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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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In Livermores time, many news reporters were convicted of trading against the news they wrote about a stockAnother trap the inexperienced trader must deal with is trying to find the exact bottom and top of a major trading cycle. Remember, there are times when a trader must be out of the market and waiting on the sidelines. It is virtually impossible to call the exact top and the bottom of any market, but it is much better to err on the side of caution. Getting out and waiting for the market to establish itself is very difficult while you are invested, because by being invested you will have an automatic bias toward the direction of your position. This bias stems from the hope. If you are long, you will subconsciously favor the long side, if you are short, you will subconsciously favor the downside. Hope lives in us all; remember, it is human nature to be hopeful. That is why Livermore often sold out all his positions and reevaluated the market from a cash position. It cost him the commissions, but he viewed this as a small insurance premium cost toward the overall profit goal. It is not what the millions of people think about the market, or say about the market . . . no, no, no, it is what they do about the market by their actual buying and selling; all this is immediately revealed on the tape; the problem is in the interpretation of this news, this evidence, as the tape flows past the reader. This was Livermores business, his lifes vocation and the thing he most enjoyed. The work of solving the puzzle was what always fascinated him. It was never the moneyit was solving the puzzle, the money was the reward for solving the puzzle. Going broke, which happened to him several times in his life, was the penalty for not solving the puzzle. The chief deception is that trading the market looks easy when it is one of the most difficult things to doanticipate the trend. We must be aware of our emotional flaws and have the discipline to control and conquer the weaknesses of our human nature. It is the most difficult task a trader faces. As Livermore explained to his sons: I lost money when I broke my own ruleswhen I followed my rules, I made money. HOW TO KEEP YOUR EMOTIONAL CONTROL IN DEALING WITH MEDIA NEWS Livermore was always suspicious of everything he read in the newspaper and never accepted what he read at face value. He tried to look for hidden agendas and self-serving reasons that could have generated the articles, no matter what paper published the information. In Livermores time, many news reporters were convicted of trading against the news they wrote about a stock. The reporters were also fed pure fiction, actual lies, by insiders to hype the stock. He always tried to read between the lines and formulate his own judgment; that is why he often preferred to be alone, to formulate his own opinions and to use his own judgment when reading the newspapers. He did not seek the opinions of others in dealing with news releases. He tried to look below the surface. Livermore told a friend: I interpret these newspaper articles in two ways. First, I try to interpret their immediate and direct influence on the opinions and actions of stock traders with regard to a particular stock. Second, I watch the actual stock quotes to detect how the news has influenced the buying and selling of specific stocks as a whole in that market industry group. Often my interpretation of a news event is wrong. But I always know that if the news development is of sufficient importance it will eventually affect the tape. In other words, I watch the tape like a hawk to see how it is reacting to actual news. I do not listen to people, the pundits, the reporters, the analysts who are trying to interpret the news item and predict what will happen to a stock, an industry group, or the overall market. It is my experience that it is far better to look objectively at the tape, for the tape will provide the actual facts as to how the public is reacting to the news. These actual facts revealed by the tape are a far better indicator than any reporter or pundit can provide. It is up to the skillful market trader to watch the tape and react only to what the tape is saying. Learn how to read the tapethe truth is in the tapelisten to it. Try and avoid the opinions of so-called-experts. One of the problems with looking too deeply into economic news is that it may plant suggestions in your mind, and suggestions can be subliminal and dangerous to your emotional stock market health where you have to deal in reality, not supposition. These suggestions are very often logical, but that does not mean they are true and will necessarily affect the market. Logic does not drive the market. It is driven by human