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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Livermore believed that the game of speculation is the most uniformly fascinating game in the worldHISTORY REPEATING ITSELF Livermore believed that 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, or the person of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor. Over a long period of years, he rarely attended a dinner party including strangers when someone did not sit down beside him and inquire after the usual pleasantries: How can I make some money in the market? In his younger days, he went to considerable pains to explain all the difficulties faced by the trader who simply wishes to take quick and easy money out of the market; or through courteous evasiveness, he would work his way out of the snare. In later years, his answer became a blunt I dont know. It was difficult for him to exercise patience with such people. In the first place, the inquiry is not a compliment to a man like Jesse Livermore who has made a scientific study of investment and trading. It would be similar for the layman to ask an attorney or a surgeon: How can I make some quick money in law or surgery? It is simply hard work, constant study, discipline, and unyielding perseverance that leads the way to success in the stock market, as it does in any profession. But before we go further, let me warn you that the fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions. You cannot read a book on how to keep fit and leave the physical exercises to someone else. Nor can you delegate to another the task of keeping your records. You must understand and follow faithfully Livermores stock trading system, and understand and combine all the aspects of Timing, Money Management, and Emotional Control, as set forth in these pages. Livermore could only lead the way, and he would be a happy man if through his guidance, a trader would be able to take more money out of the stock market than he put in. This information is for that portion of the public that at times may be speculatively inclined. Some points and ideas are presented here that come directly from Livermores many years as an investor and speculator. Anyone who is inclined to speculate should look at speculation as a business and treat it as such, and not regard it as a pure gamble, as so many people are apt to do. If the premise that speculation is a business in itself, those engaging in that business should determine to learn and understand it to the best of their ability, using all the data available. In the forty years that he devoted to making speculation a successful business venture, Livermore was still discovering new rules to apply to that business. The stock market is a journey with no end. On many occasions, Livermore went to bed wondering why he had not been able to foresee a certain imminent move, and awakened in the early hours of the ensuing morning with a new idea formulated, actually impatient for the morning to arrive in order to start checking over his records of past movements to determine whether the new idea had merit. In most cases, it was far from being 100 percent right, but what good there was in it was stored in his subconscious mind. Perhaps, later, another idea would take form, and he would immediately set to work checking it over. In time, these various ideas began to crystallize, and he was able to develop a concrete method of keeping records in such a form that he could use them as a guide. His conclusion was that nothing new ever occurs in the business of trading or investing in securities or commodities. There are times when one should speculate, and just as surely there are times when one should not speculate. There is a very true adage that Livermore loved: You can beat a horse race, but you cant beat the races. So it is with market operations. There are times when money can be made investing and speculating in stocks, but money cannot consistently be made by trading every day or every week during the year. Only the foolhardy will try it. To invest or trade successfully, one must form an opinion as to what the next move of importance will be in a given stock. Speculation is nothing more than anticipating coming movements. In order to anticipate correctly, one must have a definite basis for that anticipation, rules to follow, but one has to be careful because people are often not predictablethey are full of emotionand the market is made up of people. The good speculators always wait and have patience, waiting for the market to confirm their judgment. For instance, analyze in your own mind the effect that a certain piece of news may have in relation to the market. Try to anticipate the psychological effect of this particular item on the market. If you believe it likely to have a definite bullish or bearish effect on the market, dont back your judgmentwait until the action of the market itself confirms your opinion. The effect on the market may not be as pronounced as you are inclined to believe it should be. Do not anticipate and move without market confirmationbeing a little late in your trade is your insurance that you are right or wrong. To illustrate further: After the market has been in a definite trend for a given period, a bullish or bearish piece of news may not have the slightest effect on the market, or it may have a temporary effect. The market itself at the time may be in an overbought or oversold condition, in which case the effect of that particular news would certainly be ignored. At such times, the recording value of past performances under similar conditions becomes of inestimable value to the investor or speculator. At such times you must