Million Dollar Blunder

In this chapter, Livermore stresses on the importance of position sizing. Once the stock breaches the pivotal point, most traders make the mistake of putting in the entire stipulated amount in one go. The trick however, is to allocate it as the stock moves in your direction.

Say, a stock is trading at 100. You want to buy a total of 500 shares of the company. So, you should buy 300 qty at 100 and allocate 100 qty at 105 and the remaining 100 qty at 110. This way you can also see if your judgement about the stock’s trend is correct or not. This was the same method used by Rakesh Jhunjhunwala in his trading and he used to call this “Pyramiding”.

Study your book of price records and the price movements of the past few weeks—looking for the Pivotal Point. When your chosen stock reaches the point you had previously decided it should reach if the move is going to start initially, that is the time to make your first commitment. Having made that commitment, definitely  decide  the amount of money you are willing to risk in case your calculations go wrong. You may make one or two commitments on this theory and lose. But by being consistent and never failing to re-enter the market again whenever your Pivotal Point is reached, you cannot help but be in when the real move does occur.

The author also asks the readers to stay away from insider information or tips in the stock markets. The author illustrates a story wherein a friend of Livermore got a tip to buy a stock. He bought it in no time. Everything went rosy for some time as the company was giving positive results and the stock price went roaring. However, one fine day, it started to reverse sharply. This was the time when Livermore’s friend called up the tip giver for more information. In spite of knowing the exact situation in the company, he misinformed the trader and told him to hold the stock. This Livermore explains was because the tipsters were busy selling their own stocks in the market. 

This is how the operating market works all over the world, including India. Hence always trade by reading charts or record keeping (which is nothing but a textual representation of charts) as Livermore suggests.