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The Livermore Trading System Copyright 2015

HOW TO TRADE IN STOCKS

The Livermore Formula For Combining Time Element and Price

By

Jesse L. Livermore

“ Every great speculator has his own method of operation, his own course of study for

arriving at conclusions upon which his willing to risk vast sums of money. Such methods

are guarded like state secrets, sometimes through vanity or suspicion, but for very

practical reasons.

So when Jesse Livermore, with characteristic frankness, draws back the curtain and

reveals publicly his rules for combining time element and prices he takes the spotlight for

audacity among the top-flight speculators of the age. He lays before the reader the fruits

of forty years of speculative study.

It is a new chapter in the colorful saga of a brilliant operator.”

Edward Jerome Dies, Author –

These closing words from the Preface to How To Trade In Stocks were published in 1940

It was only months before the great Jesse L. Livermore committed suicide.

Has the brilliant operator given us the keys to the kingdom or was he just trying to raise

funds while sinking into a whirlpool of financial darkness? It is believed that he did both.

He was a Speculator!

You are here for a reason. It is assumed that it is because you want to trade

and make money in the Stock Market. Because you are reading this, you

have researched trading and found that without parallel the greatest stock

trader that ever lived was Jesse Livermore. It is through his words that today

you will begin to make a significant difference in your trading.

Right now, if you search his name online you will come up with almost

500,000 results in less than a half a second. If you go to any online book site

and type in his name, you will read the following general description of

Livermore’s famous book -

“HOW TO TRADE IN STOCKS”

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“Time Magazine described Jesse Livermore as the most fabulous living U.S.

stock trader. His progress from office boy to Wall Street legend - his trading

lessons - his triumphs and disasters - is probably the most fascinating of any

of Wall Street's stories. Even today, many stock and commodity traders owe

Jesse Livermore a deep debt of gratitude for sharing his experiences in this

book. The techniques he made public have endured through many decades

right up to today; his trading rules earned him millions of dollars, provided

he stayed faithful to them. Livermore also lost his entire fortune on more

than one occasion, when he ignored his own trading rules. Jesse Livermore

was a self-made man trading with his own money - not other people's

money, like modern investment banks and hedge funds. Depending how you

measure it, his fortune peaked between $1.1 and $14.0 billion dollars in

today's money.”

That is nothing short of amazing! Do many stock traders today have the

returns like Livermore?

Why is that? So might the challenge that you and many traders have in

reading his book and by reading Livermore’s fictional biography by Edwin

Lefevre “Reminiscences of a Stock Operator” is not with all of his stock

market insight. We all know that market experts around the world agree that

those books are some of the best trading books ever written. Rather might

our challenge be is how does one take Livermore’s work and profit from it

today and for years to come. The Livermore Trading System will show you

how. It is a complete trading system like no other.

So, why is there a “disconnect” between what traders intended to do and

what they actually accomplish?

The answer at the end-of-the-day must be that all of us are confronted by the

actual real problem of taking Livermore’s trading thoughts and methods and

turning them into practical trading methodologies that show consistent

positive returns. The Livermore Trading System does that.

Today those that want to be serious profitable traders can take Livermore’s

past trading advice and apply it now for positive returns.

Yes, you can and it is not as complicated as you may think and it is very

profitable. Not only will it be profitable now and in the years ahead but also

success will be achieved without the additional purchase of any new market

software or expensive trading platforms. Something Jesse never had or really

even needed.

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This is exactly what the Livermore Trading System accomplishes. It is over

30 years in the making. When you simply read, study and apply the

information you rest assured that over the years ahead that you will be a

winning trader.

It defines and clarifies his writings into usable profitable trading tactics that

are made to be used in today’s markets.

By simply applying his ageless profitable strategies, you actually have the

potential to profit more than Livermore could have ever imagined and you

will be years ahead of the other global market participants. You will move

swiftly towards achieving your financial goals. Simply stated, you will be a

very profitable trader.

Can that statement be true? Yes it can, because not everyone understands

what Livermore actually did to profit in the past nor do they understand how

to do it for themselves today, but you will. Again, you will be very

profitable.

That said, many so-called experts would say that today’s information

technology has changed the market too aggressively for the average

participant to profit. That is simply a lie.

They will point out that when Livermore wrote his book the Dow Jones

Industrial Average in August of 1940 was 126.99, today it is over 18,000.

In 1940, they say that the NYSE had around 400 companies listed on its

exchange but today there are over 2800 companies listed. They state that is

too many stocks for you to follow.

They will say that in May of 1940 the peak daily trading volume was 3.76

million shares traded, today the daily average there are over 1.4 billion

shares traded on the NYSE.

Please listen, there are more Stock Market trading opportunities today to

profit from than ever before. This trend will continue as volatility and

market participants increase globally.

You live in the greatest time to trade stocks that has ever existed because of

technology and market participation and equity globalization have made sure

of this.

Today is the time that Livermore would have loved to have lived and traded.

