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Seven Trading Lessons from a Legend


Try following the time-tested rules of Jesse Livermore.

Lesson Number Four: Let profits ride until price action dictates otherwise.

Perhaps the most famous quote attributed to Livermore is, "It never was my thinking that made the big money for me. It always was my sitting." Traders are wired to be "doing something," and this can cause churning, over-trading, getting out of positions too soon, and making your broker the wealthy one. The famous Turtle Traders were trend traders who made few trades and had learned the importance of staying in a winning trade.

For today's traders, there are multiple variations to keep you in a trade. It's not so important which method you implement, but that you do recognize when to hold a winner for maximum potential, and when a trend has changed character and it's time to ring the register.

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position. Even day and swing traders will benefit from letting a partial position play out when all indicators hint that more upside might be in the cards. Always remember this rule is letting a profitable position run, but it's not a license to bury one's head on a losing position.

Lesson Number Five: Buy all-time new highs.

Traders love a bargain -- trying to bottom feed, buying in on limit orders instead of market to save a penny, buying on dips, and various other trickery to try and catch the swing low of a trade. These same traders can also recount when saving a penny cost them a dollar, buying that dip was only the start of a long downtrend, and buying new lows only led to lower prices and more misery.

Livermore understood that when a trader buys new highs, that for that moment in time, the only holders are happy holders. Blue skies are above and there are no longer-term investors waiting to sell once they get back to break even. The psychological merits of buying all-time or 52-week highs are immense and shouldn't be discounted as a part of your overall strategy.

Lesson Number Six: Use pivot points to determine trends.

Livermore famously called them "pivotal points" and today they're better known as swing highs and swing lows. When going long, traders are continually looking for confirmation by assessing the strength of a move. Higher highs and higher lows are a solid indicator that a current uptrend is merely taking a slight pause, and the odds of higher prices are in their favor. These same pivot points are integral to drawing support and resistance lines to give traders their line in the sand. Taken together, trend lines and pivot points can enlighten a trader to a change in momentum, which may change the character of a trade.

Lesson Number Seven: Control your emotions

Easier said than done in everyday life, let alone in one's trading account, controlling those emotional demons that lurk under the surface may be the most difficult task for traders (beginners and seasoned alike) to master. You finally hit a quick 10-point winner, and the euphoria and pride rush in to give you a virtual high-five. You hold on past your mental stop-loss and watch your equity bleed like a leaking faucet, which in turn causes you to seethe with frustration, whether on the outside or internally. If there's one absolute rule, it's that every trader has to confront the role they allow their emotions to play in their trading life.

Livermore chronicles the times when he was trading for revenge, to get back his lost stake, or merely to prove he was right. By his own admission, these were terrible reasons to put on a trade, and he was at his finest when he blocked out the noise of his day and just watched the tape.

Our goal as traders should be to also make a critical yet honest assessment of the areas we can improve so the bottom line will support our claims of truly being seasoned traders. Adhering to the time-tested rules of Jesse Livermore would be a great start for anyone.

See how Quint uses these lessons and more as he trades Minyanville's FlexFolio. He's +20% in '09 and beating the S&P 500 by 30% since inception. Take a FREE trial today for access to the portfolio and to receive trading alerts with each trade.

No positions in stocks mentioned.

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