Jesse Livermore's 5 Money Management Rules

Money management has been a profession involving a lot of fakery - people saying they can beat the market, and they really can't.
Robert J. Shiller

A few years ago, maybe even a decade ago, I copied down a message board posting about Jesse Livermore, Posted by an experienced trader. If you are an aspiring trader, even an experienced one, you must read about this man, he should be your hero. 

1) Don't lose money. Don't lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don't lose your line. There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth. 

2) Always establish a stop. A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital. I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining; tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take sour losses quickly and get out. Remember, never meet a margin call, and never average losses. Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me: "J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right," and I would sell out of my position in the blink of an eye. I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes. Take your losses quickly. Easy to say, but hard to do. 

3) Keep cash in reserve. The successful speculator must always have cash in reserve.. .for exactly the right moment. There is a never-ending stream of opportunities in the stock market and, if you miss a good opportunity, wait a little while, be patient, and another one will come along. J.P. reach for a trade, all the conditions for a good trade must be on your side. Remember, you do not have to be in the market all the time. The desire to always be in the game is one of the speculator's greatest hazards. When playing the stock market, there are times when your money should be waiting on the sidelines in cash.. .waiting to come into play. Time is not money — time is time, and money is money. Often money that is just sitting can later be moved into the right situation at the right time and make a fast fortune. Patience is the key to success, not speed. Time is a cunning speculator's best friend if it is used wisely. 

4) Let the position ride. As long as the stock is behaving normally, do not be in a hurry to take a profit. You must know you are right in your basic judgment, or you would have no profit at all. If there is nothing basically negative, then let it ride. It may grow into a very large profit. As long as the action of the overall market and the stock do not give you cause to worry, have the courage of your convictions, and stay with it. When I was in a profit on a trade, I was never nervous. Of course the opposite is true as well. If I bought a stock and it went against me I would sell it immediately. You can't stop and try to figure out why a stock is going in the wrong direction. The fact is that it is going in the wrong direction, and that is enough evidence for an experienced speculator to close the trade. I do not and never have blindly bought and held a stock. To buy and hold blindly on the basis that a stock is in great company or a strong industry, or that the economy is generally healthy, is, to me the equivalent of stock market suicide. Stick with the winners. Let them ride until you have a clear reason to sell. 

5) Take the profits in cash. I recommend parking 50 percent of the profits from a successful

trade, especially when the trade doubled the original capital. Set the money aside, put it in the bank, hold it in reserve, or lock it up in a safe-deposit box. Like winning in the casino, it's a good idea, now and then to take your winnings off the table and turn them into cash... .the single largest regret I have ever had in my financial life was not paying enough attention to this rule.

Just Stand Aside Awhile or is it Time to Give Up?

Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.
Thomas A. Edison

Have you ever heard a market trader state: "It's all a sham; there's no way to make money in the markets. There are just too many roadblocks. The odds are against you all the way?" If you have stated this or something similar to yourself it is apparent you are ready to quit, find a new profession. However it is at times like this that you must be resilient, it is not a time to brood. 

If someone tells you that trading the markets is easy, they are kidding you or themselves or both.

Trading is not easy; there is no Holy Grail, no quick and dirty way to make profits. If there were everyone would be trading the markets, now wouldn't they?  Who would be left to do all the rest ofthe worlds work? If you want to become a successful trader it is going to take sacrifices, commitment,and just plain hard work. Until you have become skillful and experienced the odds are indeed against you. If you approach trading as an amateur hobbyist you will come to believe it is all a sham. You will begin to convince yourself that trading just is not worth it; you will be finding reasons to just give up. If this is the way you are approaching trading and you are experiencing setbacks; it's decision time. Are you going to commit to doing the work required? If not then it is probably wise to give up and walk away.

