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Date Posted: 03:34:07 06/28/03 Sat
Author: peter wong
Subject: Re: notes on Jessy Livermore's Trading Guidelines
In reply to: peter wong 's message, "notes on Jessy Livermore's Trading Guidelines" on 03:11:29 06/28/03 Sat

Market-Timing Rules

Never sustain a loss of more than 10 percent of your invested capital. Livermore learned this in the bucket shops, where he worked with 10 percent margin and was automatically sold out if his loss exceeded the limit. This is also a money-management rule.

The big money is made by the sitting, not the thinking. Once a position is taken, the hardest thing to do is to be patient and wait for the move to play out. The temptation is strong to take fast profits or cover a trade solely out of fear of losing the profit on a correction. This error has cost millions of speculators millions of dollars. Be sure you have a good clear reason to enter a trade, and be sure you have a good clear reason to close our position. It is the big swing that makes the big money for you.

Play the market only when all factors are in your favor. No one can play the market all the time and win. There are times when you should be completely out of the market.

The speculator must know the overall trend of the market ¡V the line of least resistance ¡V before making a trade. Be sure you know whether this line of least resistance is upward or downward. This applies to both the overall market and individual stocks. The basic thing you need to know before making a trade is which way the overall market is headed: up, down, or sideways. You have to decide this before making a trade. If the overall trend of the market is not in your favor, you are playing at an extreme disadvantage.

Remember, go with the flow, bend with the trend, do not sail into a gale, and ¡V most of all ¡V don¡¦t argue with the tape!

The only thing to do when you are wrong is to be right by ceasing to be wrong. Cover your losses quickly, without hesitation. Don¡¦t waste time ¡V when a stock moves below a mental stop, sell it immediately.

Stocks often act like human beings, expressing different personalities: aggressive, reserved, hyper-strung, direct, logical, predictable, unpredictable. Study the stocks as you would study people; after awhile, their reactions to certain circumstances become predictable and useful in timing the stock¡¦s movement.

Stocks are never too high to begin buying or too low to begin selling short.

Failure to take the opportunity to get out of large illiquid positions when the opportunity presents itself can cost your dearly.

Failure to take advantage of a serendipitous act of good luck in the stock market is always a mistake.

In a market moving sideways in a narrow channel where stock prices are essentially stagnant, there is great danger in trying to predict or anticipate when and in what direction the market will move. You must wait until the market or the stock breaks out of this sideways channel in either direction. Don¡¦t anticipate! Wait for confirmation! Never argue with the tape. Follow the line of least resistance.

Do not spend a lot of time trying to figure out what moves the price of a particular stock. Rather, examine the tape. The answer lies in what the tape says, not in trying to figure out why the tape is saying it. Behind all major movements in the stock market there is an irresistible force which will most likely be revealed later. This is all the successful speculator needs to know.

The stock market goes up, down, and sideways. You can make money on the up side or the down side ¡V you can buy long or sell short. It should not matter to you what side of the market you are on. You must be impersonal. When the market goes sideways and you are confused, take a vacation.

A danger signal to watch out for: the one-day reversal, when the high of the day is higher than the high of the previous day, but the close of the day is below the low of the previous day, and the volume of the current day is higher than the volume of the previous day. Beware!

If the stock you traded is going in the opposite direction from what you expected, sell it quickly. This means your judgment was wrong. Cut your losses.

Wait, be patient, until as many factors as possible are in your favor. It¡¦s the patience that makes the money.

Study the action of a stock that has made a severe break in price, a precipitous drop. If the stock does not rebound quickly, it will most likely fall away further. There is an inherent weakness in this stock; the reason will be revealed at a later time.

The market is operating in future time. It has usually already factored in current events.

It is the inception of a basic movement, pivotal point, a change in trend, which indicates whether to buy or sell. It is this change in trend that, if caught, yields the most rewards.

There are two kinds of pivotal points. The reversal pivotal is defined as the perfect psychological time at the beginning of a major market move, a change in basic trend. It does not matter if this is at the bottom or the top of a long-term trending move.

The second pivotal point is called the continuation pivotal point. The reversal pivotal point marks a definite change in direction; the continuation pivotal point confirms it.

Be alert ¡V major pivotal points can often be accompanied by a heavy increase in volume.

Pivotal points provide an essential timing device, a trigger that reveals when to enter and when to exit the market.

At the end of a bull market, watch for wild capitalization ¡V good stocks selling at 30, 40, 50, or 60 times their annual earnings. These will be the same stocks that had previously traded at much lower multiples.

Beware of wild speculative stocks that take off for no real reason, except that they are trendy, currently favored stocks.

New highs are very important for timing. A new all-time high can mean that the stock has broken through the overhead supply of stock, and the line of least resistance will be strongly upward. Many people, when they see that a stock has made a new high, sell it immediately, then go to look for a cheaper stock.

Group action is the key to timing your move. Stocks do not move alone when they move. If U.S. Steel climbs or drops in price, then sooner or later, Bethlehem, Republic, and Crucible will follow along. The premise is simple: If the basic reasons why U.S. Steel¡¦s business should come into or go out of favor in the stock market are sound, then the rest of the steel group should also follow for the same reasons.

Trade the leading stocks in the leading groups. Buy the market leader of an industry group.

Watch the market leaders, the stocks that have led the charge upward in a bull market. When these stocks falter and fail to make new highs, it is often a signal that the market is turning. As the leaders go, so goes the entire market.

Confine your studies of stock market movements to the prominent leaders of the day. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market. That is where the action is and where the money is to be made. It also keeps your universe of stocks limited, focused, and more easily controlled.

You should have a clear target price at which to sell if the stock moves against you, a firm stop. And you must obey your rules!

A successful market trader must bet only on the course of highest probabilities. Buy small positions, and probe to test your judgment before you commit to a large position. Do not establish your full position all at one time. Use probes to confirm your judgment and timing, and to find the line of least resistance.

The trader must react quickly to the unexpected. If it is wind-fall, grab it. If it is bad news, hit the roard, and don¡¦t look back or hesitate ¡V sell out the position.

Beware when volume gets heavy and stocks churn after a long upward trend. This is a clue, a warning that the end of the move is near. This is an indication that stocks are going from strong hands to weak hands, from the professionals to the public. The public often views this heavy volume as the mark of a vibrant, healthy market going through a normal correction, not a top or a bottom.

The public tends to believe that the insiders are feeding out their stock on the upward rise of a stock. They are often wrong. They are often being fed the majority of the insider or pooled stock after the stock has crested at new highs and is rolling over, churning, and starting its decline. This is the time of the highest volume. This is often the reason why a stock cannot make a new high ¡V there is simply too much supply hanging over the market. This is distribution ¡V is not always from insiders, but usually from large shareholders, such as mutual funds in today¡¦s markets.

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  • Re: notes on Jessy Livermore's Trading Guidelines -- peter wong, 04:04:50 06/28/03 Sat
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