21 Lessons From Jesse Livermore: From Dirt to Riches to Suicide
Who Was Jesse Livermore?
Jesse Lauriston Livermore is one of my favorite trader case studies.
His biography was loosely fictionalized in the famous 1923 book Reminiscences of a Stock Operator under the author’s name, Edwin Lefèvre.
Born in 1877 in Massachusetts to a poor family, he started his trading career as a teenager in an effort to escape a life of farming with his father. Dreaming of someday climbing out of poverty, he found work at a Boston stockbroker office transferring prices from ticker-tape to the quotation board.
He placed his first trade in 1891 in Burlington’s stock in a local bucket shop frequented by gamblers and suckers, and made a profit of $3.12.
Several years later he was regarded as one of the most powerful men on Wall Street.
After his first humble win, he continued to master bucket shop trading and earned the nickname “The Boy Plunger” because he was young and reckless with his capital. Yet somehow, due to his uncanny ability to read market patterns, he always seemed to come out ahead.
By 1929 he was famous among the American stock market elite. They re-dubbed him “The Great Bear of Wall Street” after he profited over $100 million during a giant market crash ($1 billion relative to today’s money).
It is said that J. P. Morgan himself personally contacted Jesse and requested that he temporarily refrain from short-selling stocks as he was crippling the American stock market. Jesse graciously agreed and made another small fortune riding the rebound.
But his success was not without setbacks. Jesse blew his account to zero several times during his career, declaring bankruptcy three times before his trading errors culminated in one final catastrophe that resulted in his suicide.
His story is fascinating and the book Reminiscences of a Stock Operator is one of the most memorable books I’ve ever read. I only found out recently that he shot himself after losing his shirt in the markets for a third and final time, which was obviously unsettling to discover.
There’s more to his story than that if you are interested, but that’s the short version.
I’ve been thinking about it a lot and why he did that, and I like to think that it’s because he was a trading pioneer who was mapping the territory as he went, like any great explorer.
He didn’t understand trading psychology, risk management and emotional discipline as well as we do now as modern traders. The sad irony is that we modern traders only know about all those important mental health pillars because of traders like Jesse Livermore who blazed the way (and died in the process).
It’s easy to ask “Why did he do it?” and be shocked that he repeated the same mistakes over and over and eventually literally capitulated. But I believe that’s because it was the 1900s, long before the modern art and science of trading was formally established, and he simply didn’t know any better.
But thanks to him and the internet, we now do.
Here’s a list of Jesse Livermore’s trading rules and what I think they mean to us as traders today.
21 Trading Lessons From Jesse Livermore
1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.
Obviously, with technological advancements and the like, trading has changed over the past hundred years. But what Jesse is saying here is that buying and selling has existed for centuries.
It’s as natural to humans as speech. We are bartering creatures.
We have always traded, speculated, gambled, invested. And the underlying factors of trading psychology and edge (ie. buying low to sell high or vice versa), and the emotional experience and reactions of traders, has not changed fundamentally since the beginning of speculation.
2. Money cannot consistently be made trading every day or every week during the year.
This rule emphasizes the importance of patience and selectivity. It’s OK to do nothing!
Even elite intraday traders who make money trading the markets on a daily basis have probably experienced occasional days of no high-quality opportunities.
It’s having the discipline to wait for your edge to manifest itself before you put risk on that determines your success as a trader.
3. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
Price action is king.
Don’t trade off gut feelings, don’t listen to market analysts, don’t let other traders influence your decisions.
Develop a trading plan, test it, then have the confidence and discipline to back it with as much faith as you can muster. Let the markets tell you what to do; not your fear and greed.
4. Markets are never wrong – opinions often are.
You must take full responsibility for your trading results.
There are no excuses. If you lost money, it’s your fault. Price action is never wrong. Whether you were stop hunted, got caught in a gap move, got burned by a flash crash, got squeezed by market manipulators, or forgot to put your stop loss in – it’s all your fault.