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These are the times for trend traders! As you know he wrote, “There is

nothing new in Wall Street. There can’t be because speculation is as old as

the hills. Whatever happens in the stock market today has happened before

and will happen again.”

You see, speculation never changes because man’s basic emotions never

change. Today you will become a profitable trader by using this Livermore

Trading System.

The format of this ebook is simple and direct. There will not be filler or

fluff. It is an actual “how-to-trade” book. It is all you will ever need.

This ebook intends to follow the table of contents as presented in

Livermore’s How To Trade In Stocks. However, it will only focus on what

is actually needed to profit in today’s market. In addition, there is a bonus

section on volume as an indicator. Livermore knew that volume was an

extremely powerful indicator.

All Livermore’s quotes are given in italics.

The sole purpose of this ebook is to exegete (expound or interpret) some of

Livermore’s actual trading thoughts and ideas into clear, usable and direct

trading applications so that you can merge his information into your trading

plan or use it this ebook trading system as your very own. Equally, other

parts not deemed important by this author will not be addressed.

You should make it your own very own guide. Make it fit your style.

This ebook is not philosophical in nature. This system intends to unfold his

trading thoughts and techniques into a usable stock-trading plan. That said it

is not an attempt to try to enter the brilliant mind of Livermore.

Again, for clarity, there will be many sections of Livermore’s book that will

not be covered. The reason is that many of his sayings are just that, his

sayings, his quotes or proverbs, and are not deemed directly applicable to

your actual trading life.

Please understand, it has not been said that his comments and thoughts are

not important. Yes, they are all very important for they make up the man,

Jesse Livermore; you should read his axioms and think on those things that

he shared as they were given in the last days of his life. It is believed that he

gave us all that he could.

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Yes, they are all very good educational truisms from someone with vast

market experience.

However, due to limitations, this book is completely focused on the

development of a trading system itself that will ultimately lead to your

trading success. The goal achieved here is for you to make money from

Livermore’s 40 years of actual work.

The hope is that you will take what is written, measure it, weigh it for any

possible benefit, and then add your thoughts and trading strategies to it.

As Livermore wrote, “In the forty years which I have devoted to making

speculation a successful business venture, I have discovered and still am

discovering new rules that apply to that business.”

The intent is not to put any words in Livermore’s mouth but rather it is to

give to you what has been taken away from his book. These interpretations

of his writings and any additions have today helped many modern traders

profit in their own trading lives. It is a very good system and will work for

generations of stock traders yet to come.

Make sure you take plenty of notes when you read Livermore’s book so that

you can compare your thoughts with what has been delivered here in this

system.

In addition, I ask that you also read Livermore’s fictional biography written

by Edwin Lefevre, “Reminiscences of a Stock Operator”. Arguably the

greatest trading book ever written. Both books are available as free

downloads at www.livermoretradingsystem.com.

It is my desire that the Livermore Trading System ebook is the second

greatest trading book that you will ever read. I hope that is the case. In

closing, learn to enjoy the journey!

Garette Haire

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Livermore Trading System – The Challenge of Speculation

Page 14 – “Successful speculation is anything but a mere guess. To be

consistently successful, an investor or speculator must have rules to guide

him. Certain guides which I utilize may be of no value to anyone else. Why

is that so? If they are of inestimable value to me, why should that not serve

you equally well? The answer to that is – no guide can be 100% right. If I

use a certain guide, my own pet one, I know what should be the result. If my

stock does not act as I anticipated, I immediately determine the time is not

yet ripe – so I close out my commitment.

You do not need to be right 100 % of the time to make a lot of money in the

stock market, so here is the first Livermore truth, cut your losses quickly and

let your profits run. Your first loss is the best loss!

Page 13 – “Profits always take care of themselves, but losses never do. The

speculator has to insure himself against considerable losses by taking the

first small loss.”

Page 15 – “I believe anyone who will take the time and trouble to study

price movements should in time be able to develop a guide, which will aid

him in future operations or investments. In this book I present some points

which I have found valuable in my own speculative operations.”

Livermore makes this sound easy but it is not as it goes against our human

nature. This is why it is important to follow your “guide”. When you follow your guide or trading plan, you will be right a very high

percentage of the time. This is the definition of success.

If you want to trade successfully, you must have a well-defined trading

guide or in this case a system. All consistent profitable traders have a

system that they follow. This system is to serve as your trading guide.

There is a an oft repeated phrase “If you fail to plan, you are planning to

fail.”

Page 13 – “ While I believe that the successful investor or speculator must

have well-advanced reasons for making commitments on either side of the

market, I feel he must also be able through some form of a specific guide to

determine when to make his first commitments.”

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Second Livermore truth – “Always Follow Your Guide”

Page 7 – “To invest or speculate successfully, one must form an opinion as

to what the next move of importance will be in an a given stock. Speculation

is nothing more than anticipating coming movements. In order to anticipate

correctly, one must have a definite basis for anticipation.”

When is a stock ready to move? Is it time to buy? Let’s find out.

