Jesse Lauriston Livermore — not a theorist, but the greatest speculator in history. Four times he made millions, three times he lost everything. His rules were born less from his wins than from his losses.
At 14 he ran away from a Massachusetts farm and, at Paine Webber in Boston, became a quote-board number-poster. He noticed the numbers had «behavior» and noted it in a book. First trade: $5 — a $3.12 profit. Before he was 20 he had taken $10,000 from the bucket shops, who banned him as «the Boy Plunger».
In the great panic of 1907, short, he won $1 million in a single day. J.P. Morgan, then rescuing Wall Street, sent word asking him to «stop selling short» — he stopped, went long, and won again. At 30 his name was a legend.
In the autumn of 1929 he sensed the turn through his pivotal points and went short on every front. In the week of Black Tuesday he won ~$100 million (about $1.5 billion today), and the papers blamed him as «the man who broke the market». When he came home, his wife had thought him ruined.
Breaking his own rules again and again, in 1934 he declared bankruptcy — for the third time. In 1940 he published his book «How to Trade in Stocks», and in November of that year took his own life. A tragic end — yet the rules in his notebook still sit on every trader's desk today.
Livermore never tried to buy the lowest price —at the right moment, when a pivotal point breaks he entered: a historic high, a round number, the edge of a consolidation. «Price flows along the line of least resistance» — a broken pivot proves that line has opened.Entering early is as bad as entering wrong.
He never took a full position at once: first probe with 20%, add when the market confirms and you're in profit, then fill it fully once confirmed again. Adding to a losing position is —not «dollar averaging», but the road to ruin. Only a winning position has the right to grow.
An iron rule on both sides: a loss —get out before it reaches 10% — at once if doubt appears; but while it's in profit and the trend is intact, sit and do nothing. The big money is not in the thinking — it's in the waiting. Only boredom and fear destroy a position.
He read the deepening credit crisis from the summer and went short. On the day the panic peaked he won $1 million in one day. With the market on the brink of total collapse, at Morgan's request he stopped shorting and, going long, won again — at 30.
Through the summer, as the leading stocks failed to hold their pivots at new highs, he noted it and pyramided his short. On Black Monday and Tuesday: ~$100 million (about $1.5 billion today) — the largest individual short profit in history.
It's a stock from your favorite company, down 15% from its high. Do you buy?
Your position is −7% and your thesis is in doubt. The thought «it'll come back» arises. What does Livermore do?
Your position is +40%, the trend intact, the pivots defended. But it's gone sideways for 2 weeks — you're getting bored. What do you do?
Livermore never bought cheap. He entered on the break — the candle that closes above the pivot. Click too early and you're catching a knife. Click the break.
«Reminiscences of a Stock Operator» (1923) — still the most-read trading book today. Livermore's own life is the greatest lesson: a system protects you, emotion destroys you.