Top 10 Trading Rules by Great Trader Jesse Livermore – Part 2

Posted by Louis Teo on April 29, 2019 at 10:57 AM

In the second part of our blog series sharing wisdom from a great trader,Jesse Livermore, we round up five more quotes from the legendary trader that continue to guide many in their trading journey today. You can read the first part here.

Lesson 6


“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

Livermore once said, “They say you never go broke taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market.”

However, it is the opportunity cost of selling early to get profits while missing out on a potential trend.

He further remarked, “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”

Lesson 7

“I believe that having the discipline to follow your rules is essential.”

Without specific, clear and tested rules, speculators do not have any real chance of success. Why?

Because speculators without a plan are like generals without a strategy, and therefore without an absolute course of action.

Speculators without a single clear plan can only act and react to the slings and arrows of stock market misfortune, until they are defeated.

Lesson 8

“When you make a trade, you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade.”

The first rule an experienced trader told me was to always protect your capital, and once you can do that, you never have to fund your account in your life again. This is as important as setting a stop loss as you can never predict when a flash crash could happen. The most recent flash crash happened on 2 January 2019 when Yen rose by a whopping 4%. To put things into perspective, USD/JPY fell by a massive 4,000 pips within 7 minutes.

Lesson 9

“Trade along the path of least resistance.”

If after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious that the line of least resistance has changed from upward to downward.

Such being the case, why should anyone ask for explanations? There are probably very good reasons why it should go down.

Lesson 10

“A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.”

Before all the fancy technology came along to allow us to read charts wherever internet was available, stock prices were transmitted over telegraph lines on ticker tape that included a ticker symbol, price and volume.

There are many traders who take out their losses and negative emotions on the market itself, which, when we looked at it objectively, is ridiculous. Traders treat the market as if it is human who has a personality. But of course, it is not.

If you get stopped out of a trade and you show a loss, or if the market doesn’t act how you expected it to, it is not the market’s fault. The market isn’t wrong. The market is never wrong, only opinions can be wrong.

Some traders might think that we have hit a short-term top in the stock market, some might think that oil is far too low at this price. Some might say that gold is forming a bottom and will soon rally to new highs.

But the truth is that the market will go where it has to go. Only the market can prove who is right and who is wrong.

If you follow the trend, forget about making predictions, and just follow prices, you can go with the flow of the market. You’ll stop being angry at missed trades and you’ll trade in a much more relaxed and effective way.

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Louis Teo

Market Strategist