It’s that time of year again…

As soon as there’s a whiff of spring in the air, I get the urge…

Yes, I’m just starting my annual re-read of Reminiscences of a Stock Operator.

So while the natural world wakes up from its winter slumber and starts to think about reproduction and all that good stuff, it makes me think of trading books.

Do you think that’s something I should be worried about?

Anyway, I’m flipping through my copy of Reminiscences here. It’s a little bit battered and worn but just about holding itself together.

And you’ve probably heard this book talked about in revered tones by traders. You may even have studied it yourself.

But for those who haven’t (and for those who want a short cut to the best bits of market lore) it really is the ‘Bible’ of effective trading.

In the book, Jesse Livermore – The ‘Boy Plunger’ and master trader of the early 20th century – shares his trading wisdom through the fictional character of Larry Livingston.

Here are 5 critical lessons you can take directly from its pages.

(I’ve lifted them from my old margin notes here, so they’re in no particular order)

Here we go…

Lesson 1: Learn to take small losses (gratefully)

Livermore went through numerous periods of boom and bust during his trading career. He could certainly make money, no doubt about that, but in the early days his weakness seemed to be hanging on to it!

Later in life he looks back through the lens of experience. He says he leant little from the winning trades, “they looked after themselves”. It was the losing trades that will teach you the lessons of a lifetime – as long as you don’t make the same mistake twice you can always trade another day.

And a big part of his later, refined strategy was the willingness to take small losses as he tried to establish a longer-term position.

He would send out little ‘probes’ into the market – small sized trades that would let him get an insider’s feel for current conditions. He was happy to cut losses quickly if the market didn’t behave how he anticipated on these tiny trades. In fact, he’d be willing to take numerous losing trades on his ‘probes’ until the market told him the time was right. He’d then build up his big position as the market moved in his favour.

Is that something you could emulate on your position trades? Could you go in initially with a fraction of your intended position? It’ll let you minimise risk and then let you fill your boots on the occasions when the market shows you your analysis is good.

Lesson 2: Ignore tips

Livermore would go to great lengths to prevent his mind becoming contaminated by popular opinion and market gossip. He’d even ride a chauffeured Rolls Royce into his Manhattan offices with curtains drawn across the windows because he didn’t want to risk being influenced by anything he saw or heard on the sidewalks.

He was especially resentful of well meaning friends who gave him stock tips “Tips! How people want tips! They crave not only to get them but to give them”.

He believed everything he needed to know could be found by observing the way the markets behaved… especially by the price patterns they formed.

So being a student of market price action is the lesson here.

You can listen to the financial press, you can subscribe to trading tip services, and you can follow the latest trading guru – you may even enjoy successful periods by doing so…

But unless you’re being taught the reasoning behind the trades – and ultimately understanding why you should take those trades in the first place – you can never have full control over your own activities.

It can take a bit of time and a bit of education, but make sure you’re always working towards being able to stand on your own two feet as a trader. Thriving off your own knowledge and know-how and being captain of your own ship is the ultimate freedom.

Lesson 3: Sit tight – being flat is a position in its own right

Livermore tells us: “After spending many years in Wall Street and making and losing millions of dollars I want to tell you this: it was never my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”

So never feel like you have to trade.

The temptation – especially if you spend time watching the market in real time – is to take trades to justify your status as a ‘trader’. And we’ve almost become conditioned by rules of the regular workplace…

Busy, busy, busy. Be proactive. Get stuff done.

It just doesn’t work like that in the markets. There are no hourly rates of pay. You eat what you kill.

I paint a picture for my students of a leopard sat in its tree waiting for dinner to go wandering by. It’ll wait for an easy kill – a young or injured animal. It won’t go running around in the midday sun like a lunatic chasing all and sundry. The risk of injury (or exhaustion) is too great.

Well, you’ve got to think of your trading in a similar way. You need to sit on your hands until the high probability situations your system identifies come trotting by – even if that means waiting for a couple of days before getting an order filled.

Remember, it’s the profit you’re here for. Not activity for activity’s sake.

Lesson 4: Follow the path of least resistance

“When the price line of least resistance is established I follow it, not because I am manipulating that particular stock at that particular moment but because I am a stock operator at all times”.

Here, he’s basically talking about following the trend. Why swim against the tide when you can swim with it?

It can be very tempting to try and catch trend reversal points but a rising market can always go higher, and a falling market can always drop further (unless it’s just hit zero!).

Using your powers of price action analysis (see lesson 2) you need to make yourself aware of the underlying current in the market and try and flow with it – that’s where the higher probability opportunities lie for you.

Lesson 5: Scared money never wins

“As I studied the problem I saw that it wasn’t a case that called for reading the tape but for reading my own self. I quite cold-bloodedly reached the conclusion that I would never be able to accomplish anything useful so long as I was worried, and it was equally plain that I should be worried so long as I owed money”

Here, Livermore’s mental clarity is clouded by the debts he was trying to clear. He was having trouble employing his usual methods because he was under such pressure to make money in order to pay back his creditors.

It’s one of those fascinating paradoxes (and the markets are full of them): The more pressure you’re under to make money, the less likely you are to make it.

The mental dialogue running through your head – reminding you that you MUST make money – can sabotage even your best efforts.
It’s why you should only ever trade with money you can afford to lose… don’t go staking your mortgage payment on a Forex trade!

And in the end, it’s all about keeping a clear mind. In order to make objective and well balanced trading decisions, you need to be operating from a low-pressure (ideally a no-pressure) position.

Right then, I’ve just slapped myself on the wrist for a few indiscretions I’ve been guilty of since I last reviewed those notes…

I hope you found something useful yourself from those 5 lessons and there really are loads more in the book. I would urge you to have a read and uncover some for yourself. You’ll find the lessons that are most relevant to you jump right off the page.

Here’s a lovely new edition of Reminiscences you can find on Amazon

Be Prepared: Market Moving Data Coming This Week (London Time):

Wednesday 2nd April
13:15 USD Non Farm Employment change

Thursday 3rd April
09:30 GBP Services PMI
12:45 EUR Interest Rate Decision
13:30 EUR ECB Press Conference
15:00 USD ISM Non-manufacturing PMI

Friday 4th April
13:30 USD Employment numbers

Monday 7th April

Tuesday 5th April
09:30 GBP Manufacturing Production

So I hope you enjoyed this week’s letter. And if you’ve already studied Reminiscences of a Stock Operator, what was the biggest lesson you took from it yourself? I’d love to know.