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Livermore Trading System – When Does a Stock Act Right?

Page 14 – “Successful speculation is anything but a mere guess.”

When one reads anything from Livermore or about Livermore, one is

immediately taken away that he is strictly into Technical Analysis. From his

days in the noisy bucket shops, to alone in the dead silence of his Wall Street

office, he was guided by only two thoughts – price and volume. At the end

of the day what else is there? These most basic of indicators is what he cared

about and they are really all that you will use in this system. While he did use the term “fundamental” several times, it was never linked

to what we call today traditional fundamental analysis.

Page 9 – “Wait and watch the action of that stock or stocks marketwise.

Have a fundamental basis to be guided by.” Here he was referencing the

need of having a trading system or guide but his concern is always on price

first and volume second.

This system will only use the most basic technical analysis indicators. Price,

a simple moving average and volume, the belief is that the simpler the better,

study Occam’s razor.

This is especially true in the informational advancing times in which we live.

Learn to simplify and multiply your dollars. The Livermore Trading system

will only trade off a weekly chart. Now why trade a weekly chart? This is

Livermore’s “Time Element” discovery. You will learn about this dynamic

discovery later in this book.

We live today just as all others have before, but today we have the

appearance of an increased pace of life. What that means is today we

experience what is termed “time acceleration”.

Page 27 – “ Speculation is far too exciting. Most people who speculate

hound the brokerage offices or receive frequent telephone calls, and after

the business day they talk markets with friends at all gatherings. The ticker

or translux is always on their minds. They are engrossed with the minor ups

and downs that they miss the big movements. Almost invariably the vast

majority have commitments on the wrong side when the broad trend swings

under way.”

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Time acceleration is not that time is moving quicker or that there is more or

less time in a 24-hour day.

Rather it is that more information that is pertinent is delivered online in 1

minute today than in a month in 1940 or in the entire year of 1840.

Livermore experienced this as well in the period that he lived. His ticker

tape provided the impetus of time acceleration in his day.

The only difference is that today our limited human mind appears to have

reached maximum processing capacity in managing trading activities and

cannot process the speed at which new information is delivered nor can we

master the overall abundance of the total information given over the course

of a set period of time.

While many may disagree with time acceleration by saying it is man that

developed this information delivery system therefore he should be able to

process it in a reasonable fashion. On the surface that sounds correct but in

reality many men brought today’s information delivery system together over

a very long period.

One generation took the work of the previous generation; they processed it,

refined it and added to it for delivery to the new incoming generation. This

process appears to warp time when really it is only the delivery of

information that has sped up exponentially.

Moreover, of course, the phenomenon of time acceleration will continue to

increase exponentially as technology continues to reinvent itself daily.

Again, just as with an earlier example, in May of 1940 the peak daily trading

volume was 3.76 million shares traded, today the daily average there are

over 1.4 billion shares traded on the NYSE.

Page 27 – “The speculator who insists on trying to profit from daily minor

movements will never be in a position to take advantage of the next

important change marketwise when it occurs.”

This is not day trading. Livermore consistently made money when he was

an intermediate term trader. This is one of his great discoveries. The

Livermore Trading System trades only off weekly charts as our time

acceleration dilemma then becomes more manageable.

Page 27 – “Remember this: When you are doing nothing, those speculators

who feel they must trade day in and day out, are laying the foundations for

your next venture. You will reap benefits from their mistakes.”

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Although not perfect 100% of the time as Livermore has said about his very

own system, trading off the weekly chart does greatly assist you in

identifying and maximizing all stock trading opportunities.

What made Livermore so good at trading was that he had amazing memory

recall of past numbers and was quick with mental mathematics. He could

easily recall a stock’s past support and resistance levels although he did not

call them by that name, he called them Pivotal Points.

With price numbers, he could mentally visualize a stock’s price pattern. That

is why he excelled in the Bucket Shops early while recording prices on the

blackboard and this ability to recall past numbers in a specific stock

continued throughout his life. This stands to reason that he would rather

physically record past price movements in headed columns than use a price

chart.

Page 15- “A great many traders keep charts or records of averages. They

chase them around, up and down, and there is no question that these charts

or averages do point out a definite trend at times. Personally, charts have

never appealed to me. I think they are altogether too confusing.

Nevertheless, I am just as much of a fanatic in keeping records as other

people are in maintaining charts. They may be right.”

At that time, price recording and charts were kept by hand each day with

prices being recorded at the close of the market. There is a belief that the

manual charting and recording prices in that day as Livermore did actually

gave them a greater understanding of a stock’s movements. It may be true.

That said the Livermore Trading System uses only weekly charts for all

trading decisions. If you feel inclined to do so, you too can manually record

stock prices in the same style or fashion that Livermore did. However, with

the commonality of today’s technology and simple availability online, it

makes charting the chosen method of many of today’s traders.

Page 48 – “ The Livermore method of recording prices in conjunction with

the time element is the result of over thirty years of study of principles which

would serve me in forming a basic guide for the next important move.”

