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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The speculator wants to trade and the broker not only is willing, but too often encourages over-tradingMONEY MANAGEMENT The speculator has to insure himself against considerable losses by taking the first small loss. 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. Therefore the investor must guard his capital account just as the successful speculator does in his speculative ventures. When you are handling surplus income do not delegate the task to anyone. So, at the risk of repetition and preaching, let me urge you to avoid averaging down. I know but one sure tip I got from a broker. It is your Margin CallWhen the margin call reaches you, close your accountnever meet a margin call. You are on the wrong side of the market. A person engaged in the business of speculation should risk only a limited amount of capital on any one venture. Cash to the speculator is as merchandise on the shelves of the merchant. A speculator should make it a rule each time he closes out a successful deal to take one-half of his profits and lock this sum up in a safe deposit box. The only money that is ever taken out of Wall Street by speculators is the money they draw out of their accounts after closing a successful deal. The only time the average speculator can draw money from his brokerage account is when he has no position open or when he has an excessive equity. Money in a brokers account or in a bank account is not the same as if you feel it in your own fingers once in a while. When a speculator is fortunate enough to double his original capital he should at once draw out one half of his profit to be set-aside for reserve. In consideration of these general trading principles it should be said that too many speculators buy or sell impulsively, acquiring their entire line at almost one price. That is wrong and dangerous. Having made that commitment, decide definitely the amount of money you are willing to risk should your calculations be wrong. PROFITS After attaining a goodly profit, you must have patience, but dont let patience create a frame of mind that ignores the danger signals. But if you pay attention to them (danger signals) consistently, in the long run you will profit immensely. 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. The speculator who insists on trying to profit from daily minor movements will seldom be in a position to take advantage of the next important change marketwise when it occurs. Experience has proved to me that the real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start. As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit. You know you are right, because if you were not, you would have no profit at all. It may grow into a very large profit, and as long as the action of the market does not give you any cause to worry, have the courage of your convictions and stay with it. Incidentally, every time I lost patience and failed to await the Pivotal Points and fiddled around for some easy profits in the meantime, I would lose money. You will discover that profits made in this way are immensely more gratifying than any which could possibly come from the tips or guidance of someone else. The fact that your trades DO show you a profit is proof you are right. I was often altogether too anxious to convert a paper profit into actual cash, when I should have been patient and had the courage to play the deal out to the end. SHORTING Many have lost their capital funds by selling a stock short after a long upward movement, when it seemed too high. I never buy on reactions or go short on rallies. I found it was an easy matter for me to turn around and get out of a position, when vitality was lacking after a stock crossed the Pivotal Point and there were many occasions when I reversed my position and went over to the short-side. That same rule should be applied in selling short. Never make an additional sale unless it is at a lower price than the previous sale. This illustrates the value of having a short interest in speculative markets because the short interests become willing buyers when they cover their shorts, and those-willing buyers, the short sellers, act as a muchneeded stabilizer in times of panic. STOCKS Stocks, like individuals, have a character and a personality. Some are high-strung, nervous, and jumpyothers are forthright, direct, logical. A skillful trader comes to know and respect individual securities. Their action is predictable under varying sets of conditions. When a stock gets into a definite trend, it works automatically and consistently along certain lines throughout the progress of its move. Then what I term a Normal Reaction will occur. On that reaction the sales volume will be much less than on the previous days of its advance. To invest or speculate successfully, one must form an opinion as to what the next move of importance will be in a given stock. 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. When a stock starts sliding downward, no one can tell how far it will go. Nor can anyone guess the ultimate top on a stock in a broad upward movement. TRADING/SPECULATION I do not say that danger signals are always correct, no rules applying to stock fluctuations are 100 percent right. 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. Every judicious speculator is 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 bad commitment when they should. Again let me say, the human side of every person is the greatest enemy of the average investor or speculator. What I am trying to make clear to that part of the public which desires to regard speculation as a serious business, and I wish deliberately to reiterate it, is that wishful thinking must be banished. The speculator who insists on trying to profit from daily minor movements will never be in a position to take advantage of the next important change marketwise when it occurs. 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. 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 for the get-rich-quick adventurer. They will die poor. I have come to the conviction, however, that larger numbers of people interested in stock-market investment and speculation would be willing to work and study to attain sensible results, if they had a guide or signpost pointing the right direction. Out of it all emerges my theory of time element in trading, which I regard as the most important factor in successful speculation. 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 wisely read a book on How to keep fit and leave the physical exercises to another. 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 I am correct in 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 with informative data available. My theory and practical application have proved to my satisfaction that nothing new ever occurs in the business of speculating 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 are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading every day or every week during the year. To invest or speculate successfully, one must form an opinion as to what the next move of importance will be in a given stock. No one man, or group of men, can make or break a market today. Experience has proved to me that the real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start. It is a human trait to be hopeful and equally so to be fearful, but when you inject hope and fear into the business of speculation, you are faced with a very formidable hazard, because you are apt to get the two confused and in reverse positions. The speculator has to insure himself against considerable losses by taking the first small loss. 