Jesse Livermore was creating a trading plan. He probably didn’t call it that but he was developing an edge.
He started tracking price action and noticed “certain habits” that later become his famous Jesse Liver more Key.
I noticed that in advances as well as declines, stock prices were apt to show certain habits, so to speak. There was no end to parallel cases and these made precedents to guide me.
Livermore said he began testing. How many of us test our trading ideas before we allocate significant money? I can tell you from my experience (after managing hundreds of traders) the answer is not many.
Too often we are eager to make money without data to back up our conviction.
Jesse Livermore Did not Trade From His Gut
You have a burning desire. I get it. So did I when I began trading full-time but that isn’t enough to risk real money. Trade small and test your ideas. Find out if you actually have an edge only then should you trade bigger.
I was only fourteen , but after I had taken hundreds of observations in my mind I found myself testing their accuracy. Comparing the behavior of stocks today with other days.
When you place a trade are you anticipating probabilities will play out over time or are you expecting something to definitely happen? This is the biggest mistake all traders make. I can’t stress enough the significance of getting your mind wrapped around probabilities.
Stop judging results on a trade by trade basis. Jesse Livermore calls it “forecasting.”
Track price action history and develop a book of patterns that repeat. Then test small. This is smart trading.
It was not long before I was anticipating movements in stock prices. My only guide , as I say, was their past performances.
Did Jesse Livermore Keep a Trading Journal?
Write everything down. I can tell you stuff that happened during the trading day at 9:45am will not be remembered with enough detail at 4:30pm. If you want to learn so you can succeed faster you must document everything. Many traders say they can;t write during market hours. I say that is BS!
If you can’t find the time to document how you plan to be successful. How you plan to craft a winning edge. You shouldn’t be trading.
Livermore said he kept the observations in his mind. I don’t believe him. Trust me. He wrote it down. If you disagree go ask ten traders if they religiously write a journal. You won’t find more that 3 who continue after their first couple of months. Sad but true. If you want to succeed, write it down so you can accelerate your progress.
Fail faster with small shares then scale up when you have proof. Proof in the form of a profitable track record. Not a gut feeling because you are “working hard.”
I carried the “dope sheets” in my mind. I looked for stock prices to run on form. I had “clocked” them.
Jesse Livermore on Winning Percentage
What winning percentage should you strive for? Forget it. This is the dumbest statistic in trading. Sure you need to have an edge. That is not winning percentage. An edge is statistical proof that somethig will happen more often than not. Winning percentage is based on profitable trades compared to total trades.
This statistic is dopey because you can have a 90% winning record but lose money.
Focus on probabilities and trade management. Step away from this horrible stat. You can see he Livermore quoted “seven out of ten.” Be careful not to misinterpret what he is saying.
He is talking about odds. Not winning trades.
You can spot, for instance, where the buying is only a trifle better than the selling. A battle goes on in the stock market and the tape is your telescope. You can depend upon it seven out of ten cases.
Check back for my weekly interpretations of Reminiscences of a Stock Operator. My goal is to help you shorten the learning curve on your journey to six-figure trading.
More about Pete Renzulli here.