Remember that price is always and foremost the most important aspect when

trading. A stock’s price is never too high to buy nor is it never too low to

sell.

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As you know, technical analysis involves the study of a stock’s price action.

It is believed that Livermore understood that all known information

including both current events, trade directions and future thoughts, true or

false, about any listed company are represented by its current price.

Therefore, the Livermore Trading System also understands that all known

information about a stock is already priced into the stock’s current price.

Page 30 – “ We know that prices move up and down. They always have and

they always will. My theory is that behind these major movements is an

irresistible force. That is all one needs to know.”

Any future movement that the stock’s price may experience can only be

based off any new incoming information.

Page 21 – “ Stocks, like individuals, have character and personality. Some

are high-strung, nervous, and jumpy; others are forthright, direct, logical.

One comes to know and respect individual securities. Their action is

predictable under varying conditions.

Markets never stand still. They are very dull at times, but they are not

resting at one price. They are either moving up or down a fraction. When a

stock gets into a definite trend, it works automatically and consistently along

certain lines throughout the progress of its move.”

This trading system is designed so that you will form an opinion with a high

degree of certainty on the future price direction of your selected stock.

In other words, you will trade the price number before you and not what

others say or think it should be or might be. In fact, you should avoid the

chatter of financial news just as Livermore did in complete silence while he

traded.

Page 7 – “ To invest and speculate successfully, one must form an opinion

as to what the next move of importance will be in a given stock. Speculation

is nothing more than anticipating coming movements.”

Moreover, it will keep you in the winning trade. This is about trend

following.

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Livermore Trading System - The Pivotal Point

Page 45 – “Whenever I have had the patience to wait for the market to

arrive at what I call a “Pivotal Point” before I started to trade, I have

always made money in my operations.”

Page 54 – “ Fascinating almost beyond belief, the study of Pivotal Points is,

you will find, a golden field for personal research. You will derive from

successful trades based on your on judgment a singular pleasure and

satisfaction. You will discover that profits made in this way are immensely

more gratifying than any which could possibly come from the tips or

guidance of someone else. If you make your own discovery, trade your own

way, exercise patience, watch for the danger signals, you will develop a

proper trend of thinking.”

Like so many of Livermore’s followers, this author immediately understood

his basic “Pivotal Point” concepts and thoughts completely. That said I

hope that my understandings are in agreement with his actual meanings. I

believe that they are.

One can see that he used his Pivotal Points throughout his entire trading life.

First, let me say that he actually intertwines the singular phrase “Pivotal

Point” with different separate trading concepts. Nothing about these

concepts are new to trading, as you will see, so we will let his words speak

for himself.

His first explanation of the Pivotal Point “definition” is given beginning with

“For example” on page 46. As you will see it is no more than his description

of what we know to be “support and resistance” of a stock.

Take a moment, reread pages 46 – 47, and simply add the word “support”

where you read the words “low point of 40 ”. When you see the price of

$49.50, think of that price as overhead “resistance”, a Pivotal Point.

In addition, Livermore uses the thought of the stock’s price carrying through

those Pivotal Point price levels (support & resistance) by “the proper extent

of 3 points”. This is one of his deciding factors to either buy, perhaps short

or to confirm his trend thoughts but really it is just a simple breakout of

support or resistance, which will be confirmed by volume. This is what he

did repeatedly with great success.

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I know that his Pivotal Points theory works as it has been presented in

Chapter 5 but I also believe there are better ways to trade by incorporating a

simple moving average and by having a clear understanding of volume.

Page 49 – “When a speculator can determine the Pivotal Point of a stock

and interrupt the action at that point, he may make a commitment with the

positive assurance of being right from the start.”

So determine support & resistance and the direction of the expected breakout

with your buy order and stop loss in place then you can trade in confidence

of having the momentum in your favor.

Now let’s look at another definition of Livermore’s general term “Pivotal

Point” used throughout Chapter 5. Again, he does not actually separate his

meaning of this term.

Take note on page 49 – “ Many years ago I began profiting from the

simplest type of Pivotal Pont trades. Frequently I had observed that when a

stock sold at 50, 100, 200 and even 300, a fast and straight movement

almost invariably occurred after such points were passed.”

Here we see that his use of Pivotal Point has a new meaning, you might call

it the “PPPP”, the “Public Psychological Pivotal Point”.

This PPPP has nothing to do with the stock’s current support & resistance

figures rather it is exclusively focused on the investing public’s perception

of the selected stock’s price moving upward through a higher milestone of

greater dollar value. The public sees that the stock has broken through a

glass ceiling and now has nowhere to go but up, the path of least resistance,

which attracts more buyers on this strength, especially as it passes certain

price figures.

The stock has broken through an overhead physiological number, a Pivotal

Point, and should now continue to travel well past that Pivotal Point number.

The upward trend is intact, the public reacts positively and the stock

continues to carry forward on momentum. Think of this when you reread

pages 49 – 53 of his book.