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. Successful speculation is not a mere guess. To be consistently successful, an investor or speculator must have rules to guide him. Certain guides that I utilize may be of no value to anyone else. One of the primary DONTS isone should never permit speculative ventures to run into investments. Dont become an Involuntary Investor. There is always the temptation in the stock market, after a period of success, to become careless or excessively ambitious. One major mistake of all speculators is the urge to enrich themselves in too short a time. Often for people who enter the speculative field 25 percent is nothing. They are looking for 100 percent. And their calculations are faulty; they fail to make speculation a business and run it on business principles. The lesson here again is that speculation itself is a business and should be so viewed by all. Do not permit yourself to be influenced by excitement, flattery or temptation. The speculator wants to trade and the broker not only is willing, but too often encourages over-trading. The uninformed speculator regards the broker as his friend and is soon over-trading. Never make any trade unless you know you can do so with financial safety. Whenever I have had the patience to wait for the market to arrive at what I call a Pivotal Point before I started to trade; I have always made money in my operations. I found it was an easy matter for me to turn around and get out of a position, when vitality was lacking after a stock crossed the Pivotal Point and there were many occasions when I reversed my position and went over to the short-side. Nevertheless, there are other ways by which one can determine Pivotal Points. You will derive from successful trades based on your own judgment a singular pleasure and satisfaction. If you make your own discovery, trade your own way, exercise patience, and watch for the danger signals, you will develop a proper trend of thinking. Few people ever make money by trading on the occasional tips or recommendations of others. Many beg for information and then dont know how to use it. Nevertheless, in making speculation a business, one automatically keeps an eye on all markets for the big opportunities. It would not surprise me if the persons who in the future follow my methods of keeping these records get even more out of them than I have. Someone else, however, may develop from this basic method new ideas which, when applied, will enhance the value of my basic method for their purpose. In consideration of these general trading principles it should be said that too many speculators buy or sell impulsively, acquiring their entire line at almost one price. That is wrong and dangerous. It was too depressing, a mood not conducive to the clear thinking that is required at all times in the field of speculation . . . to allow myself to become angry and disgusted with the cotton market just because I had used bad judgment was not consistent with good speculative procedure. I have long since learned, as all should learn, not to make excuses when wrong. Just admit it and try to profit by it. We all know when we are wrong. The market will tell the speculator when he is wrong, because he is losing money. Bear in mind that of the millions who speculate in all markets only a few devote their entire time to speculation. Beware of inside information . . . All inside information! It cannot be said too often that in speculation and investment, success comes only to those who work for it. No one is going to hand you a lot of easy money. And if there was any easy money lying around, no one would be forcing it into your pocket. I hold the firm belief that the future successful careful investor will only operate at the psychological time and will eventually realize a much larger percentage out of every minor or major movement than the purely speculative-minded operator ever did. The intent is to catch the major moves, to indicate the beginning and the end of movements of importance. VOLUME 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. WHAT TO TRADE I mean, do not have an interest in too many stocks at one time. It is much easier to watch a few than many, ten at the mostfive is better. Definitely it is not safe to try to keep account of too many stocks at one time. You will become entangled and confused. Confine your studies of movements to the prominent stocks of the day. Try to analyze comparatively few groups. You will find it is much easier to obtain a true picture that way than if you tried to dissect the whole market. Commodities frequently offer attractive Pivotal Points. TIMING WHEN TO TRADE And that is where the time element comes in. Dont let the stock go stale on you. 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. 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 commitment at all. If you have timed the movement correctly, your first commitment will show you a profit at the start. 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. Such weaknesses can be corrected by keeping and studying records of stock price movements and how they occur, and by taking the time element carefully into account. Out of it all emerges my theory of the time element in trading, which I regard as the most important factor in successful speculation. You cannot delegate to another the task of keeping your records, if you are to follow faithfully my formula for combining the time element and prices as set forth in subsequent pages. 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 his opinion, but will lose money by presuming or acting on his opinion too soon. The point I would here emphasize is that after forming an opinion with respect to a certain stockdo not be too anxious to get into it. First, wait and watch the action of that stock or stocks marketwise. Have patience and wait until the stock becomes active, until it makes a new high. There have been many times when I, like many other speculators, have not had the patience to await the sure thing. I wanted to have an interest at all times. I am human and subject to human weakness. Like all speculators, I permitted impatience to out-maneuver good judgment. But it was not until I began to take into consideration the time element that my records really became useful in helping me to anticipate coming movements of importance. 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. Try to forget a stocks past high range and study it on the basis of the formula that combines timing and price. It may surprise many to know that in my method of trading, when I see by my records that an upward trend is in progress, I become a buyer as soon as a stock makes a new high on its movement, after having had a normal reaction. It has always been my experience that I never benefited much from a move if I did not get in at somewhere near the beginning of that move. Just as markets in time will give you a positive tip when to get inif you have patience to waitthey will just as surely give you a tip-off when to get out. Rome was not built in a day, and no real movement of importance ends in one day or in one week. It takes time for it to run its logical course. It is significant that a large part of a market movement occurs in the last forty-eight hours of a play, and that is the most important time to be in it. The Livermore Method, my method, of recording prices in conjunction with the time element is the result of over thirty years of study of principles that would serve me in forming a basic guide for the next important market movement. From the time I started to merge the time element with price movements, my records began to talk to me! When a speculator can determine the Pivotal Point of a stock and interpret the action at that point, he may make a commitment with the positive assurance of being right from the start. This again illustrates the rewards that go to the person who has the patience to wait for and take advantage of the Pivotal Points. By keeping stock price records and taking into consideration the time element, you will be able to find many Pivotal Points on which to make a commitment for a fast movement. But by being consistent and never failing to re-enter the market again whenever your Pivotal Point is reached, you cannot help but be in when the real move does occur. But careful timing is essential . . . impatience costly. My losses were often due wholly to lack of patience in awaiting the proper time to back up a preconceived opinion and plan. I was often altogether too anxious to convert a paper profit into actual cash, when I should have been patient and had the courage to play the deal out to the end. I knew when the upward trend had reached its Pivotal Point, I would be given a danger signal in ample time. Certainly success with this plan depends upon courage to act, and act promptly, when your records tell you to do so. There is no place for vacillation. If you are going to wait upon someone else for explanations or reasons or reassurances, the time for action will have escaped. There is folly in trying to find a good logical reason why you should buy or sell a given stock. If you wait until you have the reason given you, you will have missed the opportunity of having acted at the proper time! |
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