Jesse Lauriston Livermore - Legendary Market Trader (2)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

In the last blog we learned about Jesse Livermore's beliefs about markets, as recounted in Edwin Lefevre's 1923 book, Reminiscences of a Stock Operator.  He also discussed traders and their make up.  In the book, Lefevre discusses the psychology of traders.  These days the buzz words used to describe the two bases for market action are fear when markets are plunging and greed when a bubble is developing.  Lefevre, writing for Livermore, had a different take on these emotions.  He wrote the following:

The speculator's chief enemies are always boring from within.  It is inseparable from human nature to hope and to fear.  In speculation when the market goes against you, you hope that every day will be the last day --and you lose more than you should had you not listened to hope --to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little.  And when the market goes your way, you become fearful that the next day will take away your profit, and you get out --too soon.  Fear keeps you from making as much money as you ought to.  The successful trader has to fight these two deep-seated instincts.  He has to reverse what you might call his natural impulses.  Instead of hoping he must fear; instead of fearing he must hope.  He must fear that his loss will develop into a much bigger loss and hope that his profit may become a big profit.  It is absolutely wrong to gamble in stocks the way the average man does.

Another danger a trader needs to overcome is the herd instinct, i.e., being swayed by others.  Gustave LeBon wrote about crowds and the contagion of an idea which triggers market movements.  The author of Reminiscences (Lefevre or Livermore) wrote about succumbing to this pressure several times in his trading career.  He also recounted instances in which he followed the advice of others, again, to his financial detriment.  He wrote, "It cost me millions to learn that another dangerous enemy of the trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind."

The traits of a successful trader, in the author's opinion, were as follows:

Observation, experience, memory and mathematics--these are what the successful trader must depend on.  He must not only observe accurately, but remember at all times what he has observed.  He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man's unreasonableness or however certain he may feel that the unexpected happens very frequently.  He must bet always on probabilities--that is, try to anticipate them.  Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass.

We will look at the trading techniques employed by Jesse Livermore in the next blog.

Excerpts from Reminiscences of a Stock Operator, Edwin Lefevre, 1923, republished by John Wiley & Sons, Inc. in the Wiley Investment Classics series

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