Jesse Livermore — Nuggets of Wisdom
In the early part of the 20th century, Jesse Livermore was the most successful and most feared stock trader on Wall Street.
He has always said — The cash is the most valuable thing on the stock exchange. Every profit that you make on the exchange is only virtual money. These virtual money remain virtual until they turn into cash (paper money). Moreover, if you have a virtual profit, then you, basically, have no risk. You risk only the money that you did not originally have.
However, if you look at the losses that can be caused by trading, there is a clear drop in your cash here. If you lose in the market, you lose your own money, not virtual. Therefore, in order to succeed in the exchange, you have to pay a lot of attention to money management.
Jesse Livermore in his entire life has learned that there are 5 basic rules for money management, following up these rules can constantly increase a deposit and help a trader save his money.
Rule №1 — Don’t Buy entire position all at one time
Livermore believed it’s dangerous to take a full stock position at only one price. Imagine If the market does not go in the direction you have planned, then you probably lose money. You must determine the proportions of investment that work best for you. For example, the proportions may be as follows: 20–20–20–40% or 30–30–40%. It means that if A trade going in the expected direction is the proof that your judgement about the price movement is correct. In reverse, if you follow this strategy and the market goes against you, it means the judgment was wrong and you will lose the part of your money (not all).
Rule №2 — Never lose more than 10% of your investment
You must set the target number of shares and decide what percentage of your portfolio you will invest in any particular situation. Livermore called this 10% rule his bucket shop rule because he learned it while trading in the bucket shops, when he worked all his trades with 10% margin. if losses exceed the limit of 10%, the position is automatically sold. If the action starts to go against you, never average losses, just close the position and move on.
Rule №3 — Always keep a cash reserve
A successful speculator must always have some cash in reserve. There is an endless stream of opportunities in the stock market, and if you miss a good opportunity, don’t worry — another will come. A smart speculator is always patient and has cash in reserve to make a huge fortune in the right situation and at the right time.
Rule №4 — Don’t buy or sell without any reason
While the stock is moving correctly, do not rush to take profits. You should have some reasons for entering and exiting a trade.. If there is no fundamental negative, then everything should work fine for you — let the action move on. The golden money management rule is cut your losses, let your profits run.
Rule №5 — Put half of your profit in bank
Put 50% of the profit from a successful trade in bank especially when your capital is doubled. There is no better time to transfer money into cash than the time after making a big profit.
Note: Never buy cheap stocks. Very often, the price of the stock suggests that this company really cost that much. Work in strong and healthy industry groups.
Determine the potential of the order in relation to the size of the investment — if there is a small potential return on large investments, skip the transaction. Always set a stop before you send the order. The stop should be calculated basing on the size of the deposit and the volatility of the traded instrument. However, it should not be so large that it would lead to a margin call when the trader does not have enough funds to cover the position. The trader himself should risk no more than 10% of his account in each transaction.
And do you have your own money management rules? If yes, feel free to share some!