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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Livermore often studied stocks as you would study people, after a while their reactions to certain circumstance become more predictableGeneral Livermore Issues Every stock is like a human being: It has a personalitya distinctive personalityaggressive, reserved, hyper, high-strung, volatile, boring, direct, logical, predictable, unpredictable. Livermore often studied stocks as you would study people, after a while their reactions to certain circumstance become more predictable. Livermore was not the first to observe this. There are traders who have made a lot of money in the stock market by just analyzing the personality of a stock and following that personality, reacting to it by buying and selling it according to its personality traits. But bewarenot often, but sometimes, personalities change. Livermore firmly believed that as long as a stock was acting properly progressing, with normal reactions such as consolidations, corrections, and proceeding in the direction of the trendthere was nothing to fear, no reason for a speculator to concern himself. And the fact that a stock is selling in new high territory should only encourage the speculator. On the other hand, a speculator must never become complacent or relaxed to the point that he misses the clues that the stock has topped out and is creating a Pivotal Point that will set it off in a new direction, perhaps a reversal in trend. The lesson: Be ever-vigilant, alert, for the danger signs. The essentials to stock market success are knowledge and patience. Few people succeed in the market, mostly because they have no patience. They have a strong desire to get rich quickly. They buy mostly when a stock is going up and is near the top. They are not willing to buy when the stock goes down and wait until it forms a pivotal point and begins to recoverif it does recover. In the long run, patience counts more than any other single element except knowledge. The two really go hand in hand. Those who want to succeed through their investments should learn that simple truth. You must also investigate before you buy; then you are sure your position is sound. Never become discouraged by the fact that your securities are moving slowly. Good securities in time appreciate sufficiently to make it well worthwhile to have patience. The only time to buy is when you know a stock will go up. These situations come along only rarelythe trader must wait, be patient; sooner or later the right situation will come along. In trading to beat the game, a big part is the right timing. Livermores quest was never ending: to refine and develop the Pivotal Point approach, his approach to trading new highs, finding the industry leaders and the best industry group. These stock-trading theories were all developed after much experience and effort. But it was the mental challenge that was always his passion and challenge. But like all traders, he also enjoyed what the money could do. WHEN DOES A STOCK ACT RIGHT? Markets never stand still. They are very dull at times, but they are not resting at one price. They are either moving up or down, if only a fraction. When a stock gets into a definite trend, it works automatically and consistently along certain lines throughout the progress of its move. At the beginning of the move, you will notice a very large volume of sales with gradually advancing prices for a few days. Then what Livermore termed a Normal Reaction will occur. On that reaction, the sales volume will be much less than on the previous days of its advance. That little reaction is only normal. Never be afraid of the normal movement. But be very fearful of abnormal movements, like a major change in personality. In a day or two, activity will start again, and the volume will increase. If it is a real movement, in a short space of time the natural, normal reaction will have been recovered, and the stock will be selling in new high territory. That movement should continue strong for a few days with only minor daily reactions. Sooner or later, it will reach a point where it is due for another normal reaction. When it occurs, it should be along the same lines as the first reaction, because that is the natural way any stock will act when it is in a definite trend. At the first part of a movement of this kind, the distance above the previous high point to the next high point is not very great. But as time goes on, you will notice that it is making much faster headway on the upside. Take a stock that starts at 50. On the first leg of the movement, it might gradually sell up to 54. A day or two of normal reaction might carry it back to 52. Three days later, it is on its way again. In that time it might go up to 59 or 60 before the normal reaction would occur. But instead of reacting, say, only a point or a point and one-half, a natural reaction from that level could easily be 3 points. When it resumes its advance again in a few days, you will notice that the volume of sales at that time is not nearly as large as it was at the beginning of the movethe stock is becoming harder to buy. That being the case, the next points in the movement should be much more rapid than before. The stock could easily go from the previous high of 60 to 68 or 70 without encountering a natural reaction. When that normal reaction does occur, it could be more severe. It could easily react down to 65 and still have only a normal decline. But assuming that the reaction was five points or thereabouts, it should not be many days before the advance would be resumed, and the stock should be selling at a brand new high price. And that is where the Livermore time element comes into play. Dont let the stock go stale on you. After attaining a good profit, you must have patience, but dont let patience create a frame of mind that ignores the danger signals. Always be on the alert. Dont be lulled into complacency. A danger signal: The stock starts up again, and it has a rise of six or seven points in one day, followed the next day by perhaps eight to ten pointswith great activitybut during the last hour of the day all of a sudden it has an abnormal break of seven or eight points. The next morning, it extends its reaction another point or so, and then once more starts