Jan. 21, 2012- The Fourteen Year Old Boy Who Knew More To Trading Than Anyone I’ve Known

Jesse Livermore, Chapter 1, Reminiscences of a  Stock Operator (1923) 

“I noticed that in advances as well as declines, stock prices were apt to show certain habits, so to speak. There was no end of parallel cases and these made precedents to guide me. I was only fourteen, but after I had taken hundreds of observations in my mind I found myself testing their accuracy, comparing the behavior of stocks to-day with other days. It was not long before I was anticipating movements in prices. My only guide, as I say, was their past performances. I carried the “dope sheets” in my mind. I looked for stock prices to run on form. I had “clocked” them. You know what I mean.”

You can spot, for instance, where the buying is only a trifle better than the selling. A battle goes on in the stock market and the tape is your telescope. You can depend upon it seven out of ten cases.

That is how I first came to take an interest in the message of the tape. The fluctuations were from the first associated in my mind with upward or downward movements. Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it to-day, at forty. The reason for what a certain stock does to-day may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now-not to-morrow. The reason can wait. But you must act instantly or be left. Time and again I see this happen. You’ll remember that Hollow Tube went down three points the other day while the rest of the market rallied sharply. That was the fact. On the following Monday you saw that the directors passed the dividend. That was the reason. They knew what they were going to do, and even if they didn’t sell the stock themselves they at least didn’t buy it There was no inside buying; no reason why it should not break.

“Speculation is far too exciting. Most people who speculate hound the brokerage offices… the ticker is always on their minds. They are so engrossed with the minor ups and downs, they miss the big movements.”

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I was thinking about a few things, and these words helped form the answers I needed to be answered within me.  Jesse Livermore’s book “Reminiscences of a Market Operator” still continues to be the few books I’ll read, re-read every single time I need any advice, particularly with trading.  One valuable section of his book describes Livermore’s approach to buying a stock.  He would sell a quantity and see how the stock responded.  Then he would do that again and again, testing the underlying demand for the issue.  When his sales couldn’t push the market down, he’d move aggressively to the buy side and make his money.  Livermore’s losses were part of a grander plan.  He wasn’t just losing money.  He was paying for information.

“If you’re trading well, there are no losing trades: only trades that make money, and trades that give you the information to make money later.  ” – Brett Steenbarger, “How To Take A Loss“

9 Buying and Selling Tests (Wyckoff Methods)

(Read more directly from the Source: Stock Market Operator, Richard Wyckoff )

Wyckoff worked with and studied them all, himself, Jesse Livermore, E. H. Harriman, James R. Keene, Otto Kahn, J.P. Morgan, and many other large operators of the day.   Wyckoff implemented his methods in the financial markets, and grew his account such that he eventually owned nine and a half acres and a mansion next door to the General Motors‘Industrialist, Alfred Sloan Estate, in Great Neck, New York (Hamptons). (Wikipedia)

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Buying Tests:

1. Downside Objective Accomplished – In a down trend you should be looking for the Preliminary Support followed by a Selling Climax.in an up trend you should be looking for the Preliminary Supply followed by a Buying Climax). The objective range does not always work out, so you need to look for other indications. In our approach, we will be putting a number of indications together to form the “Balance of Probabilities” that we will need to initiate a trade. So, when do you know, after doing all this analysis, that the trade is going to be successful? The answer to this is, you never know!

2. Bullish Price Behavior -As the trading range progresses clear patterns of volume expanding on rallies within the trading range and contracting on reactions within the trading range should be apparent. If you don’t see this in your stock, look elsewhere.

3. Preliminary Support and Selling climax- The old saying of when in doubt do nothing, is valid in our approach. These principles should be obvious to the trained observer. If they are not obvious, find a stock where it has a history of displaying clear indications.

4. Stronger than the Market

5. Trend line Broken – As long as there is a Supply line, the downtrend is intact. It is necessary for the supply line to be totally destroyed before any long positions can be taken.

6. Higher Bottoms – at some point you should see a lifting of the bottoms within the trading range.

7. Higher Tops –  at some point, you will see higher tops.

8. Base Forming – What we want to see (calculate), is that there has been a worthwhile cause build on the chart.

9. 3:1 Reward / Risk Ratio – We want to put our stops in logical places where they are somewhat protected from being executed, while at the same time limit our risk

Selling Tests

1. Upside Objective Accomplished – In an up trend, you should be looking for the Preliminary Supply, followed by a buying Climax
2. Bearish Price Behavior – Early in the trading range if may be difficult to analyze. However, as the trading range progresses patterns of volume expanding on reactions within the trading range and contracting on rallies within the trading range should be apparent. This will be little more difficult than when we are analyzing bearish behavior, because the volume tends to retain much of the bullish influence as it moves through the trading range. If you don’t see a detectable degree of bearish price behavior in your stock, look elsewhere.
3. Preliminary Supply and Buying Climax – Preliminary Supply is often difficult to detect. Often, you may only be able to identify it after the Buying Climax has occurs.
4. Weaker than the Market
5. Trend line Broken – As long as there is a Support line, the up trend is intact. It is necessary for the Support line to be totally destroyed before any short positions can be taken.
6. Lower Tops
7. Lower Bottoms
8. Crown Forming
9. 3:1 Reward / Risk Ratio

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I was supposed to make some analyses of the leading schools of fish (NI,ORE,WIN,PHES,NIKL,EEI,TEL) etc but I believe that most of my analyses are better left in the next posts, so as not to compromise anyones’ positions.  End of the day, trading beyond application of rules and patterns is all about risk management.  😀

Happy Chinese New Year!

– Faceless Trader