If you accept that the markets are never wrong and that all of your results both good and bad are a product of your own decision-making and trading plan, then and only then do you have the right attitude to succeed as a trader.
5. The real money made in speculating has been in commitments showing in profit right from the start.
It’s unwise to hold on to losers, and timing plays a major role in the quality of trading opportunities.
Many traders claim that their best trades started out profitable right away. They did not have to endure several hours or days or months of misery. They read the market conditions correctly, timed the market well and optimized their position sizing as best they could.
Keep this in mind when making trading decisions. This isn’t to say you should immediately cut any trade that goes into the negative like a scalper might, but that you should be mindful of how long your setups take to play out and judge the health of price action accordingly.
6. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
Let your winners run. The trend is your friend.
This is a classic trading maxim for a reason. By keeping your losses small and letting your best winning trades play out to their full potential, you can maximize your return vs your risk.
7. One should never permit speculative ventures to run into investments.
Only trade the timeframes you planned to trade.
If you open a trade as a swing trading or intraday opportunity, then treat it like that. Don’t get greedy and change your plan mid-trade just because you suddenly feel like you know better than the markets.
Many traders fail to capture consistent profits out of the markets because they are inconsistent with their execution. Pick your portfolio and timeframes wisely, test them, and then stick to them.
8. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
I believe here he is referring to the “buy and hold” strategy that many money managers and value investors employ.
While this is an effective strategy during bull markets, these portfolios are often slaughtered during crashes and bear markets.
Here Jesse is saying that, if you manage your risk properly, the losses incurred by a good trader can be minuscule compared to a passive investor.
9. Never buy a stock because it has had a big decline from its previous high.
Don’t try to catch a falling knife.
If an asset is falling rapidly at the height of a parabolic trend, it is probably doing so for a good reason (think: Bitcoin, Dot Com Bubble, etc.). There’s a big difference between buying a dip or a pullback and stepping in front of a freight train.
Sometimes buying into capitulation as a contrarian trading setup can work wonders under the right circumstances, but to the average trader, it is reckless and dangerous.
10. Never sell a stock because it seems high-priced.
Never short against strong momentum, and don’t be too quick to take profits just because you think your trade has exceeded its profit potential.
Wait for a reason to sell based on your trading plan rules. A short period of extremely high valuations is not a good reason to sell in and of itself. In fact, often that marks the beginning of a parabolic move even higher.
11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.
I suspect here Jesse is referring to buying breakouts into new highs in a trending market. “Normal reaction” is a bit subjective, and I have no idea what that meant to Jesse. I wonder if he even knew what that meant in black and white terms.
But buying breakouts is an extremely effective strategy during bull markets. By buying late into strength instead of early into pullbacks you are much more likely to make a profit than if you try to pick a bottom during the retracement.
12. Never average losses.
This is another classic trading maxim for a reason.
Paul Tudor Jones himself had this phrase shamelessly pinned above his trading station during his rise to trading stardom. Obviously adding to losing positions was a disciplinary issue for him back then and he believed it was important to eliminate it from his trading.
If he and Jesse think it’s important, then you should too. When a trade goes against you, by definition that means you are wrong about the trade. Either your directional bias is wrong, or your timing is wrong. That’s why we use stop losses.
Adding to a loss is the opposite of employing a stop loss, and it’s no wonder it leads to many traders’ demise.
13. The human side of every person is the greatest enemy of the average investor or speculator.
This is a very insightful observation from Jesse given the times in which he lived.
Trading psychology is the single most important pillar of any trader’s process. Once you have made some sustained effort at developing a healthy trading psychology it becomes less of a focus, but in your early days, there is nothing more important than this.
If you want to be a successful trader then you absolutely need to develop a strong psychology and healthy attitude towards trading. It’s not optional. Traders must become their own psychologists in a way.
You need to understand yourself inside and out: your emotional triggers and cognitive limitations, your strengths and weaknesses, your internal and external realities – and you need to account for them all with brutal objectivity and honesty.
