COST OF BREAKING TRADING RULES
Jesse Livermore is one of the most famous and successful traders of the last century. During his lifetime he was nicknamed "The Great Bear" because he actively sold stock assets during the Great Depression and managed to make a multimillion-dollar fortune. Wikipedia mentions that Livermore made and lost significant sums on the stock market more than once during his lifetime. He was distinguished from his contemporaries by his aggressive manner of intraday trading. Today we want to tell you about Livermore's life and his own rules of trading on financial markets.
✴️ THE BEGINNING OF HIS CAREER
The ascent of the trading legend began with the stock exchange offices in Boston. Livermore did not take part in trading, but only recorded constantly updated asset prices on a special board. It is important to realize that at the beginning of the 20th century, prices on stock exchanges were transmitted by telegraph. Having a good capacity for exact knowledge and impeccable memory for numbers, Livermore was the first to discover patterns in trend reversal models. Contemporaries note that Livermore was not sociable. All the young trader's attention was focused on price changes of liquid assets. It is noteworthy that he used only numerical sequences to make trading decisions, especially not being interested in the reasons for rising or falling prices.
Having gained a little experience in exchange offices in Boston, Livermore began to keep a notebook in which he recorded all the identified patterns in the dynamics of asset pricing. Biographical literature notes that at that time he was not interested in trades with large sums. The young trader was fascinated by the patterns in the behavior of prices, confirmations of which he was constantly looking for in practice. Some time later, his friend offered to buy a share of the company "Burlington". Having checked his records and convinced that the price would rise in the near future, Livermore invested 5$ in the mentioned brand, earning more than 3$ in a couple of days. This was Livermore's first and highly successful trade.
✴️ WALL STREET CAREER
At the age of 21, the talented trader moved to New York with the aim of conquering the stock market, having $2500 earned in small stock exchange offices in Boston. Livermore could not open an account with any of these companies because his name was on the rumor. Even then, he claimed to close a trade with a profit 7 times out of 10. No small brokerage firm wanted him among their clients, as he could easily bankrupt it.
Eventually he was able to open an account on Wall Street, investing all the money he had into the trade. To everyone's surprise, it ended with a complete loss of deposit. The reason is as follows: Livermore was a hardened proponent of short-term trading, capitalizing on minor price fluctuations. Information about the actual value of assets was transmitted by liquidity providers to Wall Street with significant delays, which led to inaccurate short-term trading. While in Boston, small firms used telephone tape orders and processed customer orders almost instantaneously, this was impossible in the real market conditions of the time.
The manager of a Wall Street brokerage house was kind to the young trader and saw potential in him. When Livermore lost his capital due to technical reasons, he lent him $500 to disperse his deposit in illegal brokerage houses. Livermore then heads to St. Louis, where he makes $2,800 in a matter of days. The company removes him from the number of clients, and also notifies all brokerage houses in the vicinity about the appearance of an overly successful participant of trades. Back in New York, Livermore managed to earn another $5,000 while trading at one of the illegal brokerage houses in New York, and then reopened an account on Wall Street.
Livermore managed to make good money on the global growth of the US stock market in 1901. On his account was the sum of 50 000$. However, later, against the background of high volatility, Livermore lost all his money and was forced to go to his hometown to earn money. After some time, Livermore again started to ruin brokerage houses in Boston, acting through his friends. He managed to save the necessary amount for a third return to New York and open another account on Wall Street.
✴️ THE 1907 MARKET CRASH AND THE GREAT DEPRESSION
In 1906 Livermore foresaw a global decline in the prices of railroad company stocks under the influence of natural disasters. In 1907, there was indeed a decline in prices, but not as rapid as the trader saw it. Then big banks managed to support the value of shares of industrial companies. Trying to sell in a growing market, Livermore again lost almost all of his fortune. He decided to stop trading and wait for a signal to enter the sell-off with all his remaining funds.
Just as Livermore had anticipated, the railroad companies were going through a tough time and the stock rushed downward. The economic situation in the country was so critical that the companies were ready to sell their shares to investors in installments with the participation of banks, but the latter were not sure that investors would be able to fulfill their financial obligations in the near future.
