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How to Trade in Stocks by Jesse Livermore

When Does a Stock Act Right?

Similar to individual personalities, stocks possess characteristics too which determine their movements. Researching about these characteristics allow traders to predict a trend and also get out of the trade when it starts moving adversely.

 

For an illustration of the author’s research on the movement of stock in a trend, let’s consider a stock that is currently trading at $50. 

 

  • On the first leg of the uptrend, it moves to 54. This is usually a gradual movement. After say 2 days, it retraces back, slightly to 52. 
  • Now, the upward movement will be with more force and this time it will reach 59 or 60 in just 3 days (in a short span of time). This trend has a reaction again, but this time, instead of a two-point reaction, it might be a stronger one. 
  • Now, again when it resumes the uptrend, you’ll notice the volumes will be lower than what it was at the beginning of the up move from 50 to 54.
  • However, because of lower volumes, the movement will be even higher this time and can move from the previous high of 60 to 70 without any retracement.

Now, Livermore gets to the concept of the “Time Element”. You must exercise patience after making a good profit, but don't let patience lead you to lose sight of the warning signs.

 

The stock begins to rise once more, rising six or seven points in a single day, then eight to ten points the following day — with a lot of activity — before suddenly breaking abnormally by seven or eight points in the final hour of trading. The following morning, it increases its reaction by one or two points before starting to move forward once more and closing quite forcefully. For some reason, though, that didn't happen the next day. This is a warning of impending danger.

 

Here traders are advised to take a side track and move out of the trade. They even should not get into the stock again, till normalcy its movements are witnessed once again.

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