14. Wishful thinking must be banished.
There’s no room for hope in trading.
As Yoda says: “Do or do not; there is no try.”
So it is with trading. Once you develop your trading plan and your system, then your only job is to follow that system with as much discipline and confidence as you can realistically muster.
If you find yourself wishing or hoping for something to happen then chances are you are operating out of the wrong mentality. Either you’ve broken your rules, you’re trading too big, or you haven’t accounted for something in your plan that you need to.
15. Big movements take time to develop.
Similar to #6: let your winners run.
If you’re trading a swing-trading or trend-following opportunity, then treat it as such. Be patient. Big price moves take time to unfold, and during that unfolding, it can be extremely tempting to interpret every tick as threatening – especially as your profit grows.
But be patient. Make sure you employ a robust trailing stop method that you feel comfortable with. Don’t give up too much open profits, but don’t suffocate your big winners either.
16. It is not good to be too curious about all the reasons behind price movements.
This is a great one. Perhaps my favorite on this entire list.
We are curious creatures. We enjoy discovering reasons for things. We are obsessed with making sense of causality. That’s a result of the fruits of several centuries of industrial, technological and scientific revolution, which is obviously great.
But in trading it is better to leave certain things as a mystery. You don’t need to know why price moves in order to exploit its movements. When I first began trading I fell into the trap of researching every factor I could think of that might influence prices.
It didn’t take me long to realize that there are so many influencing factors that it would be impossible to account for all of them. So now I depend on one tool and one tool alone: technical analysis.
17. It is much easier to watch a few than many.
Another great tip! Limit your watchlist, and limit your portfolio.
Unless through testing you have proven that diversifying your trades across multiple markets or assets increases the efficacy of your edge, then you should assume that it doesn’t.
Not only is there the edge of your strategy, there is also the edge of specializing in a market. If you know how a market typically moves because you’ve studied its activity for many months or years, then you will have an edge over traders who do not scrutinize that market as much as you do.
A good example of this would be cryptocurrency. If you’ve never traded crypto before and you suddenly decide you think you have what it takes because you’ve had success trading stocks or forex before and you jump in fists swinging, you’re going to get knocked out.
18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
“Leading active issues” is old-school jargon for “leading actively traded stocks” – like Apple, Amazon, Netflix, Facebook, etc.
These stocks lead the market as a whole, and the indexes that track the market as a whole are heavily weighted by these market leaders.
Jesse is saying that if the leading stocks are currently under-performing, then you are unlikely to make any money by investing in the overall market through an index fund or ETF or by trying to pick individual stocks to outperform those market leaders.
19. The leaders of today may not be the leaders of two years from now.
This is a wise observation that traders would be smart to consider.
Two years is a long time these days. Much longer than it was back then when Jesse wrote these rules down. Thanks to technology, a lot can happen within two years.
That means that you should not get too attached to positions in general, but you should also not count on the market leaders staying who they are forever.
I know it’s been much longer than two years, but who back in the early 2000s would have ever thought that someday companies like Apple and Amazon would be leading the market?
Furthermore, the companies that currently lead the market face terrible odds of continuing success.
According to this study by Mark J. Perry, 88% of the companies included on the list of Fortune 500 companies in 1955 either don’t exist today or have dropped off the list.
20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
This should go without saying in today’s markets. It’s pretty obvious that one stock does not dictate the direction of the entire market.
Tesla is maybe a good example of this. Just because Tesla is currently experiencing problems with its share price as of May 2019 does not mean that the entire electric car market is struggling.
Shorting Ford (or the NASDAQ) just because Tesla is having a bad day is not a wise decision.
21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.
This is great advice. All traders learn this at some point in their career – usually the hard way.
Don’t trust trading gurus and signal services, don’t trust market analysts on mainstream media, and don’t trust expert advisors and trading bots to make your money for you (unless you created it yourself).
