Not many people know that the establishment of the Forex market dates back to 1880, which is also the year when the gold standard was launched. Just three years earlier, a legendary trader was born and it so happened that this very trader was going to play a major role in the stock market crashes in 1902 and 1929. The name of this notable person is Jesse Livermore. In this article we will look at his trading philosophy that made him one of the greatest financial investors of the 20th century and helped him make millions.
Trust the market
Jesse Livermore believed that the markets are never wrong, but opinions are, so if you want to make money you have to trust the market. Traders should have their own opinion about market movements, but should only act when there is a clear market sign backing it. It’s also important that you use proven indicators that will allow you to enter the market at the right moment and not take any unnecessary risks.
History repeats itself
Jesse Livermore believed that the patterns in the stock market occur on a repeating basis and that price formations can be predicted. The reason for this, he says, is that market participants tend to react in pretty much the same way through the years and that the roots of this behavior come from emotions like greed, fear, ignorance and hope.
You can’t always win
In the light of the above paragraph, it is obvious that big money cannot be made by trading every day, all the time. One of Livermore’s basic rules is that you cannot win by making speculations all year round. The logic behind this rule is simple: it takes time for the big movements to emerge and every trade in between is closer to gambling than to a reasonable investment. Jesse preferred long-term positions over day trading and scalping. In order to follow this strategy a trader needs to be self-disciplined and very patient.
Keep the winning cards…
… and get rid of the losing ones. Although this is a simple advice a lot of investors fail to do the obvious and enter into a losing trade. As long as the price of the underlying asset goes in the right direction, there is no need to close the position. Jesse Livermore believed that you should not sell just because an instrument seems overpriced and you should not buy a stock that drops from a previous high.
Learn to accept losses
Jesse Livermore is one of the successful investors who believe that losing money is a great teacher. He had lost almost all his money several times, but the loss of millions had only made him stronger and wiser. One of the crucial things is to accept the loss early and to do so with a smile. Clinching to losing positions will not only hurt your wealth but has the power to discourage you. Selling with a loss doesn’t mean that you have failed in your investing strategy but instead shows your maturity and common sense.
Stick to your plan
This is probably the advice that is most often given by rich investors to beginners in the Forex market. Jesse Livermore himself has repeatedly faced the consequences of not following his own rules. For instance, in 1907 he managed to lose almost $3 million by making the wrong decision to buy cotton, although his strategy included selling it. What is more, he actually added to the losing position in contrast to his own basic rule of accepting a loss early.
Do not rely on tips
Jesse Livermore was famous for his disapproval of all kinds of market tips, advice or inside information. The correct way of trading is to rely on your own skills and market knowledge. This means that you must do your homework and carefully observe the trend and all underlying market conditions that make the prices move up and down. All the investment tips left by Jesse Livermore are clear and straightforward. As a true investor and Forex legend he preferred working alone and followed his own path in trading and life. Gaining millions was never a problem for him, but it was the fortune he lost that shaped his investment philosophy and rules, which we can all learn from and apply when trading Forex and CFDs on stocks.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.