Therefore, the takeaway is that Livermore’s Pivotal Points are both a stock’s

actual support & resistance figures and actual overhead set emotional price

number figures that stock would need to pass through in order to attract

additional buying from new buyers.

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Livermore actually used the PPPP to add to his initial positions, to “dollar-

cost-average” on the high side, which is the only way to ever dollar-cost-

average so that every additional position is added is profitable. You know

the amount of your profit and know your exit point.

In Chapters 6 & 7, surprisingly Livermore uses commodities as examples of

Pivotal Points in a how-to-book about stock trading. Interesting.

Please follow along in Chapter 7 taking note of his Pivotal Point comments.

Page 70 – “In the summer of 1924, Wheat had reached a price that I term a

Pivotal Point, so I stepped in with an initial buy order for five million

bushels.”

Page 71 – “ As soon as it pierced the next Pivotal Point, I gave an order to

buy another five million bushels. This was executed at an average price of

1.5 cents above the Pivotal Point, which clearly indicated to me that the

market was working itself into a strong position.”

By his own words, he bought right above Wheat’s most recent resistance

level. The next Pivotal Point as it should be was higher. He added to his

original profitable position with another five million bushels.

He sold out his full position with a nice profit of .25 cents per bushel.

In addition, there is an example of his Pivotal Point levels from pages 46-47

- support $40.00 with resistance $49.50; and (PPPP) being $50.00, $60.00,

$100.00 etc.

Page 54 – “In the last chapters of this book I explain in detail my own

method of determining the more complex Pivotal Points in conjunction with

the Livermore Market Method.”

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Livermore Trading System - The Market Key

Page 81 – “Having then a purely speculative mind, I was trying to devise a

policy for trading in and out of the market at all the time, catching the small

intermediate moves. This was wrong, and in time I clearly recognized the

fact.”

Livermore understood and found out, as so many of the “day traders” of our

time had to find out on their own. Day trading stocks is generally a loser’s

game for the individual stock trader. Corporation’s who “front run” and

participate in “flash trading” do so on a scale that the average trader could

never achieve. They do it with such force and progressive technology that

generally prices out the average individual. That said, Livermore learned to

not day trade. He only made money in stocks when he looked at a longer-

term time frame.

Again, the Livermore Trading System will only trade off a weekly stock

chart. This will allow you to stay in your selected stock and avoid minor

movements in the price. This will keep you in the trend.

Page 82 – “ Right then I determined to eliminate all the minor movements.”

This is one of his great discoveries; he called it the “Time Element”. This

is very important as weekly time-periods eliminate the majority of minor

price fluctuations. Livermore monitored daily price activities so that he

could trade of weekly movements. This is what this system will do. It

actually makes it easier to make money, as you will find out.

Page 4 – “ Out of it all emerges my theory of time element in trading, which

I regard as the most important factor in successful speculation.”

Many experts on the life of Livermore have completely missed his time

element completely.

This improved his stock trading dramatically. Intermediate term trading is

what Livermore did when he was highly successful. You will also.

Page 82 – “ By continued close study of the many records I had kept the

realization struck me that the time element was vital in forming a correct

opinion as the approach of the really important movements. With renewed

vigor I concentrated on that feature.”

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In a moment reread the entire Chapter VIII of his book. It is this section of

Livermore’s writings that both readers and researchers have had the most

difficulty in understanding his thoughts about trading.

In fact, many Livermore experts simply will not address this most important

chapter in his book as they appear to be puzzled by his trading thoughts and

techniques.

Page 82 – “ I wanted to find out what constituted the beginning of a Natural

Reaction or a Natural Rally. So I began checking the distances of price

movements.”

However, before you reread Chapter VIII think about what he is trying to

accomplish by his manual posting of stock prices. What “price picture” is

he trying to establish? What was he looking for? How could his discovery

of the time element improve his trading?

Perhaps you might now agree that what he was looking for is simply support

& resistance for entries & exits and always looking to be in the major trend

of his select stock. This is how money is made in trading stocks.

Page 84 – “Thus when recording the prices either in the Upward Trend

column or in the Downward Trend column I am impressed with the actual

trend at the time.”

Towards the end of page 84, many readers have become lost with these

trading thoughts and have a tendency to overanalyze what Livermore is

saying and rightfully so as it appears to be problematic at first glance.

Page 84 – “I decided a stock selling around $30.00 or higher would have to

rally or react from an extreme point to the extent of approximately six points

before I could recognize that a Natural Rally or Natural Reaction was in the

making. This rally or reaction does not indicate that the trend of the market

has changed its course. It simply indicates that the market is experiencing a

natural movement. The trend is exactly the same as it was before the rally

or reaction occurred.”

After reading the above paragraph think of the role that a simple moving

average line (SMA) offers a trader when overlaid on a Bar or Candlestick

chart. The reaction of a stock’s price moving back towards the SMA line

from either below or above does not necessarily indicate a change in trend

direction. It is simply a “natural movement” as it reverts to its average.

