Saturday, January 28, 2012 EST

Jesse Livermore's trading and approach to the market can be understood by reading Reminiscences of a Stock Operator. This is a book that a trader can grow in appreciation with time and experience in the market. 

Below is a snippet from Reminiscences and highlights Livermore's trading approach.


Jesse Livermore's Trading System (Reminiscences of a Stock Operator)

It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself -- that is, against human nature. That is the reason why I say that the man who is right always has two forces working in his favor basic conditions and the men who are wrong. In a bull market bear factors are ignored. That is human nature, and yet human beings profess astonishment at it.

People will tell you that the wheat crop has gone to pot because there has been bad weather in one or two sections and some farmers have been ruined. When the entire crop is gathered and all the farmers in all the wheat growing sections begin to take their wheat to the elevators the bulls are surprised at the smallness of the damage. They discover that they merely have helped the bears.

When a man makes his play in a commodity market he must not permit himself set opinions. He must have an open mind and flexibility. It is not wise to disregard the message of the tape, no matter what your opinion of crop conditions or of the probable demand may be. I recall how I missed a big play just by trying to anticipate the starting signal. I felt so sure of conditions that I thought it was not necessary to wait for the line of least resistance to define itself. I even thought I might help it arrive, because it looked as if it merely needed a little assistance.

This experience has been the experience of so many traders so many times that I can give this rule: In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.

A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. Stock-market post-mortems don't pay dividends.

Not so long ago I was with a party of friends. They got to talking wheat. Some of them were bullish and others bearish.

Finally they asked me what I thought. Well, I had been studying the market for some time.

I knew they did not want any statistics or analyses of conditions. So I said:

"If you want to make some money out of wheat I can tell you  how to do it."

They all said they did and I told them, "If you are sure you wish to make money in wheat just you watch it. Wait. The moment it crosses $I.20 buy it and you will get a nice quick play in it!"

"Why not buy it now, at $I.I4?" one of the party asked.

"Because I don't know yet that it is going up at all."

"Then why buy it at $1.20? It seems a mighty high price."

"Do you wish to gamble blindly in the hope of getting a great big profit or do you wish to speculate intelligently and get a smaller but much more probable profit?"

They all said they wanted the smaller but surer profit, so I said, "Then do as I tell you. If it crosses $1.20 buy."

As I told you, I had watched it a long time. For months it sold between $1.10 and $1.20, getting nowhere in particular.

Well, sir, one day it closed at above $1.I9. I got ready for it.

Sure enough the next day it opened at $1.20-1/2, and I bought.

It went to $1.21, to $1.22, to $1.23, to $1.25, and I went with it.

Now I couldn't have told you at the time just what was going on. I didn't get any explanations about its behavior during the course of the limited fluctuations. I couldn't tell whether the breaking through the limit would be up through $1.20 or down through $1.10 though I suspected it would be up because there was not enough wheat in the world for a big break in prices.

As a matter of fact, it seems Europe had been buying quietly and a lot of traders had gone short of it at around $I.I9. Owing to the European purchases and other causes, a lot of wheat had been taken out of the market, so that finally the big movement got started. The price went beyond the $1.20 mark.

That was all the point I had and it was all I needed. I knew that when it crossed $1.20 it would be because the upward movement at last had gathered force to push it over the limit and something had to happen. In other words, by crossing $1.20 the line of least resistance of wheat prices was established.  It was a different story then.

I remember that one day was a holiday with us and all our markets were closed. Well, in Winnipeg wheat opened up six cents a bushel. When our market opened on the following day, it also was up six cents a bushel. The price just went along the line of least resistance.

What I have told you gives you the essence of my trading system as based on studying the tape.

I merely learn the way prices are most probably going to move. I check up my own trading by additional tests, to determine the psychological  moment. I do that by watching the way the price acts after I begin.

It is surprising how many experienced traders there are who look incredulous when I tell them that when I buy stocks for a rise I like to pay top prices and when I sell I must sell low or not at all. It would not be so difficult to make money if a trader always stuck to his speculative guns -- that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down.

He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time. The same tape that said up did not necessarily lie merely because it is now saying NOT YET.


Conclusion: Livermore was a break-out trader. He also was not without flaws he would hold on to losing positions and get wiped out. The book also highlighted many psychological aspects of trading. Many of Livermore's insights in the book are spoken about in many modern books today but they do not credit him as the originator.

 

Saturday, January 28, 2012 EST

The Expert Option Search feature was updated to allow a range of expiration dates as part of the search criteria.

This can be done by selecting the dates under the column heading shown below "Exp. Dates Between." 

The example below will search for any option expiration dates between 2/3/2012 and 2/18/2012.

Wednesday, January 25, 2012 EST

In his book, Trading In the Zone, Douglas discusses how a trader can begin to eliminate the emotional risk of trading with a probabilistic mind-set. 

A probabilistic mind-set is essential to understanding the market because the market is "always communicating in probabilities." 

A probabilistic mind-set consists of internalizing the following fundamental truths (Douglas):

1.  Anything can happen. Or as I like to say, anything can happen…and often does. Usually the market does the exact opposite of what we think it should do and when we begin to doubt the market it does exactly what we once thought it should do.  Get it?

2.  You don’t need to know what is going to happen next in order to make money. Trading is not about being right in our arrogant predictions, it is about making money.  We are never going to be able to predict what will happen next either in the market or in life so let’s just get over it once and for all.

3.  There is a random distribution between wins and losses for any given set of variables that define an edge. Trading is like tossing a coin: we can have five wins in a row or five losses;  we could win one lose one.  Wins and losses are random so do not bet the farm or the crops.

4.  An edge is nothing more than an indication of a higher probability of one thing happening over another. Call it what we will but if we have a system, a methodology, a strategy, an edge for locating a trade then we have found an indication of a high probability circumstance that has been historically proven to repeat itself over and over again and will probably do so in the future.

5.  Every moment in the market is unique. No matter how many times we have traded an edge the outcome can be different this time and no matter how perfectly matched this pattern is with the last one, this one is truly unique if for no other reason than in this market the participants are not the same as in the last one.  The market is too diverse and too fluid to be put in a box, wrapped up and sold to the next consumer.

If you have a method for trading Douglas says to stick to it 100%. He has a 20 trade plan to help a trader work on this issue.

Make 20 trades, using your trading method, and stick to it. This means trading when your "edge" appears using stops to get out, and not changing your rules or rolling the dice.

This will help take the emotion out of trading so that you do not make yourself "wrong" for losses or "right" for wins.  What does make you "right" is you stick to your trading plan and know that trading is a numbers game.

 
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