Jesse Livermore was a legendary stock trader who amassed a huge fortune worth $100 million ($1.5 billion in today’s money) at his peak in 1929. He traded on his own, using his own funds, his own system, and not trading anyone else’s capital.
Livermore liked trading in stocks that were moving in a trend, and he avoided ranging markets. When prices approached a pivotal point, he waited to see how they reacted. Price patterns, combined with volume analysis, were also used to determine if the trade would be kept open .
According to some sources, his stock selection process involved the following steps:
- He only traded stocks that were moving in a clear trend, and avoided sideways or choppy markets.
- He waited for pivotal points, such as previous highs or lows, to be broken before entering a trade. He used stop orders to execute his trades automatically when the price reached his desired level.
- He added to his positions (pyramided) when the price moved in his favor, but only if the volume confirmed the trend. He used a trailing stop to protect his profits and exit the trade when the trend reversed.
- He analyzed the market conditions and the general mood of the investors to determine the best time to enter and exit the market. He was especially alert for signs of market tops and bottoms, such as euphoria or panic, and used them as contrarian indicators.
- He kept a record of his trades and studied his mistakes and successes. He also kept track of the price patterns and signals that worked best for him.
These are some of the main aspects of Jesse Livermore’s stock selection process, but there is much more to learn from his life and trading career. I recommend reading his book How to Trade in Stocks (1940) or the fictionalized biography Reminiscences of a Stock Operator (1923) by Edwin Lefèvre for more insights into his trading methods and philosophy.