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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Later in Livermores trading history, he decided that he would not hold stocks for long that did not move in the direction he had anticipatedTHE MARKET OPERATES IN FUTURE TIME Every successful trader must understand that the market does not operate in present time; it operates in future time. The current market of 2004 bottomed out in October of 2002, forming a clear Reversal Pivotal Point. (See Figure 8.1.) This went basically unnoticed by most traders, mutual funds, and media pundits. Livermore would have loved it! Behind all major movements in the stock market are irresistible forces at work. This is all the successful speculator needs to know. Just be aware of the actual stock movements, and act upon that knowledge. It is too difficult to match up world events or current events or economic events, with stock market movements. This is true because the stock market always moves ahead of world events. The stock market is not operating in the present or reflecting the present; it is operating on what is yet to be, the future. The market often moves contrary to apparent common sense and world events, as if it had a mind of its own, designed to fool most people, most of the time. Eventually, the truth of why it moved as it did will emerge. It is foolish to try and anticipate the movement of the market based on current economic news and current events, such as the balance of payments, Consumer Price Index, and the unemployment figures, even the rumor of war, because these are usually already factored into the market. Livermore did not ignore these facts or remain ignorant of themhe wasnt. But these were not facts he could ever use to predict the market. After the market moved, it would be rationalized in endless post mortems by the financial pundits, and later when the dust had settled, the real economic, political, and world events would eventually be brought into focus by historians as to the actual reasons why the market acted as it had. But by that time it was too late to make any money. Trying to figure out the why of a market move can often cause great emotional strife. The simple fact is, the market always precedes economic news; it does not usually react to economic news for any sustained period. It must be understood by the astute trader that the market lives and operates in future time. For example, a good earning statement is issued by a company and the stock proceeds to fall in pricewhy? Because the market had already factored in those earnings. TIME AS A TRADING DIMENSION Later in Livermores trading history, he decided that he would not hold stocks for long that did not move in the direction he had anticipated. If he had followed his rules and waited for what he considered to be the perfect time to buy the stock, and if it did not move as he believed it should move within a few days or what he considered a reasonable time, he would then sell out the position. He would wait days, weeks, months, for the stock to position itself at the spot he thought most opportune, in other words the perfect moment to make his purchasewhen every factor was in his favor. If the stock did not do as expected, he would often sell out his entire position, even if the stock did not decline. Why? Because the successful trader must try and keep his money circulating as a merchant must keep his inventory moving, so he can keep the inventory fresh. The one thing he had learned in his many years of playing the stock market was that there are always opportunities in the market, so to remain with your cash in a stand-by position meant that your money, your inventory, was inactive now, but this could yield huge benefits in the future, when it was finally committed to that special situation. Just as it is true that many people will sell their good stocks and keep their losers it is true that they will also keep the stocks that are flat, not doing anything or going anywhere. Please be aware that this does not mean a stock will not have a normal correction or a normal consolidation in an upward trend. What we are talking about here is a stock that is just wallowing in a trading channel, making no progress in either direction. It must be determined whether the stock is being accumulated or is being distributed. If it is not clear, then it is sometimes best to exit the stock than to take a chance that it is being distributed and will eventually move against you and go down and cost you money. Give the stock a little time to show itself in these situations, but waste no time in closing out an inconclusive stock and moving on to another trading situation. Livermore often sold a stock that had even moved a point or two in his favor, but he simply did not like the weak or limp manner in which it was acting. It did not matter to himeven if he had a small profit or a small lossthe major fact remained the stock did not do what he had analyzed and believed that it would do. So the conclusion was obvious and always simple to himhis judgment had been wrong and therefore he must exit the trade. One thing he knew for sure was that his judgment had been wrong in the past and that it would be wrong again in the future. The danger was in not recognizing his mistakes and getting out in time. The old adage is correctpride often does come before a fall. The worse kinds of stocks are what he called Listless Drifters. These are stocks that do not move in the desired manner and simply tie up a stock market traders capital as they hang out there drifting in no mans land. Whenever Livermore was forced to depend on hope, he always felt exposed to danger. When he simply took his loss, he knew what it was, and he know what he would have to make back to get into profit. Also, if he stayed with the losing or listless position, it had a negative psychological effect and always bothered him as he moved ahead with future trades. Livermore discovered that he could not afford to trade in anything but live stocks, stocks that are leading the pack, stocks that have inherent energy. This energy, or momentum, always meant trading on both sides of the marketthe upside and the downside, long or short. He observed many, many people who purchased stocks and put them away in safe deposit boxes or safes, feeling that their investments were safe. These were the thoughts that people had for the stocks of steel, radio, aircraft, oil, railroads, and hundreds of other safe-as-money-in-thebank securities that all eventually went sour in his day. This was never true in Livermores view: One can never assume that a stock can be bought and put away for the future. It was essential for Livermore to keep his capital in circulation. Remember, when a merchant has part of his capital frozen out of circulation he must then make all his profit on the capital that is left. This hampers and hinders him because that unfrozen capital must often work twice as hard to make up for the dead, frozen capital, which yields little or nothing. It must also be understood by the trader that in the Livermore Trading System, money