One of the most epic books ever written about trading Reminiscences of a Stock Market Operator, a thinly disguised biography of Jesse Livermore written by Edward Lefevre. This book provides a detailed fictionalized look into Livermore’s life as a trader, although it was written in 1923 before his huge triumph from shorting the stock market ahead of the great crash of 1929.

Livermore himself — after losing most of that fortune — wrote How to Trade in Stocks in 1940, months before he took his own life. While the earlier book is better known, the trading book is where Livermore laid out 21 trading rules. More than 70 years later, Livermore’s rules are still widely followed by many traders; here are some to keep in mind while you trade:

  • Nothing new ever occurs in the business of speculating or investing in securities and commodities.
  • It is much easier to watch a few than many.
  • If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.
  • Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.
  • Money cannot consistently be made trading every day or every week during the year.
  • Never average losses.
  • Wishful thinking must be banished.
  • Never buy a stock because it has had a big decline from its previous high.
  • Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.
  • Markets are never wrong – opinions often are.
  • The real money made in speculating has been in commitments showing in profit right from the start.
  • It is not good to be too curious about all the reasons behind price movements.
  • Big movements take time to develop.
  • Never sell a stock because it seems high-priced.
  • Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.
  • The leaders of today may not be the leaders of two years from now.
  • At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
  • One should never permit speculative ventures to run into investments.
  • The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.
  • I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.
  • The human side of every person is the greatest enemy of the average investor or speculator.

Let’s take a look at one of these rules: Big movements take time to develop.

Check out this daily chart on Amazon.com Inc (AMZN).

Clearly, in the the second half of 2014, AMZN’s price stalled, and Livermore’s rule comes into play. It’s all about being patient, if you’re in a position to see a large movement in price.

AMZN more than tripled in value over the ensuing time period; big movements take a while to materialize.

Final thoughts

Livermore’s rules to trading are still applicable today, and should be in the back of traders’ minds at all times. But if you want them front-of-mind because they would help you trade with discipline, print them out or write them down and put them on your trading station.

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   Petra Hess runs PetraPicks.com. She is a technical swing trader and long-term investor in domestic and Canadian stocks and ETFs.

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