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Livermore looked for a price rally or reaction of six points from a most

recent high or low to be considered a natural movement of a stock priced

$30.00 or higher.

Trading stocks that are priced $30.00 or higher may be good advice, but this

Livermore Trading System will trade any stock regardless of price. That

said it is always wise to stay with a stock that is above $5.00 per share with

plenty of volume.

While it may have served Livermore in his day, a Natural Rally or Natural

Reaction of a stock in today’s market may be more or less than six points.

It is always best to look at a stock’s previous price rallies or reactions

movements to have general idea of its nature. His “six points” measurement

rule of a stock’s reaction or rally carries a much different weighting for a

$30.00/share stock then it does for a $130.00/share stock.

This is a challenge and why this trading system will use a percentage “ % ”

of a stock’s price movement rather than “points”.

A brief comment on perhaps why most readers get confused in Chapter VIII.

There is a thought that Livermore perhaps wanted to confuse his readers

about his trading techniques. At this time in his life, he desperately needed

income to support his extravagant lifestyle. One cannot help but to

understand how depressed he was at the writing of his book given that in a

few short months he would commit suicide.

He may have very well written these last two chapters of his book as actual

trading “teasers” so that he would be continually needed by the general

public to explain his life long trading methods, thus giving him self-esteem

and a potential stream of income as he could speak around the country

giving lectures on his trading techniques. That said it is true that no one

knows for sure.

This Livermore Trading System is attempting to take his writings and

present it in a modern easy-to-use trading system so that anyone can use it

and make money-trading stocks. As you will see, this endeavor is very

successful. It is up to you to make this trading system your very own.

Along with Livermore’s “six points”, here has been much confusion around

his term “Key Price” indicator as well.

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Now take time and reread Chapter VIII but as you read the terms of “six

points” and “Key Price”, think of his comments given in relation to what a

“Simple Moving Average” (SMA) offers a stock trader.

Page 82 – “What I wanted to discover was a method of recognizing what

constituted the minor swings. I realized a market in a definite trend still had

numerous intermediate oscillations. They had been confusing. They were no

longer to be my concern.”

With this trading system, any change of a stock’s trend will be identified by

its “Key Price”, as it relates its position to a Simple Moving Average

(SMA) line and two other easy to use indicators.

Page 85 – “But there is a danger of being caught in a false movement by

depending upon one stock. The movement of two stocks combined gives

reasonable assurance. Thus, a positive change in trend must be confirmed

by the action of the Key Price.”

Livermore’s “Key Price”, was first looking for a change in trend within a

specific industry group. Today we have many services, business sector

ETF’s and industry specific indexes that do this identification work for us.

Second, his use of his Key Price was also used in the identification of trend

continuation movement. His “Key Price” is nothing more than his written

version of price and a SMA.

Page 85 – “Thus, a positive change of the trend must be confirmed by the

action of the Key Price.”

Page 87 – “ From these records one can visualize a map useful in

determining the approach of important price movements.”

The Livermore Trading System will not use two different stocks to

determine the Key Price; rather it uses series of easy to understand indicators

Simple Moving Average, Volume and the newly developed Signal Trend

Reversal Bar, STR.

This winning combination will reveal a stock’s actual “Key Price”.

Page 87 – “ Certainly success with this plan depends upon courage to act

and act promptly when your records tell you to do so. There is no place for

vacillation. You must train your minds along those lines.”

19

Page 89 – “The intent is to catch the major moves, to indicate the beginning

and the end of movements of importance. And for such purpose you will find

the formula of singular value if faithfully pursued.”

Page 90 – “ There is nothing complicated about it. The various phases will

be absorbed quickly and with easy understanding by those who are

interested.”

Now it is time to learn to trade stocks.

20

Livermore Trading System - How to Actually Trade in Stocks

After reading Livermore’s book, the reader may come away more confused

than educated with an exact practical plan of trading in stocks. Again,

Livermore’s writing style may have been more for his self-preservation in

being needed by the public to constantly explain his trading method for a

speaking fee. One will never know his internal thoughts as he completed his

text.

It is well known that his book did not sale as he had hoped it would. Many

believe that it was just too difficult for the average individual to actually

implement. The reading public never quite accomplished taking his written

trading methods and putting them into actual stock trading.

The remainder of this book will do just that. That said this attempt to

coordinate Livermore’s trading thoughts into an actual usable stock-trading

plan is a worthy ideal. This Livermore Trading System has completed what

it set out to do, present Jesse Livermore’s 1940’s trading thoughts into an

easy-to-use modern stock-trading system. Almost anyone can make money

using the Livermore Trading System.

Before you actually begin to trade stocks using the Livermore Trading

System, it should be understood that you have already read both

“Reminiscences of a Stock Operator” and “How to Trade in Stocks”. If you

have not read them, please stop now and go read them. There is much

needed trading information in both.

This system is about actually making money in the stock market now and

using it today to increase your net worth over your lifetime.

