The ‘Boy Plunger’ spills the beans… how to make a fortune from trading

There’s a big cherry blossom tree in the middle of my lawn. I’m looking at it now, through my office window.

And when I first got interested in trading we were having some glorious sunny weather. I dragged the wooden picnic table under the branches of that tree for shade. It’s where I did my early studying.

I remember the pink blossom floating down into my untouched cup of tea as I sat transfixed by Reminiscences of a Stock Operator. I just couldn’t tear myself away. It’s still my absolute favourite trading book today.

I’d heard how some of the big hedge fund guys would re-read Reminiscences every year and I vowed to do the same. So as soon as we get a bit of spring-like weather and the tree starts to blossom that’s my cue.

(And if the temperature manages to creep above today’s 8 degrees Celsius I might even risk a bit of outdoor-reading again!)

Now you probably own a copy of Reminiscences. But have you read it? I mean really read it, absorbing all the lessons right there at your fingertips?

If not, I insist you go and do so immediately! It’s the biggest single biggest trading education leap you can take.

And if you don’t own a copy yet, go and get one. Personally, I’d order the proper book so you can underline passages and make notes in the margins. But if e-readers are your thing, the Kindle edition only costs 99p.

Here’s an Amazon link: Reminiscences of Stock Operator

And if you want a short-cut to the best bits, just so you know where to pay closest attention, here are my top 5 lessons from the book…

They all come to us via the main character Larry Livingston, everyone’s favourite ‘Boy Plunger’ and thinly disguised caricature of master trader Jesse Livermore (the real focus of the true story).

Livermore Lesson 1: Learn to take small losses

Livermore went through periods of boom and bust during his trading career. He could certainly make money, no doubt about that. His weakness seemed to be hanging on to it.

Later in life he looks back through the lens of experience. He says he learnt 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 refined strategy was the willingness to take small losses as he tried to establish his longer-term positions.

So 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 copy 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 once the market shows you your analysis is good.

Livermore Lesson 2: Ignore tips

He would go to great lengths to prevent his mind becoming contaminated by popular opinion and market gossip. He’d ride a chauffeured Rolls Royce into his Manhattan offices but with curtains drawn across the windows. He didn’t want to take the risk of 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 is the ultimate freedom.

Livermore Lesson 3: 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 ‘trader’. And we’ve almost become conditioned by rules of the ‘normal’ 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.

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 your order filled.

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

Livermore 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 has 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.

Livermore 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!

Keep 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.

I hope you found something useful yourself from those five 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.

And I guarantee you’ll learn a whole new set of lessons on reach re-read too!

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

Wednesday 27th April
09:30    GBP    Gross Domestic Product
15:00    USD    Pending Homes Sales
15:30    USD    Crude Oil Inventories
19:00    USD    FOMC Statement & Interest Rate Decision

Thursday 28th April
04:40    JPY    BOJ Monetary Policy Statement
06:00    JPY    BOJ Outlook Report
07:30    JPY    BOJ Press Conference
08:55    EUR    German Unemployment Change
13:30    USD    GDP

Friday 29th April
10:00    EUR    CPI

Monday 2nd May
All day    UK Bank Holiday

08:55    EUR    German Manufacturing PMI
15:00    USD    ISM Manufacturing PMI

Tuesday 3rd May
05:30    AUD    Interest rate Decision
09:30    GBP    Manufacturing PMI

So we have more central bank data to keep an eye on this week. Trade safely, enjoy the bank holiday weekend and I’ll catch up with you again soon.

Happy trading!