In This Episode
- How Nicholas Darvas was a similar trader
- The guy who turns $1,000 into $100,000
- The dark side of Jesse Livermore
- Jesse Livermore's book: How to Trade in Stocks
Jesse Livermore's Trading Psychology
In this episode, we dive into what made Jesse Livermore a great trader and the aspects of his psychology that also lead to his downfall.
We also talk about other traders like Nicholas Darvas and Larry Williams and how they apply similar concepts that Jesse Livermore used.
Read the Transcript:
Hugh: All right, so we're on the topic of trading psychology obviously. So Jesse Livermore, how would you analyze his psychology? What do you think were good parts of his psychology? What do you think were the ones that brought him down?
Walter: Well, my favorite quote and I used to have it. I don't have it up anymore but I used to have it. I could post it in the show notes. He said something along the lines of, “I always made my money by sitting and waiting”. You got that. It was by sitting and waiting.
“Plenty of traders…” — or men, I think he said men — “…can be right about the market and buy at the exact bottom and sell the exact top but there are very few that can actually hold on to it”. To me, that kind of sums up what you know, what was good about Jesse. Now the bad things are obviously you know people don't talk about this a lot but he killed himself.
One of the reasons why he killed himself is because he went boom and bust several times just like the markets you know in his time. He went up and he went down. He made it all and lost it all and that was because he went really hard with his risk. So you know you can learn a lesson in that in trying to figure out a way for you to avoid hitting rock bottom like that and not losing at all.
So that's the other part of it, he may have had I mean, today probably they would have put him on Prozac and you know say that he is bipolar or whatever. I mean, probably. I don't know but you know back in his day, they didn't have such a thing as you know prozac-deficiency or whatever the diagnosis is.
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Walter: So I think the real lesson with Jesse is you know, it's the same with Nicolas Darvas. It was similar too. If you read his book, Nicolas Darvas, “How I Made Two Million Dollars in the Stock Market” which doesn't seem like a lot but back in you know in the fifties it was or forties whenever he did that.
I think sitting and waiting and learning how to be patient with your winners is good. Possibly pyramiding, if you like pyramiding and adding to winners. The thing to watch out for is the risk part. You don't want to risk so much or just be so convinced that you're right that you just pile it all in because if that's the case you can obviously run into a big problem by having too much on the line. It's absolutely devastating if it doesn't go right for you.
Hugh: True and I think if you do have that kind of personality where you know you're good at pyramiding or like scaling up your winners, I think once you are done with that campaign or whatever you have to take all the money out. Just leave a small amount in there and build that again. And then if you blow that out, you're okay but I think there's a tendency to put all the money into play and you know you can lose everything.
Walter: Totally and it's fun to do that. It's fun to take off a little bit and get really aggressive with it. I mean, it sucks when it doesn't go well but once in a while it will and you don't need it to go right that many times you know.
I have a friend. He does that too. He takes out a thousand bucks and he'll run it up sometimes. He'll run it up when he gets to over a hundred, he quits. So he goes from a thousand to a hundred but a lot of times it doesn't work you know and so he's down a thousand, down a thousand, down a thousand.
Imagine doing that eleven times and on the twelfth time you hit a hundred grand. You're up. You're still up. You're up eighty-eight thousand so it's not a bad approach but it's kind of a way to get around it, isn't it?
Hugh: Yeah.
Walter: If you have that tendency, it's a way to kind of funnel all that energy into your little account where you're going to be super aggressive instead of risking it all you know. So it makes a lot of sense for a lot of people.
Hugh: Yeah, true. I know this guy who knows Larry Williams and Larry showed him this thing where he put it on a trade for like three bucks or something like that. Something small and made like a hundred dollars. He was like, “Wow! How to do that again?” He said, “Oh, do your own homework” but it just outlines Larry's mentality. Just bet a small amount and try to make a big amount and if you lose it then no big deal.
Walter: Yeah, absolutely. That's right.
Hugh: Okay, cool. Thanks, Walter.
Walter: Thank you.
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
SHOW NOTES:
Jesse Livermore – How To Trade in Stocks
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