The Pivotal Points
The last chapter introduced something called “important levels” for timing the trade. Those important levels in the author’s language are termed “Pivotal Points”.
These pivotal points are discovered via record keeping of the movement of stock prices in a notebook. When you note down the movements of stock, you recognize that there are certain levels, like a psychological price point (round numbers - $100, $200, etc.) or relative points such as 52 weeks high or low, which when breached define the trend of the stock.
Livermore started the position only when the stock reached the pivotal point and thereby would slowly increase his position as it moved in his desired direction. Additionally, he notes that just as the market gives you a tip of when to get in the trade (via pivotal points), similarly, it gives you an indication of when to exit the trade.
For example: Consider a stock that has been declining for a while and reaches a low point of 40. It then makes a rapid run up to 45 in a few days, backs down for a week in a few point range, and then continues to extend its run up to 49. For a few days, the market becomes boring and inactive. The stock should sell below its pivotal point of 40 by three points or more before it has another significant bounce if it truly intends to resume its downward trend. This is the time to pay close attention to the market. If it fails to break through 40, it is a sign to purchase when it recovers 3 points from the low price reached during that reaction. When it reaches 43, if the 40 points have been penetrated but not to the necessary extent of 3 points, it should be purchased.
For exits, Livermore quotes, “Bear in mind when using Pivotal Points in anticipating market movements, that if the stock does not perform as it should, after crossing the Pivotal Point, this is a danger signal that must be heeded.”
Livermore summarizes his trading strategy as “Timing, Money Management and Emotional control”.