sitting in cash was not deemed to be capital out of circulation. It was considered reserve capital waiting to be used at the propitious moment when it could bring in huge returns, as it often did for Livermore. But above and beyond this reasoning are what he called lost opportu nities. Because their capital is frozen, these stock traders miss many golden opportunities to trade the winners, the stocks that would have bought them profits and successprofits that were unavailable because their capital was tied up in stagnant, unprofitable situations. Hope is the villain here, and it has ruined millions of traders over the course of timetake your losses right away; after all, they are real whether you sell the stocks or not. As a result of this thinking about the dimension of time, Livermore initiated a new technique into his trading system near the end of his life, a technique that is still revolutionary in its thinking, even in todays stock market. Livermore used two stops when he entered a trade, a price stop and a time stop. These were combined with his thinking that he would not stay with any trade more than a few points if it moved against him, and he would not stay with a stock position for more than a few days if the stock did not perform as he expected. This became the lifeblood of his trading system because it was how he kept his capital in working circulation. It may sound contradictory, but it isnt; there are times when he was out of the market completely with all his working capital in cash, waiting and waiting for the market to choose a trend and for the perfect trading scenario to re-present itself to him. Often money that is sitting can later be moved into the right situation at the right time and make you a vast fortune. Patience, Patience, Patience is the key to success, not speed; time is a cunning speculators best friend, if he uses it correctly. Remember the clever speculator is always patient and has a reserve of cash. Jesse Livermore The concept of time will be even more challenging in the coming decades as worldwide stock markets become digitalized and trade electronically (with no human help). The Toronto Stock Exchange and the German Dax have already converted to electronic markets that operate with no hands-on help from human beings. This will eventually result in worldwide 24-hour-a-day trading. One of the unpredictable aspects, however, is that a person could go to sleep and awake in the morning with deep losses or healthy profits. Please note, the concept of global tradingor trading following the rising sun, beginning in Japan and ending in the United Statesis a reality that is not far away from common usage. It is actually possible to do this now, and it is being done currently by a handful of ambitious traders, who often go without sleep. Livermore used a week as his rough time frame in deciding whether he would hold a stock that he had purchased and that did not act as he predicted. In other words, he would give a stock five trading days to move after he had acquired it. As already stated, his reasoning was simple: I have waited until what I believe is the perfect moment to pull the trigger on a stock, and go ahead and buy a stock or sell it short. If the stock does not perform, then something is wrong with my judgment, because I thought everything was ready when I pulled the trigger . . . it is obvious if the stock does not do as I anticipated, then I have not analyzed the situation correctly . . . therefore I must cancel out the trade and not wait for the stock to act right. As in all similar cases, the solution will be revealed to me at a later date. What was novel and important here is that: The stock did not have to move against Livermore for him to sell it. The stock could remain flat or near the price he purchased it. It could simply lie languishing. The point to Livermore was that whatever it is doing, it is not doing what he had expected it to do, so his safest bet was to get out of the trade and move on or perhaps go back into the situation after the move had been confirmed. This is a far more difficult concept to execute than may appear to the average trader. Emotionally, it becomes a struggle, since the trader may not have lost any money in the trade. It may be recalled that Livermore also said a trader needs a reason to buy a stock and a reason to sell. This technique provides the reason: The stock did not do what it was supposed to when it was bought! This was a good enough reason for Livermore to close out the trade. This is an essential factor in the Livermore Stock Trading System. One of the main challenges for a trader is to identify the current leaders and to spot the new leaders who are waiting to take over from the current ones. During major shifts and changes in market direction, it is of paramount importance to observe the leaders that are being driven out and identify the new stocks that will assume the leadership in the future. It is usually best to go with the strongest stock in the strongest groupdo not look for the cheapest or the laggard stock that has not yet had his turn to move in the groupalways go for the strongest most dominant stock in the group. In the long run, this will pay off. Livermores theories and methods came from his never-ending study of the market. He believed a trader is always a student of the market, never a master. Like a ships captain who studies the oceans, the tides, the moon, his fellow shipmates, the construction of his ship, and the stars for navigation, he knows he can never be in complete control, for a variety of reasons. He knows the biggest reason is that he cannot control the weather, the weather is in the hands of God and nature. Livermore knew that the market is comprised of human beings, and human beings are mostly driven by emotion not logic. He knew that people were often unpredictable and not like the stars in the heavens with a reliable pattern or the tides that rise and fall as predicted. With humans, nothing in their behavior is certain except uncertainty. A good stock trader must, in the end, be a student of human behavior, but he can improve his odds by placing the highest probabilities on his side. In Livermores case, he made several fortunes by doing this correctly. In every case, his theories were based on actual trading experience. His thinking was way ahead of its time, and even today much of his thinking revolutionary and inspiring. His vision of the dimension of time and how it applies to trading stock is one of those factors. The Time Stop And please add to your trading arsenal what Livermore stated before: I always have two stops in mind when I enter a trade: I have a price stop and I have a time stop. I will not stay with any trade more than a few points if it moves against me and I will not stay with a stock position for more than a few days or perhaps up to a week, if the stock does not perform as I expect it to perform. And there is still much more for traders to do on the subject of time in the future, as technology and the human knowledge base continues to expand. |
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