A Trading System

According to Jesse Livermore from the book Reminiscences of a Stock Operator by Edwin Lefevere.

“…I began to see more clearly perhaps I should say more maturely that since the entire list moves in accordance with the main current there was not so much need as I had imagined to study individual plays or the behaviour of this or the other stock.”

“Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn't it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”

“The moment I ceased to be satisfied with merely studying the tape I ceased to concern myself exclusively with the daily fluctuations in specific stocks, and when that happened I simply had to study the game from a different angle. I worked back from the quotation to first principles; from price fluctuations to basic conditions.”

“Of course I had been reading the daily dope regularly for a long time. All traders do. But much of it was gossip, some of it deliberately false, and the rest merely the personal opinion of the writers.” “It was not a vital matter for them to marshal their facts and draw their conclusions from them, but it was for me.”

“..now when I decided to sell I plunged. Since we undoubtedly were entering upon a genuine bear market I was sure I should make the biggest killing of my career.” “The market went off. Then it came back. It shaded off and then it began to advance steadily. My paper profits vanished and my paper losses grew.”

“I had made a mistake. But where? I was bearish in a bear market. That was wise. I had sold stocks short. That was proper. I had sold them too soon. That was costly. My position was right but my play was wrong.”

“I have always found it profitable to study my mistakes. Thus I eventually discovered that it was all very well not to lose your bear position in a bear market, but that at all times the tape should be read to determine the propitiousness of the time for operating. If you begin right you will not see your profitable position seriously menaced; and then you will find no trouble in sitting tight.”

“…at that time I had not developed my system of placing my bets or I would have put out my short line on a declining market, as I explained to you the last time. I would not then have lost so much of my margin. I would have been wrong but not hurt. You see, I had observed certain facts but had not learned to coordinate them.”

“That is what happened. I didn't wait to determine whether or not the time was right for plunging on the bear side. On the one occasion when I should have invoked the aid of my tape-reading I didn't do it. That is how I came to learn that even when one is properly bearish at the very beginning of a bear market it is well not to begin selling in bulk until there is no danger of the engine back-firing.”

My conclusion:

1.    Study the general conditions to determine if it is a BULL (going up) or BEAR (going down) market.

2.    Make a list of stocks you want to buy or sell. Investor’s Business Daily has a good stock screening system to help create this list. Their screens/lists do very well in a BULL (up) market. We will talk about creating your own stock list in future blogs.

3.    Check to see if your list of stocks is participating in the BULL (going up) market. If not, then wait till your list of stocks starts to participate. I refer to this list as the “momentum leaders” in my blog. I check to see if the index (which I create) of “momentum leaders” is participating in the BULL (up) market. If not, I wait.

4.    It is very important to learn to place bets. This is a way to manage risk and minimize losses. Trade a small amount and see if that trade makes a profit. If it does not make a profit you would lose only a small amount. The market is telling you “not yet”.. wait. This is a topic for future blogs.