That said, it is often hard to stay upbeat. There are times when nothing seems to click. Your trading strategies are not working, or you may have trouble getting an accurate read on the markets. This is a very common ailment. Depending on your past experience, there are times when the market does not seem to behave in the way you anticipate. Market conditions change, and unless you have a wealth of experience, you may simply not be familiar with the factors that are driving market action. It may just be a matter of standing aside until market conditions change. It becomes necessary to weather the storm.

Winning traders view unfavorable market conditions as a learning opportunity, a time to gain even more market experience. They objectively study the markets, trying to understand how the market moves and why. It is a time to think creatively and hone trading skills. It is at times like these that it is time to stand up and cultivate a fighting spirit. Instead of quitting; why not just rest awhile. It is all right to take a break. Even the most successful trader feels a little burned out at times. By resting, relaxing, and rejuvenating, you will find the strength to muster enough enthusiasm to tackle the markets again. And this time, you may find that the obstacles that once seemed insurmountable are now just minor bumps in the road to success. 

After you have taken your rest, review your plan and your risk management techniques, build up enough trading capital: only then should you address the psychological side of accepting losses. Begin to refute assumptions about risk and loss. Make a list of justifications that you can read after you have lost: "Losses are a business expense. It is like a personal investment in your trading business. It is like paying tuition in order to learn important trading lessons." These sayings may not work at first. It is hard to change over night. Practice! That's why you should actually write down these sayings about losses, and read through the list when you feel guilty about a loss. 

Trading often is emotionally draining, and if you are not careful, you can feel beaten and ready to quit. But rather than search for a way out, remember the reasons to stay. If you persist, gain as much experience as possible, and hone your trading skills, you will achieve enduring financial success.

The Power of Compounding (Developing Your Plan IV)

The time to save for the future is now. Thanks to compounding interest, the earlier you start putting money away for the future, the more you will save.
Alexa Von Tobel

Unfortunately many traders and investors do not understand the simple concept of compounding. Their plan is written with goals that are blatantly unrealistic. The plans and the goals are more of a hope than a plan. If I can make X dollars then I can tell my boss where to go and live the good life. Whatever they perceive that good life to be.

Realistically you should understand the power of compounding; this basic principle is

essential in helping you initially set your goals, and keep them realistic. You can now work backwards from your end game to your current situation and plan. For instance if you invested $10,000 today at X% returns ( here is a Calculator) what would that $10,000 would be worth 3,5,10 and 20 years hence?

It should not surprise you that the higher the return, the higher the potential risks. What is your risk tolerance (how much of that risk capital can you afford, not only financially, but psychologically as well) to risk in order to attain your financial goals? I cannot overestimate the psychological part. It’s very easy to say I am willing to risk X% to make Y, but are you really psychologically ready? As an example and a true story; I once had a client referred to me when I was a commodities trader. He listed his net worth at $50 million exclusive of his home (this is 1970s dollars). I had thought I explained everything involved to both our satisfactions I evidently did not. I purchased for him one contract of an agricultural commodity. The market closed that day and he had a loss, on paper, of $200.

The next morning I received a call from this individual only to find out he couldn’t sleep the

night before because of the paper loss. Luckily I suppose, that market opened higher the next morning eradicating that minor loss and the position was liquidated. While this is obviously an extreme example it illustrates the point; your psyche and risk tolerance can and will affect how you go about things as it should. If you are risk averse, admit that to yourself. It merely changes how you go about trading/investing it doesn’t eliminate your trading/investing plan.

Before continuing; take the time to do some self-analysis. This is not an easy task; self- analysis rarely is. It will be time well spent. Keep a log, and in it write where you wish to be financially 3, 5, 10, and 20 years hence. How much capital do you have now, how much of it is risk capital, and how much can you contribute to the goal on a monthly or annual basis?

Your trading capital should be capital that you can afford to lose. I did not say be happy to lose, but if you lost it or a majority of it, your current lifestyle would not be affected, and in your opinion, the capital can be replaced within a reasonable period of time