Learning from the Grand Master of Speculators

In stumbling into this trade by chance, I unconsciously did something that would only become a real method in years to come. Of course, I knew what I was doing. I had heard of other traders who had completed these types of trades successfully. And of course, there are examples of traders in trading literature who have become wealthy in this way.

But, let’s be honest! You can only really understand a method if you apply it yourself. Theoretical knowledge does not help you at all. Since I did not intend to do such a trade, I was not prepared for the potential risks of this method. Neither did I know what I would go through emotionally during the time I was holding that position.

In retrospect, I took the time to study the traders who had used this strategy successfully, and above all, of course, the American trader and speculator Jesse Livermore. He is probably the most prominent example of a trader who went the whole hog. You can read about Jesse Livermore on the Internet, and of course, I also recommend the book by Edwin Lefevre “Reminiscences of a Stock Operator”.

It describes the method we are talking about here, in an entertaining way. Of course, Livermore did not master his method from the beginning. He started off playing the market in the short term, like most of us (times do not change). At some point, he realized that the big money could only be earned with the big market movements. Of course, for this, he needed a different method to that of a day trader. First, one has to say that Livermore traded primarily in equities.

There was no such thing as trading with an index at the time. However, you can apply this method perfectly in the usual trading markets such as SP500, Nasdaq, Dax, IBEX, CAC40, or EUR/USD. Before Livermore became active at all, he observed the markets. This is the first pillar of his method. Livermore was a good observer.

Above all, he looked at the market leaders of that time, the driving forces of the stock markets. He studied the most important stocks of the sectors. In his time, these were, for example, Bethlehem Steel or Northern Pacific. Of course, today those would be stocks like Apple, Google, Amazon, or Facebook. He watched the behavior of those leaders. He looked at how they responded to certain news, whether they recovered quickly from a negative news announcement (bullish) or not (bearish). If you want to get involved with Livermore’s method, you can refer to the little book by Richard D. Wyckoff “Jesse Livermore’s Methods of Trading in Stocks”. In my opinion, the keyword here is “observing”.

In other words, Livermore may have had no position in the market for weeks or even months. He was 100% in cash during those periods. That is not easy for many traders, because you have the feeling that if you have no position at all, you are not involved in the stock market, and you could miss out on good opportunities. Nothing could be farther from the truth. 100% of cash is a position. Actually, it is a very important position. Before you can act, you first have to learn to observe closely and wait for the really good opportunities to come your way. Patience is one of the most important virtues that you will need to develop if you want to be successful with this method. It is undoubtedly the hardest part of the method. You will have to learn to transfer money to a brokerage account and then do nothing, for weeks, sometimes even for months.

Can you do this, even if your broker bombards you with emails, and asks you to start trading because his systems are sending him great “signals”? Again, you will have to learn from Livermore, who hated nothing more than the so-called tips that you get from everywhere as soon as you enter the stock market. He tried to free himself from these confusing influences by all the means he had at his disposal. He did this by partially isolating himself from the outside world so that he was only able to listen to his own intuition and instincts.

He did not become active until he saw a real opportunity, coming from his own observations. I think that this habit is much more difficult to learn today than it was in Livermore’s day. Today, the news, opinions, and tips, and whatever distractions the broker industry may invent – do not only come in the form of newspapers, magazines, newsletters, emails, and alerts. They also flash at you at the most inopportune moments, on the small, flat device that each of us carries around permanently, wherever we go. You must learn to forget about all that noise and disregard all the supposedly interesting stock market pages and the seemingly interesting articles by analysts. Or even better, do not even read them anymore.

You must learn to become a completely independent observer and a completely independent-minded person. If you have acquired this important capacity of being able to ignore what others are saying, you will one day begin to perceive signals from the market yourself.

This is very important because you cannot trade this method if you cannot observe and think on your own, and have therefore have not formed your own opinion of the market. Did I just say that you should get your own opinion of the market? Yes, even though you may have read everywhere, that you can only be a good trader if you have no opinion of the market!

This may apply to short-term strategies such as day trading, but it does not apply if you want to make a trade, as I did with silver in 2008. At the end of 2007, due to the financial crisis, I was bullish on gold and silver and the market proved me right.