Reminiscences of a Stock Operator: Reminiscences of a Stock Operator is the biographical writings of Jesse Livermore, a commodities and stocks trader from the 19th century. Unlike many trading books, he focuses on his great losses as well as his great wins. It is packed with a ton of information and I won’t be able to fit it all into this one review so I highly recommend you go and read it yourself as well. One element he focuses on is the psychology of trading, and the longer I myself have been investing and trading the more important mastering your own psychology seems to be in making a profit consistently. Jesse Livermore was a smart kid growing up and very good at mathematics. He finished his schooling ahead of time and once he finished school he joined a stock brokerage firm updating the quotation board with the new stock prices as soon as they were received. This is where his interest in predicting the stock prices started and he kept a record of where his predictions were correct and incorrect. He soon started to place bets at so-called “bucket shops” which were unregulated markets to speculate on stocks. He quickly built up the sum of $25,000 (which in today’s money would be worth over $750,000). The bucket shops refused to work with him after he kept winning at which point he moved to New York. Once in NY, he lost all his previous profits as the system that worked for bucket shops didn’t work on exchanges. This was due to the delay in the time an order arrived to the exchange through his broker, slippage would change his price massively in the wrong direction. Previously being able to close a trade instantaneously without any market impact was a huge benefit. He eventually rebuilt his previous profits by using bucket shops and restarted once again on Wall Street. These are the lessons he learnt during his time there: - He referred to all the large losses he made as “tuition fees”, stressing them as learning experiences: “There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win.” - There is much to learn from partial victory as there is from defeat. - The learning process doesn’t stop at lessons on financial profit but also on avoiding losing capital. - Learn to distinguish between money lost due to the trader’s fault and money lost due to circumstances that were impossible to foresee. - You will match your intelligence against the intelligence of other traders who you will never see/talk to/meet. - The market is an intellectual challenge that you are constantly trying to outsmart. - A man may beat a horse race, but no man can beat horse racing. - The market is mostly driven by the psychology of the herd. - A trader shouldn’t blindly be bullish or bearish. A trader should be focused on if they are right. - Trends tend to be established before news is published. - In bull markets, bear news is ignored and bull news is exaggerated (And the reverse in bear markets). - During booms, take profits and realize that all trends come to an end. - The moment a raid by other traders stops, prices will rebound. - During a bear market, if there is a huge drop in the market and you are short, cover your shorts. - He studied price action of a stock in order to establish the line of least resistance. He thought that prices move along the line of least resistance and stocks are never too high to buy or too low to sell. “Suppose line of least resistance showed a bull movement. I would buy ten thousand bales. If the market went up ten points after, I would take on another ten thousand bales. If after buying the first ten or two thousand bales, the position showed a loss, out I’d go. I was wrong, maybe temporarily, but it doesn’t pay to start wrong in anything.” - When a line of least resistance is upwards and crosses a psychological barrier for the first time, momentum will often take the stock to an even higher barrier much faster. - To time your entry to the market: buy on a rising market. Never advance until you are sure you will not have to retreat. He didn’t like buying on declines and counting the decline from ATHs as profit. - Get out of positions when you have a market with sufficient liquidity. - A successful trader must develop the skills of observation and memory. To observe the market conditions accurately and remember at all times what they observed. - Nothing teaches a trader more than experience in the market. The more time they spend with the market, the more success they will often have. - Keep physically fit and mentally healthy. - Stick to your trading plan. It doesn’t have to be right all the time. As long as it is right 7 times out of 10 you are doing very well. - You don’t always have to be in a trade. If there is no reason to trade, don’t. - Fear and hope are the two most common emotional states in trading. In a downturn, an amateur hopes that every day will be the last day and he loses more than he should. When the market is bullish, he'll instantly take profits too soon out of fear. Instead, fear that your loss may develop into a much bigger loss, and hope that your profit may become a big profit. - He stresses the reader to think for themselves and do their own research instead of relying on others. If you lose your ability to think independently, either by falling to the influence of a magnetic and persuasive personality or by basing decisions on gratitude, both will cause a trader to be in a state of uncertainty and indecision, preventing him from trading with confidence. - Also, he stresses the importance of ensuring you have sufficient trading capital to maintain independent thinking, as without it, it becomes impossible to stay detached and emotionally unreactive towards the trades that you are making, and allows you to make minor losses. This is an old book, but it's well worth a read for investors and traders alike. Times may change but human psychology is still much the same.