As a result, in 1907 there was a global collapse of the stock market in the U.S., and Livermore managed to earn 250,000$. In October of the same year, the panic of businesses reached its peak and banks started sending their representatives to Livermore asking him to stop selling stocks as it could lead to global economic problems in the US. Under this influence Livermore closed short positions, opening all capital to buy at the point of trend reversal. This trade brought him 3,000,000$ net profit in 9 months.
During the period from 1907 to 1929, trading volumes on the U.S. stock market increased significantly. Almost every resident of the country invested in stocks. The reason for the growth of financial literacy of the population and popularity of the stock market was the large-scale advertising campaigns of private brokerage firms. Nevertheless, in 1929 there was a large-scale market crash. The reason for the downtrend, among other things, was a multimillion sell trade, which was conducted by dozens of brokers under the leadership of Livermore. This trade brought him more than 100,000,000$ of profit, which by today's standards can be compared to a billion.
✴️ JESSE LIVERMORE'S TRADING RULES
Today the following Livermore's rules of capital management in financial markets may sound cliché, but at the beginning of the last century every trader was familiar with them. Let us pay attention to them too:
1. Don't average losses. It is important to realize that the principles of pricing liquid assets have changed significantly since the beginning of the last century.
2. Do not exceed risk tolerance. Livermore used to set the maximum risk per trade at about 10% of capital.
3. There is no need to quickly secure in profits if the trend is moving in your direction. The reason for closing an order can only be objective factors that indicate a correction or reversal.
4. Withdraw 50% of profits after each trade. Livermore had an unwavering rule to withdraw part of the profit. The investor himself explained it by the unpredictability of the market.
5. One should enter the market only when there are appropriate signals.
✴️ CONCLUSION
Perhaps it is worth mentioning that in 1930, Livermore broke his own rule by investing all his funds in one trade, after which he became bankrupt. In those years, he no longer had the strength to start over, and he decided to write a book on stock trading with the simple title "How to Trade Stocks?" He hoped that the work would become a bestseller, which would give him recognition and wealth. However, this did not happen, and in 1940, Livermore shot himself in one of the hotels in New York. The official reason for the shooting, if Wikipedia is to be believed, was depression. Livermore was a truly great trader who, during his lifetime, had a significant impact on both the decline and growth of the U.S. economy.
✴️ THE BEGINNING OF HIS CAREER
The ascent of the trading legend began with the stock exchange offices in Boston. Livermore did not take part in trading, but only recorded constantly updated asset prices on a special board. It is important to realize that at the beginning of the 20th century, prices on stock exchanges were transmitted by telegraph. Having a good capacity for exact knowledge and impeccable memory for numbers, Livermore was the first to discover patterns in trend reversal models. Contemporaries note that Livermore was not sociable. All the young trader's attention was focused on price changes of liquid assets. It is noteworthy that he used only numerical sequences to make trading decisions, especially not being interested in the reasons for rising or falling prices.
Having gained a little experience in exchange offices in Boston, Livermore began to keep a notebook in which he recorded all the identified patterns in the dynamics of asset pricing. Biographical literature notes that at that time he was not interested in trades with large sums. The young trader was fascinated by the patterns in the behavior of prices, confirmations of which he was constantly looking for in practice. Some time later, his friend offered to buy a share of the company "Burlington". Having checked his records and convinced that the price would rise in the near future, Livermore invested 5$ in the mentioned brand, earning more than 3$ in a couple of days. This was Livermore's first and highly successful trade.
✴️ WALL STREET CAREER
At the age of 21, the talented trader moved to New York with the aim of conquering the stock market, having $2500 earned in small stock exchange offices in Boston. Livermore could not open an account with any of these companies because his name was on the rumor. Even then, he claimed to close a trade with a profit 7 times out of 10. No small brokerage firm wanted him among their clients, as he could easily bankrupt it.
Eventually he was able to open an account on Wall Street, investing all the money he had into the trade. To everyone's surprise, it ended with a complete loss of deposit. The reason is as follows: Livermore was a hardened proponent of short-term trading, capitalizing on minor price fluctuations. Information about the actual value of assets was transmitted by liquidity providers to Wall Street with significant delays, which led to inaccurate short-term trading. While in Boston, small firms used telephone tape orders and processed customer orders almost instantaneously, this was impossible in the real market conditions of the time.