With this book, you are going to learn exactly how to recognize and profit

from the stock market as Livermore did. While it certainly is not always

easy, you are going to find that it really is not that difficult either. Just stay

with your trading plan and it will work for you.

Page 4 – “I have come to the conviction, however, that larger numbers of

people interested in stock market investments and speculation would be

willing to work and study to attain sensible results, if they had a guide or

signpost pointing the right direction. And it is for them that this book is

written.”

21

You are going to find simple truisms that will make trading in the stock

market more predictable, lucrative and hopefully more enjoyable.

Page 5 -“I can only light the way, and I shall be happy, if through my

guidance, you are able to take more money out of the stock market than you

put in.”

The rules that you are going to learn are not newly invented rules; rather

some are an extension of what you have already learned from reading both

books mentioned earlier. So please make sure that you have read them.

That said other rules in this book might appear to be completely new to

trading but they are not.

Page 6 - “ My theory and practical application have proved to my

satisfaction that nothing new ever occurs in the business of speculating or

investing in securities or commodities. There are times when one should

speculate, and just as sure there are times when one should not speculate.”

If you want to trade successfully, you must have a trading plan. All

consistent profitable traders have a plan that they follow. This Livermore

Trading System plan will serve as your life-long trading guide.

First, you should know some basics of “Technical Analysis”. Using the

most basic technical analysis is the best approach to trading. This is what

Livermore did, the simpler the better. This is what this system will use.

There are really just three main approaches used in the trading analysis of

stocks. They are fundamental analysis, technical analysis or a combination

of both. You are only going to use only technical analysis. Although not

perfect, it can greatly assist you in identifying significant trend trading

opportunities. This is all a trader can hope for in a successful system.

Page 57 – “ The price pattern reminds you that every movement of

importance is but a repetition of similar price movements, that just as soon

as you familiarize yourself with the actions of the past, you will be able to

anticipate and act correctly and profitably upon forthcoming movements.”

As you know, technical analysis involves the study of a stock’s actual price

and its action. In our trading world, all known information about a company

both current and future is represented in its current price. Price and volume

are the golden keys to the trading kingdom.

22

This is important, a stock is priced where it is at this very moment in time

based off all known information about that stock and it is only new incoming

information that moves its price going forward into the future. Livermore

said the exact same thing:

Page 89 – “Remember: there is always a reason for a stock acting the way it

does. But also remember: the chances are that you will not become

acquainted with that reason until some time in the future, when it is too late

to act on it profitably.”

These series of price movements are used in the Livermore Trading System

to form a judgment on the future price direction of any stock. Again, this is

best accomplished through technical analysis. In other words, you will trade

what you see now and not what you think might happen. Furthermore, what

you will always be looking for is a “trend”.

Page 7- “To invest or speculate successfully, one must form an opinion as to

what the next move of importance will be in a given stock. Speculation is

nothing more than anticipating coming movements. In order to anticipate

correctly, one must have a definite basis for that anticipation.”

Page 8 - “ Markets are never wrong – opinions often are.”

Page 14- “Successful speculation is anything but a mere guess.”

A trend is best defined as the clear and distinct overall direction in which the

price is tending to move, its most likely path of least resistance.

Page 15- “A great many traders keep charts or records of averages. They

chase them around, up and down, and there is no question that these charts

or averages point out a definite trend at times.”

One of the most important rules to successful trading is to follow the trend.

There is old proverb on Wall Street, “the trend is your friend!” A trend

exists until there is evidence that the direction in which the price is moving

has changed.

In Chart 1 Alcoa (AA) is in a nice up trend. Your actual first signal to buy

was given on October 25, 2013. This is a weekly chart of AA.

23

Page 13 - “While I believe that the successful investor or speculator must

have well-advanced reasons for making commitments on either side of the

market, I feel he must also be able through some form of a specific guide to

determine when to make his first commitment.”

You will learn when to make a commitment.

Page 27 – “If you have timed the movement correctly, your first commitment

will show you a profit at the start.”

Chart 1

Before the Livermore Trading System trading rules are given, you need to

know what will be needed to trade stocks using this system. As you can see

in Chart 1 there are some specific chart display requirements that you must

be able to set up in order to trade stocks flawlessly. They say that a picture

is worth a thousand words; your chart picture is worth tens of thousands of

dollars!

These chart requirements are very basic. All Livermore Trading System

decisions will be made off a weekly chart. Each price bar will represent one

week of market action. This weekly chart selection is a standard option

offered by all chart & data providers.

This weekly setting is Livermore’s “Time Element” discovery. He

simply understood that he must slow down time to trade stocks effectively.

1) Only weekly stock charts will be used in the Livermore Trading

System. This is a weekly stock trading system.

24

Page 27 – “ Remember this: When you are doing nothing, those speculators

who feel they must trade day in and day out, are laying the foundation for

your next venture. You will reap benefits from their mistakes.”

