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How to Trade in Stocks by Jesse Livermore

Three Million Dollar Profit

In the last few chapters, the author described how he struggled to reach perfection or his failures. In this chapter he discloses what his best trades were. He made a humongous bet on Wheat and Rye in 1924, which led him to a huge profit.

 

First, he identified a pivotal point (resistance point). Wheat crossed the point he bought a few lots of Wheat, however, the price action remained dull for a few days. Livermore waited for Wheat to cross the next pivotal point and thereby began placing his next lot of buy orders. An important lesson for the readers here is to size up the trade only when you see that the stock is moving in your direction, i.e. when it crosses the first resistance, do not jump in with the entire amount, divide it amongst various resistance zones and buy it as soon as it gives a break out.

 

After the first extraordinary move, Livermore decided to exit the trade. However, when wheat went up again (significantly), he realized that he had made a mistake. This made him realize that one should not get attached to the profits. It's not prudent to exit a trade prematurely. 

 

The other large trade was in Rye. This time Livermore was short on Rye and hence once it breached the pivotal point (support in this case), he placed a sell order. Similar to his practice of position sizing he kept on placing sell orders as the trade moved in his favor. 

 

The author also emphasized on the importance of trade execution by the broker. In the current era of mobile trading, we place orders ourselves and brokers have little control over our trades.

 

However, in the past, brokers had a lot of control over placing the orders. Livermore remembers that his broker had executed his Rye trade very effectively. His broker halted his order for some time, as he saw a large lot was going to be sold in Rye. Hence, once the large sell off happened, the prices went down further and Livermore could cover up his shorts at a better price, thereby making him an extra profit of $350,000.

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Units 8/12