Trade stocks using the Jesse Livermore method

Although I am a Forex trader, I have to admit that there is probably more money to be made trading stocks than there is in Forex, even if it is just a matter of degree. Jesse Livermore is one of the most successful stock traders of all time. He explained his trading rules in two books, but since there were discrepancies between the two publications, there is a lot of confusion about what exactly his methods were. After a careful study of his writings, I will expose here the great methods he used and which can still be used today to achieve spectacular profits.

A word of warning first: when Livermore traded stocks as a serious professional, he bought and sold the stocks themselves with a 10% margin. This is quite different from most online brokers today which allow trading of individual stocks. To do it correctly and without paying too much in fees and commissions, you really have to start with a five-figure sum, and use a high-end broker.

…there is probably more money to be made trading stocks than there is in Forex…”

Here’s how Livermore did it:

Step 1 – Determine if the stock market is a bull market or a bear market

Livermore explained that he didn’t start becoming a true professional until he learned to anticipate big moves in the market. One of the benefits of trading stocks is that you can use broader economic cycles and conditions to predict whether they are more likely to go up or down.

There are several statistical definitions of what constitutes a bull market or a bear market. Traders can also look to economic fundamentals to confirm whether a bull or bear cycle exists. Perhaps the easiest method is to use a fairly simple technical analysis of the main stock index itself, the most important of all global stock indices being the S&P 500. Moving averages are most commonly used: for example, if the 50-day simple moving average is above its 200-day equivalent, a bull market can be called, the reverse signifying a bear market. Alternatively, you might want to watch if two consecutive months close above or below the 12-month simple moving average to determine the same.

When trading stocks using the Livermore method, you are only long during a bull market and short during a bear market.

Step 2 – Prepare to open new trades when a new bull or bear market begins

Livermore said a stock trader’s job is to start buying stocks at the start of a bull market and hold until the bull market ends; or start shorting stocks at the start of a bear market and hold until the end of the bear market. He also pointed out that sometimes a market is neither quite bullish nor quite bearish, which would mean it would be time to exit existing trades, but not open new ones in the opposite directions.

Step 3 – Sector Selection

When the trader is ready to start buying or selling, he must decide which stocks to buy. Stock indices can be bought, but profits can be maximized by picking the hottest stocks in the upcoming cycle. This is best achieved through a top-down approach that looks at industry indices published by multiple financial services companies. Of course, the study of the economic situation of this sector can also be useful. Technically, you can look at sector index prices and see if they are as bullish or bearish as the broader market index, which is important confirmation that you are looking in the right sector.

Step 3 – Selection of actions

Livermore traded the two hottest stocks in each selected sector it wanted to be in. Again, a simple technical method to see which stocks are making new highs or strongest lows can be used, in addition to looking at company financials, stock market, products, etc. There were two major advantages to being in the two hottest stocks in a sector: first, a diversification benefit, and second, Livermore saw that if one of the stocks started to perform significantly worse than the another, it was a likely indication that something was wrong with that company, and when it did, it went out of that stock.

A significant portion of business actions using the Livermore Method focus on key companies that are at the forefront of technological change and customer demand. Livermore focused heavily early in his career on sugar, steel and railroads, which were key elements of the economic changes of the late 19and century. In the current bull cycle, he would definitely buy Apple stock the same way he bought sugar when new technologies were being developed to make sugar affordable to the masses.

Step 4 – Make the trade

Livermore liked to buy breakouts and sell breakdowns. He has also always moved on in his new trades, and not in positions of equal size either. I can illustrate this with an example.

Suppose you have identified the beginning of a bull market. You are interested in shares A and B of sector C. Share A is making a new high price, higher than it has been for several weeks or months. Livermore would buy stock A immediately, but with only a quarter of the total amount of shares of that stock he could possibly buy. He would then wait to see how it would work. If it continued to rise sharply and reach new highs, it would buy again: half of the remaining three-quarters, then wait a little longer. If the pattern repeated itself, he would then buy the rest of the shares he wanted. He said you could use a 1% rise in price as a signal to add to the trade, but he probably used his own judgment more than he used any set percentage.

If at any time the upward move seemed to fail, Livermore would come out. By moving in the trade, he protected himself against more serious losses when he was “wrong” about the momentum of the move. When he was wrong, he patiently waited for everything to go back to normal and tried the swap again.

Livermore did not use hard stop loss orders. He just got out when he thought he was wrong.

Step 5 – Sit well

One of Livermore’s most famous quotes is “I’ve made more money sitting still than I ever made being right.” What he meant by that was that no one could predict every market move, so get in early and don’t get out until the whole market has played out. This way, you could buy a stock for $10 and sell it two years later at the end of a bull market for $210, and make huge profits. He specifically warned against selling back for fear the market will turn, then trying to buy back the shares later. Livermore suffered from this in its early years of stock trading.


There you have a glimpse into the stock trading method of a man who was probably the greatest stock trader of all time. A final word of warning: Livermore has gone bankrupt several times, mostly due to poor money management skills. He simply risked too much of his capital on his trades. Be careful that in this matter you do not follow his example.

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