Jesse Livermore’s Stock Trading Secret

Jesse Livermore is believed by many to have been the greatest stock market speculator who has ever lived.  He earned several fortunes over his lifetime.

While his life ended tragically due to personal demons, Jessie left behind a legacy of investing lessons that remain applicable for every investor.

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  • I have always been fascinated by Jesse Livermore and his investing techniques.

    This interest has led me to discover what I consider the number one secret to his success.

    It’s not something that is difficult to understand or implement.  In fact, it is something so simple that you will kick yourself for not implementing it sooner in your trading and investing career.

    First, let’s take a closer look at Jesse Livermore.

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  • Jesse Livermore’s father pressured him to be a farmer, but this soon to be wealthy investor knew his passion was in the stock market from a very early age.

    Fighting with his father, Jesse ran away from home at the impressionable age of 14.  His highly skilled mathematical mind and appetite for the stock market enabled him to land a position as a quotation boy at a local stock brokerage.

    Back then, prior to computers and real-time feeds, teenagers were hired to manually change the numbers on large boards that listed stock quotes for investors using the brokerage house as their office.  The closest example today to this environment is the off-track betting parlor.

    Understanding that he was developing an edge over the market,  Jesse started investing by risking his hard-earned salary in the off-exchange stock trading parlors of the day called bucket shops.

    As you likely imagine, these seedy places were like magnets to degenerate gamblers and other hard-living party type people.  Think of  small, smoky poker rooms as the equivalent today.

    His math genius brain quickly began to discern repeating patterns in the stock prices. This talent earned him enough money by the age of 21 to move to New York City, the epicenter of the financial world.

    Once in New York, this young financial wizard turned his full attention to the legitimate stock exchanges.

    Quickly building a reputation as a master stock trader, he earned around $3 million dollars shorting stocks during the 1907 crash and approximately $100 million after the great crash of 1929.

    Surprisingly, despite his vast success, he was forced to declare bankruptcy after losing 90% of the $3 million made during the 1907 crash.

    This was primarily due to a single trade in Cotton where 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 One driven bull market to another large trading stake.

    His legendary status was cemented in history when he successfully shorted stocks during the great crash of 1929 earning over $100 million with his investments.

    Although he had great success, he also had his demons.  Being married three times with the third marriage to a woman whose last four husbands committed suicide clearly shows his personal life, despite having a fortune, was in serious disarray.

    Jesse’s life ended tragically in a suicide at the Sherry-Netherland Hotel in New York City.

    The Secret

    Despite this tragic ending, tremendous and timeless investing know how can be gleaned from studying his stock market techniques.

    My studies of his methods have revealed that his number one investing secret has to do with how to enter a stock trade.  While countless words have been written on how to time entries, project stock prices, fundamental/technical analysis, and manage trades, very little has been focused on the correct way to enter a stock market investment.

    There are three primary ways to enter a stock trade.

    Out of these three primary methods, one emerges as superior in most situations.

    This method is how Jesse Livermore traded.  It is important to note that he didn’t always follow his own rules.  In fact, he readily admitted, that when he took his huge losses, it was a direct effect of not following his own successful investing methods.

    There are 3 basic entry tactics for stock trading.

    All at once, Averaging Down, and Averaging Up— also known as scaling in or pyramiding

    Let’s talk about these 3 primary entry methods in more detail.


    1. All at once entry method

    This the most basic and easy to understand stock trading entry. It is also the way the majority of average investors enter trades.

    If you are going to invest in 1000 shares of stock, when the trade triggers, you go in with all 1000 shares at one time.  If you have substantial faith in the set up that triggers the trade, the all at once method makes good sense.  In addition, during very fast moving market, the all at once method can be effective However, it is far from the ideal method in most cases.

    1. Averaging up

    Averaging up is Jesse Livermore’s stock trading secret. He called it “testing the market”. This stock trading entry method is also known as pyramiding.  Averaging up is when your 1000 share trade size is entered in pieces with the price going in a profitable direction.

    Jesse called this “testing the market” since he would test the stock by buying 100 shares out his 1000 and if the 100 moved in the profitable direction, he would buy 100 or 500 more until he reached his full investment size.  Remember, the exact numbers are only as an example, every investor, depending on his risk tolerance, commission structure and opinion will break down the entry numbers in a variety of ways.  The exact numbers is not the important part of the tactic.

    Averaging up is how many fortunes have been made in investing, including Jesse Livermore’s.

    The reason it works is that your initial risk is relatively low due to the small relative size of your entry.

    When the trend starts to develop, gaining momentum you begin to increase your size in the trade which adds to profits as the move continues in the anticipated direction.

    1. Averaging Down

    This stock trading entry method is the opposite of averaging up. Many pundits teach to avoid this method as it can lead to huge losses.  While this is very true, averaging down into positions can work when used by skill investors with a plan.

    The key is being disciplined, since averaging down often does spell total destruction for the undisciplined trader.  The concept is the same as averaging up, but this time as the trade moves against you, more shares are purchased bringing the average purchase price down.

    This results in your break even point of the trade to drop in direct correlation to the number of shares entered at each level on the way down.

    The fact that stocks prices don’t move in a straight line is why this entry method works at times.

    It also gives the investor wiggle room to be wrong with the timing of the initial entry, by providing a potentially wide range of movement to still capture profits.

    It is critical to understand the total amount you are willing to lose prior to starting this strategy and STICK TO IT.  If you don’t there is a very high potential of a complete blow up of your account if the adverse move continues past your capital base to withstand it.

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