entirely ignore personal opinion and apply strict attention to the action of the market itself. Markets are never wrongopinions often are. The latter are of no value to the investor or speculator unless the market acts in accordance with his ideas. No one man, or group of men, can make or break a market today. One may form an opinion regarding a certain stock and believe that it is going to have a pronounced move, either up or down, and eventually be correct in ones opinion, but one will lose money by presuming or acting too soon. Believing his opinion to be right, the trader acts immediately, only to find that after he has made his commitment the stock goes the other way. The market becomes narrow; he becomes tired and gets out. Perhaps a few days later it begins to look all right, and in he goes again, but no sooner has he re-entered than the stock turns against him once more. Once more, he begins to doubt his opinion and sells out. Finally, the move starts up. Having been too hasty and having made two unprofitable commitments, he loses courage. It is also likely that he has made other commitments and is not in a position to assume more. Thus, by the time the real move in the stock he jumped into prematurely is on, he is out of it. The point to emphasize here is that after forming an opinion with respect to a certain stock, do not be too anxious to get into it. Wait and watch the action of that stock for confirmation to buy. Have a fundamental basis to be guided by. Experience proved to Livermore that the real money made in trading was in commitments to a stock or commodity that show a profit right from the start. Livermores trading operations were mostly driven by Pivotal Point action. As already explained, he always attempted to make his first trade at the right psychological time, that is, at a time when the force of the movement was so strong that it simply had to carry through. It simply had to and did go. But there were many times in his career when, like many other speculators, he did not have the patience to await the sure thing, because he wanted to have an interest in the market at all times. With all his experience, why did he allow himself to do so? The answer is that Livermore was human and subject to human weakness. Like all speculators, he permitted impatience to outmaneuver good judgment. Profits always take care of themselves but losses never do. The speculator has to insure himself against considerable losses by taking the first small loss. In so doing, he keeps his account in order, so that at some future time, when he has a constructive idea, he will be in a position to go into another deal, taking on the same amount of stock as he had when he was wrong. The speculator has to be his own insurance broker, and the only way he can continue in business is to guard his capital account and never permit himself to lose enough to jeopardize his operations at some future date when his market judgment is correct. There are definitely certain times when a reversal in trend rally gets under way, and at this time an astute trader can devise a specific method (rules) to use as a guide, which will permit him to judge correctly when to make his initial commitment. Successful speculation is not a mere guess. To be consistently successful, an investor or speculator must have rules to guide him. Certain guides that one trader, such as myself, utilizes may be of no value to anyone else, so the trader may want to create his own combination of methods to trade the market. Independent thinking was Livermores hallmark, and there are many ways to successfully trade the stock market. No guide to trading can be 100 percent right. So, if a stock does not act as you anticipated, you must immediately determine that the time is not yet ripe and close out the commitment. Perhaps a few days later your guide indicates you should get in again, so back you can go, and perhaps this time it is 100 percent correct. Livermore was convinced that anyone who will take the time and trouble to study the market carefully should in time be able to develop a guide that will aid him in future operations or investments. Livermore said, A great many traders keep charts or records of averages. They chase them around, up and down, and there is no question that these charts of averages do point out a definite trend at times. Personally, charts have never appealed to me. I think they are altogether too confusing. Nevertheless, I am just as much of a fanatic in keeping records as other people are in maintaining charts. They may be right, and I may be wrong. My preference for records is due to the fact that my recording method gives me a clear picture of what is happening. But it was not until I began to take into consideration the element of time and timing that my records really became useful in helping me to anticipate coming movements of importance. I believe that by keeping proper records and taking the time element into consideration, one can with a fair degree of accuracy forecast coming movements of importance. But it takes patience to do so. Familiarize yourself with a stock, or different groups of stocks, and if you figure the timing element correctly in conjunction with your records, sooner or later you will be able to determine when a major move is due. If you read your records correctly, you can pick the leading stock in any group. Traders must keep their own records. Dont let anyone else do it for you. You will be surprised how many new ideas you will formulate in so doing; ideas which no one else could give you, because they are your discovery, your secret, and you should keep them your secret. |
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