to advance, closing very strong. But the following day, for some reason, it does not carry through. This is an immediate danger signal. All during the progress of the move, it had nothing but natural and normal reactions. Then all of a sudden an abnormal reaction occursand by abnormal I mean a reaction in one day of six or more points from an extreme price made in that same day something it has not had before. When something happens abnormally in the stocks normal pattern, it is flashing you a danger signal that must not be ignored. You have had patience to stay with the stock all during its natural progress. Now have the courage and good sense to honor the danger signal and step aside. This is not to say that these danger signals are always correct because, as stated before, no rules applying to stock fluctuations are 100 percent right. But if you pay attention to them consistently, in the long run you will profit immensely. A speculator of great genius once told Livermore: When I see a danger signal handed to me, I dont argue with it. I get out! A few days later, if everything looks all right, I can always go back in again. Thereby I have saved myself a lot of worry and money. I figure it out this way. If I were walking along a railroad track and saw an express train coming at me sixty miles an hour, I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track again, if I desired. Every judicious speculator must always be on the alert for danger signals. Curiously, the trouble with most speculators is that something inside of them keeps them from mustering enough courage to close out their commitment when they should. They hesitate, and during that period of hesitation they watch the market go many points against them. Then they say: On the next rally Ill get out! When the next rally comes, as it will eventually, they forget what they intended to do, because in their opinion the market is acting fine again. However, that rally was only a temporary swing that soon plays out, and then the market starts to go down in earnest. And they are still in itdue to their hesitation. If they had been using a guide, it would have told them what to do; not only saving them a lot of money but eliminating their worries. As mentioned, emotion is the greatest enemy of the average investor or speculator. Why shouldnt a stock rally after it starts down from a big advance? Of course it will rally from some level, if the stock is basically all right financially. But why hope it is going to rally at just the time you want it to rally? Chances are it wont, and if it does, the vacillating type of speculator may not take advantage of it. Banish wishful thinking. A trader cannot be successful by speculating every day or every week. There are only a few times a year, possibly four or five, when you should allow yourself to make any real commitment at all. In the interims, you are letting the market shape itself for the next big movement. If you have timed the movement correctly, your first commitment will show you a profit at the start. From then on, all that is required of you is to be alert, watching for the appearance of the danger signal to tell you to step aside and convert paper profits into real money. Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out are laying the foundation for your next venture. You will reap benefits from their mistakes. Speculation is far too exciting for most people; most people who speculate hound the brokerage offices or receive frequent telephone calls, and after the business day they talk stock market with friends at all gatherings. Trading is always on their minds. They are so engrossed with the minor ups and downs that they miss the big movements. Almost invariably, the vast majority have commitments on the wrong side of the market when the broad trend swings get under way. The speculator who insists on trying to profit from daily minor movements may miss the next important change when it occurs. TIMETHE FOURTH DIMENSION IN TRADING Livermore heard a story that had a great effect on him about a remarkably successful speculator who lived in the California mountains and received quotations three days old. Two or three times a year, he would call on his San Francisco broker and begin writing out orders to buy or sell, depending upon his market position. A friend of Livermores, who spent time in the brokers office, became curious and made inquiries. His astonishment mounted when he learned of the mans extreme detachment from market facilities, his rare visits, and, on occasion, his tremendous volume of trades. Finally, he was introduced to the trader from the mountains, and in the course of conversation inquired of this man from the mountains how he could keep track of the stock market at such an isolated distance. Well, the man replied, I make speculation a business. I would be a failure if I were in the confusion of things and let myself be distracted by minor changes. I like to be away where I can think. You see, I keep a record of what has happened, after it has happened, and it gives me a rather clear picture of what markets are doing. Real movements do not end the day they start. It takes time to complete the end of a genuine movement. By being up in the mountains I am in a position to give these movements all the time they need. But a day comes when I get some prices out of the paper and put them down in my records. I notice the prices I record are not conforming to the same pattern of movements that has been apparent for some time. Right then I make up my mind. I go to town and get busy! Consistently, the man from the mountains, over a long period of time, drew funds in large quantities from the stock market. He was something of an inspiration to Livermore. After hearing this story, Livermore went to work harder than ever trying to blend the element of time with all the other data he had compiled. By constant effort, he was able to bring his records into a coordination that aided him to a surprising degree in anticipating coming movements. The dimension of time (not timing) was the last element that fascinated Jesse Livermore. He was studying it in detail at the time of his death He believed that in the stock market, time is not moneytime is time and money is money. |
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