In this article, we will break down Livermore’s key trading principles with real-world examples, making them easy to understand and apply.
1. The Trend Is Your Friend
Livermore’s Rule:
“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills.”
Livermore believed that markets move in trends, and successful traders should follow them rather than fight them. He emphasized the importance of waiting for a confirmed trend before taking a position.
Real-World Example:
Imagine you are trading Tesla (TSLA). The stock has been on an upward trend for weeks, continuously making higher highs and higher lows. Instead of shorting it because “it looks overbought,” Livermore would wait for a clear signal that the trend has reversed before considering a short trade. By riding the trend rather than anticipating a reversal, you align with market momentum.
2. Cut Losses Quickly, Let Profits Run
Livermore’s Rule:
“A loss never bothers me after I take it. I forget it overnight. But being wrong — not taking the loss — that is what does damage to the pocketbook and to the soul.”
Livermore understood that losses are part of the game, but letting them grow is dangerous. He always recommended cutting losses quickly while allowing winning trades to run.
Real-World Example:
Suppose you buy Apple (AAPL) at $150, but the stock drops to $140. If your stop-loss was set at $145, following Livermore’s principle, you would exit the trade and move on. On the other hand, if AAPL moves up to $160, instead of selling too soon, you hold onto the position until you see clear signs of trend reversal.
3. Trade with a Plan
Livermore’s Rule:
“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 man of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”
Trading requires discipline and a clear strategy. Without a plan, traders fall victim to emotional decision-making.
Real-World Example:
You decide to trade Amazon (AMZN). Instead of blindly entering, you set clear rules:
- Buy above $3,500 if it breaks resistance.
- Set a stop-loss at $3,400.
- Target a profit of $3,600 or higher. By following a well-thought-out plan, you remove emotions and trade based on logic.
4. Do Not Overtrade
Livermore’s Rule:
“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.”
Livermore warned against excessive trading. He believed that the biggest profits came from waiting patiently for the right setups rather than jumping into the market constantly.
Real-World Example:
A trader sees Bitcoin moving sideways for weeks and decides to jump in and out multiple times, collecting small wins and losses. However, a patient trader who waits for a major breakout earns a much larger profit
with less effort. Sometimes, doing nothing is the best move.
5. Don’t Follow the Crowd
Livermore’s Rule:
“Men who can both be right and sit tight are uncommon.”
Livermore stressed the importance of independent thinking. The crowd is often wrong, especially at market extremes.
Real-World Example:
During the GameStop (GME) craze in early 2021, retail traders rushed to buy at inflated prices. Many who followed the hype lost money when the stock crashed. A disciplined trader would analyze the risk and avoid trading based purely on social media frenzy.
Final Thoughts: Livermore’s Trading Philosophy
Jesse Livermore’s success came from discipline, patience, and understanding market behavior. His trading rules remain as relevant today as they were a century ago. If you follow his principles — trading with the trend, cutting losses, planning your trades, avoiding overtrading, and thinking independently — you will be well on your way to becoming a better trader.
Remember, the market will always present opportunities. The key is to be prepared, patient, and disciplined when they arise.
Happy trading!