not trust our own opinions until price action confirms them.

In summary, this is Livermore’s trading philosophy:

• Trade only when there are real opportunities in the market.

• Use price patterns, as markets tend to repeat historically.

• Don’t overtrade or trade every day.

• Use pivotal points for your trades.

• Follow the trend and let your profits run (it takes time to make big money).

• Never average down your losses.

 

■ Jesse Livermore's Trading Method and Key Rules

G.P. for TradingCenter(c)

 

Resources:

• How to Trade in Stocks, Jesse Livermore (1940)
• Reminiscences of a Stock Operator, Edwin Lefèvre (1923)