The manager of a Wall Street brokerage house was kind to the young trader and saw potential in him. When Livermore lost his capital due to technical reasons, he lent him $500 to disperse his deposit in illegal brokerage houses. Livermore then heads to St. Louis, where he makes $2,800 in a matter of days. The company removes him from the number of clients, and also notifies all brokerage houses in the vicinity about the appearance of an overly successful participant of trades. Back in New York, Livermore managed to earn another $5,000 while trading at one of the illegal brokerage houses in New York, and then reopened an account on Wall Street.
Livermore managed to make good money on the global growth of the US stock market in 1901. On his account was the sum of 50 000$. However, later, against the background of high volatility, Livermore lost all his money and was forced to go to his hometown to earn money. After some time, Livermore again started to ruin brokerage houses in Boston, acting through his friends. He managed to save the necessary amount for a third return to New York and open another account on Wall Street.
✴️ THE 1907 MARKET CRASH AND THE GREAT DEPRESSION
In 1906 Livermore foresaw a global decline in the prices of railroad company stocks under the influence of natural disasters. In 1907, there was indeed a decline in prices, but not as rapid as the trader saw it. Then big banks managed to support the value of shares of industrial companies. Trying to sell in a growing market, Livermore again lost almost all of his fortune. He decided to stop trading and wait for a signal to enter the sell-off with all his remaining funds.
Just as Livermore had anticipated, the railroad companies were going through a tough time and the stock rushed downward. The economic situation in the country was so critical that the companies were ready to sell their shares to investors in installments with the participation of banks, but the latter were not sure that investors would be able to fulfill their financial obligations in the near future.
As a result, in 1907 there was a global collapse of the stock market in the U.S., and Livermore managed to earn 250,000$. In October of the same year, the panic of businesses reached its peak and banks started sending their representatives to Livermore asking him to stop selling stocks as it could lead to global economic problems in the US. Under this influence Livermore closed short positions, opening all capital to buy at the point of trend reversal. This trade brought him 3,000,000$ net profit in 9 months.
During the period from 1907 to 1929, trading volumes on the U.S. stock market increased significantly. Almost every resident of the country invested in stocks. The reason for the growth of financial literacy of the population and popularity of the stock market was the large-scale advertising campaigns of private brokerage firms. Nevertheless, in 1929 there was a large-scale market crash. The reason for the downtrend, among other things, was a multimillion sell trade, which was conducted by dozens of brokers under the leadership of Livermore. This trade brought him more than 100,000,000$ of profit, which by today's standards can be compared to a billion.
✴️ JESSE LIVERMORE'S TRADING RULES
Today the following Livermore's rules of capital management in financial markets may sound cliché, but at the beginning of the last century every trader was familiar with them. Let us pay attention to them too:
1. Don't average losses. It is important to realize that the principles of pricing liquid assets have changed significantly since the beginning of the last century.
2. Do not exceed risk tolerance. Livermore used to set the maximum risk per trade at about 10% of capital.
3. There is no need to quickly secure in profits if the trend is moving in your direction. The reason for closing an order can only be objective factors that indicate a correction or reversal.
4. Withdraw 50% of profits after each trade. Livermore had an unwavering rule to withdraw part of the profit. The investor himself explained it by the unpredictability of the market.
5. One should enter the market only when there are appropriate signals.
✴️ CONCLUSION
Perhaps it is worth mentioning that in 1930, Livermore broke his own rule by investing all his funds in one trade, after which he became bankrupt. In those years, he no longer had the strength to start over, and he decided to write a book on stock trading with the simple title "How to Trade Stocks?" He hoped that the work would become a bestseller, which would give him recognition and wealth. However, this did not happen, and in 1940, Livermore shot himself in one of the hotels in New York. The official reason for the shooting, if Wikipedia is to be believed, was depression. Livermore was a truly great trader who, during his lifetime, had a significant impact on both the decline and growth of the U.S. economy.
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