Money in Hand

Faulty speculation is one of the main reasons for losing money in the stock market. The majority make the mistake of averaging down losses which ultimately leads to revenge trading and hence more losses. Therefore, Livermore has advised to strictly avoid averaging down. Commit more money to a trade only when it is moving in your direction. On the other hand, try cutting down losses when the trade moves in the adverse direction.

The other common mistake that the author speaks about is the faulty urge in individuals to make unrealistic returns in a very short period of time. He quotes that a 500% return in 2-3 years is reasonable expectation in trading, however, expecting a similar return in 2-3 months is fatal.

The author believes that speculation should be considered as a business and hence have similar return expectations from trading as a businessman would expect, say, from opening a shop or a store. 

Every time a successful deal is closed, a trader should make it a routine to collect half of his winnings and place them in a safe deposit box. Speculators only ever withdraw money from Wall Street after a successful deal is closed, and this is the only money they ever take out of the market.

Livermore followed a similar strategy. 

Hence his advice in this chapter is that money in a broker's account is not similar to what it is in hand.

The next advice that Livermore gives in this chapter is to avoid overtrading. Now, if the speculators were smart enough to know at which time they should over-trade, the practice would be justified. There are times when they could or should over-trade. But once acquiring the habit, very few speculators are smart enough to stop. They are carried away, and they lose that peculiar sense of balance so essential to success. Never listen to brokers as the incentives are not aligned in this business. The broker earns when the trader makes frequent trades. Hence his advice would always make you trade more frequently when you are trading on your own analysis. The author reminded that Proper analysis should include “Record keeping” and “timing the trade” at important pivot points.