Trade like a King: 3 trading lessons from Jesse Livermore

Trading is 20% technique, 80% psychology

Novice traders make one common mistake — they focus on technique: they study technical analysis, indicators, look for ready-made strategies and trading robots… But they forget about the main thing, which accounts for 80% of their potential success — studying their own emotions and market psychology. The technique and skills will come later, with experience.

To understand how important it is to focus on psychology, we borrowed tips from Jesse’s book — The Memoirs of the Stock Exchange Speculator. We drew an analogy, adjusted the situations to the present time and market conditions and tried to find out, what the main character, Jesse Livermore, would do.

And here’s what we recommend first of all.

Study people, not the economics

Of course, the trader needs to understand the economy and how it works. Livermore himself looked through the company reports, read business publications and analyzed news and rumors.

The more he dug into it, the better he understood: he has to start analyzing people. The way others see the market. And the facts and figures — are only an addition.

Let’s see how we can apply Livermore’s approach in real life.

Bitcoin rose from $ 3,000 to $ 8,000:

BTC growth since the beginning of 2019

There are no fundamental reasons for growth:

  1. Cryptocurrencies are still illegal in advanced economies
  2. Bitcoin hasn’t become the settlement currency: banks and online services don’t accept this digital coin

It’s an illegal currency, and people do not use it. Why would the price grow?

What do people think about Bitcoin?

Let’s look for the answer in the homeland of this cryptocurrency, in China. A country with deeply rooted socialism, that has only 2 payment systems: AliPay and WeChat Pay, both controlled by the authorities.

WeChat Pay and AliPay

Mining coins is illegal in China, local payment systems have banned cryptocurrency and freeze the accounts suspected of operations with “digital” money.

The Chinese account for each transaction and report to the state. There is no other option.

Bitcoin is just what they need!

Imagine a world without Webmoney and PayPal. How would a Chinese person send some money to a friend or make an international transfer without paying commission to monopolists who watch his every transaction?

People in China have nothing else to do: cryptocurrency is the only solution for them.

The USA adds fuel to the flames by threatening China with the trade war.

And that’s why as soon as the Chinese noticed that Bitcoin was growing in price, they instantly invested the yuan into cryptocurrency:

Yuan falls, BTC/USD grows

Thanks for the method, Jesse!

How would Jesse Livermore analyze Bitcoin?

  1. First, he would ask himself a question — who needs this digital coin? Who are the buyers and who are the sellers? He would look at people and the crowd, not at technical facts.
  2. When looking for his answers, he would find out about China and learn about its needs: except for the two largest state monopolists, there are no other payment systems and payment options in China. The country needs more freedom in terms of financial transactions, people need to have choices.
  3. And only finishing off his analysis, Livermore would add facts — that cryptocurrency is illegal in China and the country is in the middle of the trade war with the United States. See? Facts are only supplementary.

Analyze the psychology and the needs of other traders. That way, you’ll understand what the others are waiting for. Once you identify the needs of the majority, you’ll be able to determine the long-term trend.

Taking into consideration all the above mentioned, the following conclusion suggests itself:

You may not know the origin of the trend and its reason, but you can always determine its direction.

Bitcoin trend

The general trend is like an airplane — give it some time to reach its take-off speed, and once it reaches its momentum, it would be hard to reverse it.

But to earn from the trend and to make sure that your predictions work, you need to keep in mind one simple thing:

Trade alone

Always trade alone, based on your own strategies and analysis. People will give you advise and present facts opposite to your strategy. Fellow traders may call you dumb and try to prove you wrong.

In the world of mass media, people easily pick up false stories and spread rumors, which leads to misinformation. It’s everywhere: it pours out of mouths of the media, your colleagues and so-called “insiders”.

The best decision for a trader in such conditions is to think for himself. Check the information yourself and trust the price when trading with the trend:

Media about Bitcoin in 2018

Imagine how many BTC forecasts were made in 2018. Those who were interested in Bitcoin growth went out of their way to convince everyone around them that the price will “definitely reach $20 000” and that it’s the best time to buy at the bottom”.

But the end result is what we see on the screenshot above — the price plummeted tо $3000.

So, it doesn’t really matter what top business magazines, your colleagues or friends think. Do not listen to them.

No matter how many arguments in favor of growth/decline they give you, the price is the only one to believe and to follow.

Make it your rule not to trust anyone in terms of trading. Make your own decisions. It’s your trading and your results, and you are the only one responsible for it.

About responsibility, by the way. Who do you think is responsible for a false forecast — you or the market?

Don’t try to shift the blame

Imagine that you thoroughly analyzed an asset. Read all the news about it for the last month. You followed your trading strategy. But you still lost.

It’s the nature of trading. No matter how hard we try, sometimes mistakes simply cannot be avoided.

Maybe, you miscalculated something when placing your trade. Or maybe the market went crazy like it was in case of Bitcoin in 2017:

In fact, it’s irrelevant, who made a mistake. The trade is closed and you have to accept that we can’t control everything. But we can control and choose how we react to what happened.

Imagine, that you opened a position. You’ve considered all the criteria:

  • trend;
  • zone;
  • candlesticks.

2 BTC positions. Both loosing

Both trades didn’t work out as planned and turned out losing. No matter who is to blame, only you decide whether it’s a good or a bad trade.

Do you know the difference between a novice trader and Jesse Livermore? Jesse has learned to lose a trade, but not his spirit. A novice trader usually gets discouraged and looses both.

You are so close to being a pro. Put in some more effort

A trader develops as a person. His approach to trading the market evolves with him.

First of all, learn to analyze the price and determine a long-term trend.

Then, stop listening to recommendations and trading signals. Develop your own trading style. Someone else’s system will never make you rich.

When you dive into economics, remember: you need to watch and study people, not facts. Expectations and emotions — that’s what drives the market.

And of course, don’t get discouraged and fall into despair. Do not blame yourself. There will be more opportunities. A missed opportunity or a losing trade won’t prevent you from making a profit in the long run.