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Updated: May 25, 2021

Jesse Livermore - The Life of a Stock Trading Legend



Legendary trader Jesse Livermore, arguably the most influential stock trader to have lived within the last century.

Few stock trading books have had the influence and lasting popularity as this trading classic – Reminiscences Of A Stock Operator.

Written almost 100 years ago this book is just as relevant now as it was then.

In this video we provide insight into Livermore’s life, his stock trading beliefs and how these beliefs translate toward the modern-day trader.

Jesse Livermore lived in the age of telegrams, ticker machines and manually updated quote boards. Not forgetting huge commission costs.

A century later we now have smartphones, instant information from the web, high frequency trading and just about any set of data you want to see to make an educated investment decision. Therefore, you would not be alone in thinking this book should be obsolete…

But Livermore himself points out, people do not change. The same forces of fear and greed are still evident today. People will try all sorts of trickery to get your money, some resorting to desperate measures.

The message being that the emotions of people towards money remain the same as they did many years ago, the same emotions that move the markets today.

Livermore was always fascinated by the markets and spent much of his time in the bucket shops of New England trying to understand them. He soon developed a skill of being able to read the tape and to help him remember the patterns for each stock, he would write his theories into notebooks.

Soon after he realised he was able to predict the movement of a stock based on its previous price pattern. It was not long after at the age of just 14 he placed his first trade and became a fulltime trader.

Livermore had a quantitative approach to price action which will be familiar to most modern-day traders. Initially he was a pure technical trader and his system gave prediction to the short-term movement of stock prices, however his style of trading developed further over many years whilst continuously studying the markets.

At the age of 21 through his trading success, Livermore amassed the equivalent of $686,000 and was subsequently banned from the bucket shops. This led him to the proper brokerage accounts in New York, where he knew his price action system could beat the markets.

He was soon to realise however that his system was not profitable outside of the bucket shops. The transaction costs and delays of the brokerages meant that he was not able to buy or sell quickly enough as he could before.

He continued trading in New York but before the end of the year, compounded by the excessive use of leverage, his trading account slowly declined, he was eventually wiped out and declared broke…

Livermore later said;

“The game taught me the game. And it didn’t spare the rod while teaching.”

Despite his losses Livermore knew his scalping strategy worked in the bucket shops due to the favourable transaction costs and quicker speed. He later travelled to St.Louis, and under a false name he began to rebuild his account.

After once again making a considerable amount of money in the bucket shops, he decided to test his luck again in New York where he knew real wealth was possible.

During his second bout in New York Livermore made several wrong bets which again almost wiped him out. He refers to these losses as tuition fees and says:-

“There is nothing like losing all you have in the world for teaching you what not to do. 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”

Livermore provides numerous lessons, pointing out that stocks decline much faster than they climb, and you should therefore never average down losses.

He suggests taking out half of your profits once you have doubled your original capital. But perhaps more importantly, give yourself time, be patient and do not over trade. It could lead you to the poor house…

Throughout Livermore’s time as a trader in New York, he often struggled to navigate his way through the treacherous terrain within the Wall Street culture. That was until he met a fellow trader nicknamed Old Turkey by his colleagues.

Old Turkey had a different approach to Livermore. Instead of holding out for small market fluctuations that worked so well for Livermore in the bucket shops, Old Turkey would pick a position and hold on to it for the longer term. In his mind, the larger profit gained from the macro market movements far outweighed the short-term benefits of Livermore’s scalping approach.

It was clear that although Livermore’s pricing predictions were right in the medium to long term, they were ill-timed in the short term. In the bucket shops the strategy was far more forgiving due to the low trading costs, in New York it was a different story.

The introduction to Old Turkey’s more patient approach was a life changing moment for Livermore, he later said;-

“It was never the thinking that made big money for me. It was my sitting”.

Livermore made his reputation as a short seller during the Panic of 1907.

Before the panic hit the roads of Wall street, he had been selling short in accordance with his views of the market and general economy. He watched as the situation gradually got worse, he stayed short, and aided by the wisdom of his old colleague Old Turkey, he saw very healthy increases in the value of his positions.

After a succession of crises and poor sentiment hit the market in October, it finally crashed. The markets seized up and required a personal intervention by financier JP Morgan to arrange a bailout.

At the bottom of the market Livermore finally took his profits and made his first million-dollar gain, but perhaps more importantly he realised that he had finally learnt to trade intelligently and patiently.

Another key lesson learnt by Livermore is that there is as much to learn from victory as there is from defeat, the learning process isn’t restricted to lessons about making money but also on avoiding the loss of money, he Alludes to keeping losses small and allowing your winners to run, a common principle preached by modern day traders.

No matter how robust the strategy may seem, money is often lost through no fault of the speculator, from developments that nobody can foresee, referring to them as inconveniently timed storms.

Having a back-up plan for unforeseen events is paramount to limit your market exposure and aid your psychology.

One of Livermore’s favourite tactics was to buy at the points of least resistance, suggesting that no matter how high the price is, the market can always go higher. Equally, no matter how cheap the price may seem, it can always go lower.

This page summarises Livermore’s strategy, which he called the Pivotal Point Theory.

Notice how the buy and sell actions were at whole number junctures, and at these junctures there are periods of consolidation prior to a breakout.

Additionally, he makes note that only stocks of interest, showing high volume should be considered, in fact, Livermore says this is the primary characteristic.

For the traders out there watching this, they will know that this theory has stood the test of time and is the foundation used today by some of the best traders in the world, including Mark Minervini, perhaps the most successful stock trader of the modern era.

From 1916 and through most of 1917 the Dow Jones lost approximately 40% of its value.

At the start of the year Livermore was bullish like everyone else, but gradually moved to the bearish side. He noticed previous leading stocks had stopped rising, a key indicator that the market was at a turning point. Finally, the bear market began, and he doubled down on short positions.

During this period Livermore took 3 million dollars of profit.

Livermore makes the point that the bear market conditions can start long before prices start to fall. In this case, it is wise for the trader to wait for prices to start to fall before entering large short positions.

Your bias should not be long or short unless the markets action confirms otherwise, you must be dynamic enough to switch your opinion in the direction of the market activity.

The well-known trader Stan Weinstein later split market activity into stages and would have categorised this downturn a stage 4 decline.

Jesse claimed that the markets never change, the two opposites, fear and greed, are the same today as in 1800, 1900 and 2000, he quoted:-

“Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Jesse Livermore’s legend lives on today through the work of many others, he is undoubtedly the most influential trader of our time.

The book scores an easy 5 stars.

Thanks for listening.

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