Jesse Livermore’s Ten Trading Rules

Before William O’Neil and Nicolas Darvas there was Jesse Livermore. Livermore was considered to be one of the greatest traders to ever live. He is said to have made over $100 million shorting the 1929 crash, an unthinkable amount in his time. He made and lost millions on several occasions, he was a master of the market. We would all do well to sit up and listen to the primary rules that he traded with.

  1. Buy rising stocks and sell falling stocks.
  2. Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it’s rising you should be long, if it’s falling you should be short.
  3. Co-ordinate your trading activity with pivot points.
  4. Only enter a trade after the action of the market confirms your opinion and then enter promptly.
  5. Continue with trades that show you a profit, end trades that show a loss.
  6. End trades when it is clear that the trend you are profiting from is over.
  7. In any sector, trade the leading stock – the one showing the strongest trend.
  8. Never average losses by, for example, buying more of a stock that has fallen.
  9. Never meet a margin call – get out of the trade.
  10. Go long when stocks reach a new high. Sell short when they reach a new low.

Jesse Livermore did publish a book How to Trade In Stocks which is recommended reading by Willaim J. O’Neil.

While Livermore won in the markets over the long term he also lost everything many times, he even went into bankruptcy before making his unbelievable wealth. While he was a true pioneer in trend following, his weakness was the proper respect of risk management, especially his understanding of  the odds that he would be ruined if he risked large amounts of his capital on each trade. He was living proof that if you do not respect the risk of ruin you will eventually be ruined by a string of losses.