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How to Trade in Stocks by Jesse Livermore

How to Trade Stocks – Emotional Control

A little-known fact is that Livermore used to take psychological lessons at night school to better understand human nature. From there, Livermore deduced that although there may be millions of brains at work in the market, only a small number of psychological patterns needed to be researched and understood because human nature shares certain characteristics.


By personality, Livermore was a disciplined man. He went to bed early every night, by 10 PM and rose at 6 AM. In stock markets, according to him, to be successful, one needs silence, seclusion and time to dive deep into new information that comes every day. A careful, disciplined man needs to be aware of everything and ignorant of nothing. You can not afford to be careless in the field of trading. Apart from being mentally fit, a good trader also needs to be physically fit.


The rules of investment and trading are different. In comparison, you might have heard many successful investors categorizing themselves as contrarian; it's rarely fruitful in the field of speculation. Livermore was a trend follower and hence moved along the crowd, most of the time. The only time he went against the crowd was when the change in trend was to be spotted. He believes that change in trend is the most difficult time in a speculator’s trading life.


He has two rules for keeping his emotions under control in trading:

  1. Never be invested in the market all the time. Be in cash when unsure of the market direction.
  2. Use pyramiding as a tool to allocate capital to a trade. This means you start with a small allocation and size up the trade as the stock moves in your direction.


He advises us to remain far from people who give tips and even the management of the company that provides guidance to influence stock prices. According to him, the most money he has lost was when someone gave him tips on what to buy or short. He later went on to decide that whenever he loses money, it should be because of his own mistake. 


The three important characteristics of practicing emotional discipline are:

  • Poise (Balanced person with dignity of manner)
  • Patience
  • Silence (Keep your victories and failures to yourself)

The astute stock market trader manages his emotions and always makes decisions with the future in mind rather than the present or the past. In light of this, it appears as though a crystal ball may always be used to predict these emerging Industry Groups that will eventually become the new strong sector-stocks for the current rally.

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Units 11/12