10 Lessons from Jesse Livermore

Who was Jesse Livermore?

Jesse Livermore is an icon on Wall Street and his methods in the stock market were revolutionary. Throughout his career he made and lost fortunes; including a $100 million profit by being short going into the great crash of 1929, this cemented his nickname as the Boy Plunger. Sadly, in 1940 Livermore took his own life. Although tragic, this event is something we can learn from by analysing Livermore’s life and methods in detail.

Before discussing the 10 lessons it is important to have a basic understanding of Livermore’s trading methods. His method was focused upon identifying pivot points in price for individual stocks. When a stock crossed what Livermore determined to be the pivot point, both for going long or short, Livermore would act decisively. Livermore categorized pivot points into 3 types: 1) breakout; 2) reversal; and 3) continuation.

When in an open position Livermore shares many key lessons on controlling our own psychology and not being prey to basic human emotions. As Livermore said himself “the human side to every person is the greatest enemy of the average investors or speculator”. Livermore’s methods of when to enter a stock, and dealing with our own emotions, are applicable to speculators/investors of all time frames.

#1 – “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.”

People move markets. The emotions of a speculator 100 years ago are the same as today; hope, greed, fear etc. Livermore was able to identify repeatable patterns of behaviour and profit greatly.

#2 – “Trade only when the market is clearly bullish or bearish”

Livermore understood that when speculating it is a game of probabilities not certainties. Therefore, he would only trade in the direction of the market when the direction was clear – i.e., going short when the general market trend was bearish. By doing so he further stacked the probabilities of a successful outcome on his side. Another key lesson not listed here of Livermore’s was patience. Patience to stay with a trade, but also patience to sit on the sidelines in cash when the market is dull/inactive (trending sideways).

#3 – “Only enter a trade after the action of the market confirms your opinion and then enter promptly”

This ties in with another of Livermore’s famous quotes “markets are never wrong, opinions often are”. What Livermore means by these two quotes is that let the market dictate whether you are right or wrong and wait for the market to confirm your opinion. As mentioned earlier, Livermore traded at what he deemed to be the pivotal points. However, he would not enter a trade until the market showed him he was correct.

#4 – “Continue with trades that show you a profit, end trades that show a loss” & “End trades when it is clear that the trend you are profiting from is over”

No doubt you’ve heard the saying “cut your losses and let your profits run”. Livermore was able to quickly exit losing positions to preserve capital for another speculation, his rule was a maximum loss of 10%. He often said that cash to the speculator is like inventory to the shop owner. How to identify when a trend if over will be covered in a separate post.


Averaging losses means if you went long a stock at $50 and the price moves against you to say $45 you buy more to bring your average price down. This is a flawed rationale and greatly increases your risk/exposure. Applying this method you would continue buying all the way down to $0. A speculator keeps his account in order by taking the first small loss and seeking other opportunities (of which there always will be). As the saying goes, if you can’t take a small loss sooner or later you’ll take the mother of all losses. Often times an increase or decrease in price and the reason why will not be known to the ‘average speculator/investor’. What’s important to note is that the price has moved, the reason why is of less concern.

#6 – “It is much easier to watch a few than many” & “In any sector, trade the leading stock, the one showing the strongest trend”

What Livermore meant by these quotes is to follow the strongest sectors and the strongest performing stocks within those sectors. If you cannot make money from these stocks you will not make money from the stock market. Livermore would attempt to purchase these stocks at the pivotal points to increase his chances of success.

#7 – “The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.”

Your trading records are a reflection of your performance in the stock market and can contain many lessons if diligently kept and updated. Livermore, at the end of the year, would lock himself inside a bank vault for several days with all his trading records for that year (plus the millions he had made). By analysing his trades in solitude he was able to continually attempt to perfect his trading methods by understanding what was and wasn’t working. Furthermore, Livermore did not invest on tips (the time he did in the cotton market he lost a fortune) by doing his own thinking, and reaching his own conclusions, he was self sufficient and this gave an even greater sense of accomplishment.

#8 – “To be consistently successful, an investor or speculator must have rules to guide him.”

What is your own method? Do you have strict rules? There is a million different ways to make a million in the stock market. What’s important is to have a method that is consistently successful and works for you. By using Lesson 7 and diligently keeping your own records over time you can work to perfect your method. As Bruce Lee said “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced 1 kick 10,000 times”. Practice your method over and over again, constantly trying to perfect your edge.

#9 – “Keep stress at bay, act in all ways to keep the mind clear and your judgement correct.”

I find this quote one of Livermore’s most fascinating. If you have read ‘How to Trade in Stocks’ by Jesse Livermore (with updates from Richard Smitten) you’ll know Livermore’s personal life was far from stress free. Of course, we also know the tragic ending to his life. Therefore, I think Livermore meant this as a lesson to those who want to follow in his footsteps. Vast fortunes can be made in the stock market but if stress and a clear mind cannot be maintained it can unfortunately lead to ruin.

#10 – “One should never permit speculative ventures to run into investment. Don’t become an involuntary investor.”

Livermore believed that more money was lost by ‘investors’ than was lost from speculating on stocks. By this he meant that when someone bought a stock that turned into a loss, rather than selling with a small loss, that person would become an involuntary investor whilst the share price continued to move against them. Normally the cause for becoming an involuntary investor was due to the emotional hurt of accepting they were wrong. Livermore’s point is that more money is lost from people that continue to hold losing positions than is lost by closing out small losses.

Here’s to Jesse!

Please note that this blog post is for educational and information purposes only. It is not financial advice of any kind.
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