No one is giving out free money. Don’t confuse financial entertainment with financial advice.
Jesse Livermore’s Suicide
My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie.Jesse Lauriston Livermore
On November 28, 1940, Jesse shot himself in the cloakroom of the Sherry Netherland Hotel in Manhattan.
Most trading blogs and articles tend to gloss over Jesse’s suicide. I suppose it’s a difficult topic to address and one that doesn’t exactly get readers excited about trading.
I should also mention that his life was very complicated – including several failed marriages, a murdered son, two world wars and God only knows what other problems he had that were never documented. So I don’t want to suggest that any of us have a clue what was going through his mind at the time.
But I want to dig a bit deeper into this part of his story, because I think it’s incredibly important to recognize that one of the greatest traders in history ended his career with a gun in his mouth.
Perhaps the first most important and obvious takeaway is that life is precious, and that you should never take your health and your good fortune for granted.
When things are going well for you and your family and friends, cherish those moments. They are unfortunately too few and far between.
I injured myself about seven years ago in my early 20s and have suffered chronic pain issues ever since which has been extremely difficult to deal with. I never imagined it would happen to me, but it did. My most painful regret is not taking the time to fully appreciate my good health when I had it.
None of us are safe from life. So be grateful for the times when things are going well. It will fortify your spirit for when the harder times inevitably surface.
Respect Risk, Every Day – Forever!
The second is that no matter how skilled or successful you become as a trader, the risk of ruin is always present. Just like the seasoned soldier on the battlefield is fully conscious of the fact that any bullet could be his last; any trading day could be yours.
You can never forget even for a moment how important your risk control is. You must forever guard against complacency. It can take decades to build up a net worth of immense proportions through trading, and then a single bad day to lose it all. Don’t let that happen to you.
The boneyard of failed traders and investors who met their demise as a result of neglecting to respect risk even after many years in the business is deep and ever-growing.
Find Meaningful Pursuits
The third takeaway is that you shouldn’t attribute your feelings of self-worth with your trading results or your trading account. You need to neutralize your ego as a trader.
Not just because it will help you make money, but because it will protect you from depression and serious mental health risks. There are very real mental risks associated with trading which may be something you’ve never considered, as I didn’t until I began to experience them myself.
We’ve all seen the disclaimers saying trading is risky and you could lose your capital, but no one mentions you could also lose your mind.
If you have an addictive and/or impulsive personality then you need to be extra careful with your trading. You must put in extra homework on yourself and your psychological wellbeing if you plan to be successful as a trader.
Money has the potential to bring out both the best and the worst in people. It’s an amplifier. If you’re unhappy now, then having lots of money will not make you happy later. As Turney Duff can attest, if your work and your life doesn’t bring you happiness, then money won’t help.
It is important that you develop meaningful pursuits outside of trading. Remind yourself constantly why you put yourself through the challenges of trading. If you are only focused on making money, then the (frequent) times when you are struggling to make money will seem unbearable.
Don’t Be Stubborn
The most troubling part of Jesse’s story is that he prophesied his own demise several times throughout his writings, and yet he continued down the path of self-destruction anyway.
I suppose many people suffer from this affliction. I myself can definitely relate to the feeling of “knowing better, but doing it anyway” and then facing the inevitable consequences of my stupid behavior.
But in Jesse’s case it truly is a mystery why he continued to repeat the mistakes that led to his suffering right up until the bitter end given his thorough grasp on the craft of speculation.
I guess the most important lesson of all that we can take from his troubled life as a trader is that it never pays to be stubborn.
The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.Jesse Livermore
More Information on Jesse Livermore
If you are interested in finding out more about Jesse’s life as a trader then these resources may be of help:
Biography: Reminiscences of a Stock Operator
His Book: How to Trade in Stocks
Wikipedia: Jesse Lauriston Livermore – Wikipedia
Trade Records: Jesse Livermore’s Trading Timeline
Legends of Trading: Jesse Livermore – By The Duomo Initiative