People wonder where great traders such as Ed Seykota find inspiration and influence. Jesse Livermore is one such man from the early 20th century. He is an early trend following trader. Jesse L. Livermore was born in South Acton, Massachusetts, in 1877. At the age of fifteen he went to Boston and began posting stock and commodity prices on the quotations board at Paine Webber. He studied price movements obsessively, began to trade on their fluctuations, and by his twenties had moved to New York City to speculate full time. Over forty years he developed an instinct for price movement that no formal education could have produced, and lost and rebuilt fortunes multiple times in the process.
How to Trade in Stocks: The Livermore Formula
Jesse Livermore wrote one book: How to Trade in Stocks: The Livermore Formula for Combining Time, Element and Price. It was published in 1940. The book is very rare and not easily found. Some excerpts from the original version are below.
“When you are handling surplus income do not delegate the task to anyone. Whether you are dealing in millions or in thousands the same principal lesson applies. It is your money. It will remain with you just so long as you guard it. Faulty speculation is one of the most certain ways of losing it.”
“Blunders by incompetent speculators cover a wide scale. I have warned against averaging losses. That is a most common practice. Great numbers of people will buy a stock, let us say at 50, and two or three days later if they can buy it at 47 they are seized with the urge to average down by buying another hundred shares, making a price of 48.5 on all. Having bought at 50 and being concerned over a three-point loss on a hundred shares, what rhyme or reason is there in adding another hundred shares?”
The logic is unanswerable. Adding to a losing position increases exposure precisely when the market is signaling that the original premise was wrong. The Turtle rules‘ hard stop requirements were designed to prevent exactly this pattern, building into a systematic framework the discipline Livermore was describing from painful experience.
“We know that prices move up and down. They always have and they always will. My theory is that behind these major movements is an irresistible force. That is all one needs to know. It is not well to be too curious about all the reasons behind price movements. You risk the danger of clouding your mind with non-essentials. Just recognize that the movement is there and take advantage of it by steering your speculative ship along with the tide. Do not argue with the condition, and most of all, do not try to combat it.”
Richard Dennis could have written that paragraph. Eckhardt could have delivered it as Turtle training. Livermore wrote it in 1940.
Sitting Tight: The Hardest Lesson
Livermore’s most quoted insight addresses what separates the traders who make fortunes from those who merely identify correct positions: “It was never my thinking that made big money for me. It was my sitting. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after this that a stock operator can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of ignorance.”
Every systematic trend following approach is built partly around mechanizing this discipline. The Turtle trailing stop approach, letting a position run until the trend reverses by a defined amount, enforces the patience Livermore described. The desire to sell before a trend ends costs more than it saves, which is why he also warned: “Give up trying to catch the last eighth, or the first. These two are the most expensive eighths in the world.”
On Losses, Being Wrong, and the Damage to the Soul
Livermore’s reflection on losses produced one of the most honest assessments of what losing actually costs a trader: “To tell you about the first of my million dollar mistakes I shall have to go back to this time when I first became a millionaire, right after the big break of October, 1907. As far as my trading went, having a million merely meant more reserves. Money does not give a trader more comfort, because, rich or poor, he can make mistakes and it is never comfortable to be wrong. And when a millionaire is right his money is merely one of his several servants. Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong, not taking the loss, that is what does damage to the pocketbook and to the soul.”
“What I have told you gives you the essence of my trading system as based on studying the tape. I merely learn the way prices are most probably going to move. I check up my own trading by additional tests, to determine the psychological moment.”
Marty Schwartz described the same insight when he said he became a winning trader the moment he separated his ego from his trading. Livermore arrived there through painful experience across four decades of markets.
Key Livermore Quotes
“I can’t tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.”
“Since suckers always lose money when they gamble on stocks, they never really speculate. 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 to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!”
“The game of speculation isn’t all mathematics or set rules, however rigid the main laws may be. If a stock doesn’t act right don’t touch it; because being unable to tell precisely what is wrong, you cannot tell which way it is going.”
“Remember that stocks are never too high for you to begin buying or too low to begin selling. That is where the tape comes in, to enable you to decide as to the proper time for beginning. Much depends upon beginning at exactly the right time.”
“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
“Without faith in his own judgment no man can go very far in this game. That is about all I have learned, to study general conditions, to take a position and stick to it.”
“Profits take care of themselves, losses never do.”
“Remember, you do not have to be in the market all the time.”
“The successful speculator must always have cash in reserve, like a good general who keeps troops in reserve for exactly the right moment, and then moves with great conviction, and commits his reserve armies for final victory, because he has waited until all the odds are in his favor.”
“I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because the pressure is to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous wolf-patrolled prairie of contrary opinion.”
“Reasonable people act unreasonably when they are afraid. And people become afraid when they start to lose money, their judgment becomes impaired. This is our human nature in this stage of our evolution. It cannot be denied. It must be understood.”
Livermore’s Lasting Influence
Livermore’s story did not end well. He declared bankruptcy four times and took his own life in 1940, the year his book was published. The traders who studied him, from Seykota to Paul Tudor Jones, did not take away the story of his failures. They took away the observations about price, patience, and the psychology of holding winners that he had extracted from a lifetime of market experience.
Reminiscences of a Stock Operator, Edwin Lefevre’s fictionalized biography published in 1923, remains on the recommended reading list of virtually every serious systematic trader. Dennis recommended it. It is the document that most accurately captures what Livermore understood about markets before the language of trend following, systematic rules, and position sizing existed to describe it precisely.
Frequently Asked Questions
Who was Jesse Livermore?
Jesse Livermore was an American speculator and trader active from the late 19th century through 1940. He began as a tape reader at a Boston brokerage at fifteen, moved to New York to speculate full time, and built and lost multiple fortunes across four decades. He wrote one book, How to Trade in Stocks, published in 1940, and is widely considered one of the earliest practitioners of what would later be called trend following.
Why does Livermore appear on a trend following site?
Livermore’s observations about price movement, patience with winning positions, cutting losses without hesitation, and the danger of fighting a trend in progress are foundational to the trend following philosophy that Dennis built into the Turtle system. His insights predate by decades the systematic frameworks that later encoded them into rules.
What is How to Trade in Stocks?
How to Trade in Stocks: The Livermore Formula for Combining Time, Element and Price is the only book Livermore wrote. Published in 1940, it is rare and not widely available in print. It distills his lifetime of market observation into principles covering position sizing, averaging losses, the psychology of speculation, and the importance of following price rather than fighting it.
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