Livermore strategy
"A speculator must concern himself with making
money out
of the market and not with insisting that the tape
must
agree with him. Never argue with it or ask for
reasons or explanations."
- Jesse Livermore
It would seem that his Market Key strategy was basically as follows
When the price has risen by at least 20% from a low, its highest price in that rise is a pivotal point.
When the price has fallen by at least 20% from a high, its lowest price in that rise is a pivotal point.
To begin, you need to establish the 2 most recent high and low pivotal points.
If the price falls by more than 10% from its high pivotal point, there is no uptrend.
If the price rises by more than 10% from its low pivotal point, there is no downtrend.
An uptrend is resumed when its high pivotal point is exceeded by more than 10%.
A downtrend is resumed with its low pivotal point is broken by more than 10%.
Tape Reading Methods
In this first quote from Reminiscences of a Stock Operator, Jesse Livermore
makes note the fluctuations were giving messages. Early on he was intending
to understand the message that would result in a trading edge. What tape
reading method do you use? I personally use candlesticks in multiple
time frames.
“Of course there is always a reason for fluctuations, but the tape does
not concern itself with the why or wherefore. It doesn’t go into
explanations. I didn’t ask the tape why when I was fourteen, and I don’t
ask it today at forty…”
This is an important quote by Livermore. Too many traders want to know
“why” after the fact. Tape readers by the very definition, don’t interpret THE
WHY. Tape reading is interpreting price action.
“The reason for what a certain stock does today, may not be known for
two or three days, or weeks, or months. But what the dickens does that
matter? Your business with the tape is now-not tomorrow. The reason
can wait. But you must act instantly or be left. Time and again I have
seen this happen…”
To put this quote by Livermore in context for the modern trader, we could call
them momentum traders.
“You’ll remember that Hollow Tube went down three points the other day
while the rest of the market rallied sharply. On the following Monday you
saw that the directors passed the dividend. That was the reason…”
Notice Livermore wasn’t making notes to potentially trade the reason in the
future. He didn’t care why.
He was simply reading it and found the reason amusing. Modern tape readers
can use the news to trade stocks in play. The correct way to implement this
strategy is to use the news as a catalyst to find stocks in play, but…you are
ultimately going to trade the price action.
There is a difference between a catalyst and trade management. Struggling
traders believe a catalyst or an edge will translate into profitability. Your edge,
or any reason to be in a trade, is only the first part of the trading equation. The
money is made or lost in trade management.
An amazing educator and trader, Marian Boyle, writes a must-read post each
day for the community Good Morning Wall Street. It is a great source to find
stocks in play each morning.
“Well, I kept up my little memorandum book perhaps six months. Instead
of leaving for home the moment I was through with my work, I’d jot down
the figures I wanted and would study the changes, always looking for
the repetitions and parallelisms of behavior -learning to read the tape,
although I was not aware of it at the time.”
Jesse Livermore made it clear he was keeping a trading journal. He also
points out that he stayed late to improve. I can’t tell you how many traders I
have witnessed over the years leave when the bell rang at 4pm. It was sad to
see. If this is you, you have absolutely no shot at success. I used to joke about
a daily fire-drill at 4pm.
Trust me. Those who understood, knew I wasn’t
joking. How you spend your spare time will dictate how you spend your
future.