emotion. CUT YOUR LOSSES, LET THE WINNERS RIDE Note: This conversation and story are excerpted from The Amazing Life of Jesse Livermore: Worlds Greatest Stock Trader by Richard Smitten. The conversation, held at lunch, was between Jesse Livermore, Walter Chrysler (Chrysler Motors), Ed Kelley (head of United Fruit Co.), T. Coleman DuPont (DuPont Family), and Colonel Ed Bradley of Bradleys Casino in Palm Beach (Bradley was the owner of the longest running illegal gambling club in the United States). Ive been hearing rumors on the Street about you and a wheat trade. Tell us about it, J.L., entertain us at lunch. Well, I just felt the demand for wheat in America was underestimated, and the price was going to rise. I waited for what I call my Pivotal Point and stepped in and bought 5 million bushels of wheat, about 7 million dollars worth. I watched the market closely after the purchase. It lagged. It was a dull market, but it never declined below where I bought it. Then one morning the market started upwards, and after a few days the rise consolidated, forming another of my Pivotal Points. It laid around in there for a little while, and then one day it popped out on the upside with heavy volume. A good signal, so I put in an order for another 5 million bushels. This order was filled at higher and higher prices. This was good news to me because it clearly indicated that the market line of least resistance was upward. I liked the fact that it was much more difficult to acquire the second lot of 5 million bushels. I then had filled out my predetermined target position of 10 million bushels, so I stepped back, and kept my eye on the market. It formed into a strong bull market and rose steadily for several months. When wheat rose 25 cents above my average price I cashed in. This was a bad mistake. Livermore paused as the lobster salads were served and the second bottle of champagne was opened. Walter Chrysler asked, J.L., how the hell could it be a bad mistake to make a profit of two and a half million dollars? Because, Walter, I sat back and watched wheat rise another 20 cents in price in three days. I still dont get it, Chrysler said. Why was I afraid? Why did I sell? There was no good reason to sell the wheat. I simply wanted to take my profit. It still looks like a pretty good trade to me. Im afraid you lost me, J.L., Ed Kelley added. All right, let me explain. You remember that old joke about the guy who goes to the race track and bets on the daily double and wins, then takes all his winnings and bets it on the third race and wins. He does the same on all the other races, and wins. Then on the eighth and final race he takes his hundred thousand dollars in winnings and bets it all to win on a horse, and the horse loses. Yeah, Chrysler nodded. Well, hes walking out of the track and he meets a pal of his, who says. Howd you do today? Not bad, he answers, smiling, I lost two bucks. They laughed. Thats a good story J.L., but how the hell does it apply to the wheat story? Chrysler asked. Simplewhy was I afraid of losing the tracks money, my profits? In effect, I was simply acting out of fear. I was in too big a hurry to convert a paper profit into a cash profit. I had no other reason for selling out that wheat, except that I was afraid to lose the profit I had made. Whats wrong with being afraid? Dupont asked. So, what did you do, J.L.? Kelley asked. Well, after I booked my profit in the wheat I realized I had made a great mistake. I had not had the courage to play the deal out to the end til I got a signal to sell, a real definitive sell signal. So . . . ? I re-entered the market and went back at an average price 25 cents higher than where I had sold out my entire original position. It rose another 30 cents, and then it gave a danger signal, a real strong danger signal. I sold out near the high of $2.06 a bushel. About a week later it sold off to $1.77 a bushel. Well, you have more guts than me, J.L., and it sounds a little like greed to me, Ed Kelley said. Thats because you sell fruit, Ed. The way you know how to diagnose the market on fruit is the way I am supposed to know how to diagnose the stock and commodities markets, and the wheat futures market had shown no signs of weakness when I first sold it. The next time I sold the wheat it was different. I could see definite symptoms of weakness. It gave the clues, the hints, the tell-tale signs of topping out. The tape always gives plenty of warning time for the savvy speculator to heed. Well, J.L., I like your story but sometimes I think maybe you got a set of those lucky horseshoes up your ass, just like Ed Bradley here, Chrysler added. Well Walter, a little luck never hurt anyone. Livermore paused and looked around at the group. Id say we all had our share of luck at one time or another. They all laughed. |
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