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Jesse Livermore belongs among the greats in trading. Born in 1877, his life saw several great crashes, including the 1929 Wall Street Crash. By 1929, he had made around $100 million, the equivalent of billions today, having made and lost other fortunes along the way.
He did this without the aid of price charts or algorithms, instead he kept track of prices in a ledger. He developed the concept of pivot points, which involved watching a stock at key levels to see how it reacted. He would add to successful positions in a manner called ‘pyramiding’, by taking progressively smaller positions in a stock to increase his risk and compound his winnings.
Jesse Livermore developed many rules for trading, but some of his most instructive moments come from his losses. He learnt the hard way not to trust rumour, or other people, relying instead on his own analysis. But, he would also over-leverage himself, or would hang on to his losing positions rather than cutting his losses.
The book ‘Reminiscences of a Stock Operator’ is a thinly-veiled biography of Livermore, and still makes for excellent and instructive reading today.
Nicholas Darvas was a dancer by trade, but his book ‘How I made $2 million in the stock market’ is another must-read for those interested in trading. After some disastrous investments, Darvas set out to learn more about potential high-growth sectors. He then looked for clues in the volume of a stock, waiting for a substantial increase. Then, he narrowed his choices down to stocks trading in a narrow range, and waited for a breakout.
What makes his system more remarkable is that he did all this in the 1960s, when the only way of keeping in contact with his broker was via telegrams, and even then these would only reach him infrequently. His success is a reminder that traders do not need to be glued to their screens every minute of every day.
Many traders call themselves trend followers, but Ed Seykota may perhaps be the greatest of them all. He began his career when computers still used punch cards, looking to hop on board long trends by following mechanical signals to buy and sell, in order to ride out the trend for as long as possible. He stresses the need to follow your system even when it showed a string of losses, since his risk management meant that each losing trade cost him only 1% of his capital.
Like Darvas, he didn’t watch price action all day, waiting until the close to update prices. By risking only 1% of his capital on each trade he was able to control his emotions to a greater extent than would have been the case if he risked more. He also avoided making predictions, arguing that the market would tell him what to do when the time came along.
He even wrote a song, the ‘Whipsaw Song’, which talks about his trading principles.
What makes them great?
These traders are just a few of those who have done well in financial markets. The key with examining their history is not just to marvel at their success, but to try and discern what made them successful.
Each trader mentioned above had a system, which included position sizing, stop loss positioning and a successful approach. Jesse Livermore in particular, is a valuable example, since he made and lost fortunes by first following and then abandoning a system.
Successful trading requires a clear system that takes into account the possibility of losing trades, and also aims to preserve a mental equilibrium that prevents a trader from becoming too emotional during their trading hours. As the traders above show, it is possible to become successful, but not without a strict system and the ability to follow that system.