Page 27 – “ The speculator who insists on trying to profit daily movements

will never be in a position to take advantage of the next important change

marketwise when it occurs.”

Chart 2

Price Bar Chart Display setting – use “OHLC” bar chart only. (Candlesticks

charts can also be used if you are more familiar with their design and

function)

A OHLC price bar represents the open-high-low-close market price

movements of a weekly time-period. Chart 2 is simply called a “Bar

Chart”. Small marks or “tick marks” project from both the left side and the

right side of the vertical line indicating the opening price (O) on the left side

and the closing price (C) on the right. You can now see how much your

stock price has travelled during one week of market activity, the high (H)

price and the low (L) price of the week.

2) Use Weekly OHLC Bar charts.

The next indicator used in the Livermore Trading System is a Simple

Moving Average (SMA). It is generally considered the best way to identify

a trend.

25

A simple moving average is a line placed on your chart that smoothes out

price action by calculating an average of closing prices over a specific

period of time and displaying the result on your chart providing the overall

direction for a set period of time. Time period used is 21 weeks.

3) The Livermore Trading System uses a Weekly OHLC Bar Chart

with a 21 SMA.

The final piece of this system will be Volume. This simply represents the

number of shares that have traded over a given period, in this case, weekly.

Volume is a gauge powerful of the buyers in your stock as in Chart 3. A

strong breakout of your selected stock will be accompanied by increased

volume. Volume will always most definitely confirm the breakout.

Chart 3

4) Weekly OHLC Bar Chart with both a 21 SMA and Volume

Page 28 – “Many years ago I heard of a remarkably successful speculator

who lived in the California mountains and received quotations three days

old. Two or three times a year he would call on his San Francisco broker

and begin writing out orders to buy or sell, depending upon his market

position…I make speculation a business.”

Page 29 – “ Real movements do not end the day they start. It takes time to

complete the end of a genuine movement. By being up in the mountains I am

in a position to give these movements all the time they need.”

26

Page 29 – “ That happened many years ago. Consistently, the man from the

mountains, over a long period of time, drew funds abundantly from the stock

market. He was something of an inspiration to me.

I went to work harder than ever trying to blend the time element with all the

other data I had compiled. By constant effort I was able to bring my records

into a co-ordination that aided me to a surprising degree in anticipating

coming movements.”

The basic chart settings of the Livermore Trading System will use a weekly

chart with a 21 simple moving average and volume displayed. This system’s

set up is not expensive or even complicated. The beauty is in its simplicity.

Livermore, while very good with numbers, was very simple in his stock

trading approach.

Data and charting providers like BigCharts.com and StockCharts.com are

excellent free sites. They will allow you to customize your charts to follow

the Livermore Trading System.

As with any trading system, you will need to know the overall stock market

direction.

Page 30 – “We know that prices move up and down. They always have and

they always will. My theory is that behind these major movements is an

irresistible force. That is all one needs to know.”

In addition to these basics, there are several other “moving parts” of this

system that you must take into consideration before making a firm trading

decision.

The first moving part to consider is the direction of the overall stock market.

You will need to know where the S&P 500 index has closed each week. The

S&P 500 consists of the 500 largest companies in the U.S. as measured by

market capitalization.

The Livermore Trading System uses “SPY”, an exchange-traded fund (ETF)

as a representative of the performance of the S&P 500 Index. In addition, it

is used with a 34 weekly period SMA; see Chart 4 below.

Is the weekly SPY above or below the 34 SMA? If it is below then you will

do very little stock buying even if some select stocks are breaking out in an

upward advance. (Inverse ETF’s could be considered a trading in a market

downturn)

27

Page 32 – “Have patience and wait.”

You must always put the probabilities of success in your favor; in other

words, the overall market should be in an upward trend before you trade on

the long side in any stock. The trend should always be your favor.

1) Is the SPY above or below the 34-SMA?

Chart 4

Going forward, each step in the Livermore Trading System is a refining

process towards your success. You will continually narrow your focus to

find the best stock to trade.

The next moving part in your plan is which industry groups are now in

favor? Here you need to apply yourself as you search for those stocks that

will advance in an upward trend. Livermore knew that this single

application would make you serious money. It makes sense that those stocks

in the best performing industry group will continue to advance.

Livermore knew that you must go where the action is. This system is

designed to invest in the best industry groups when the market is moving

upwards and stay on the sideline when the trend is downward.

28

Page 33 – “Confine your studies of movements to the prominent stocks of the

day. If you cannot make money out of the leading active issues, you are not

going to make money out of the stock market as a whole.”

Time to begin trading. First, determine if the market is moving in the upward

direction by looking at the weekly SPY chart with 34 SMA. Just look at

Chart 4 again and determine which side of the 34-SMA is the SPY.

Important rule, never use CNBC or Fox Business to see what the market is

going to do as they have an agenda. They are paid to make noise.

Stay away from all electronic noise; consider their noise to be Livermore’s

version of “stock tips”. Everything you need to know is right there in front

of you every time you look at your weekly SPY chart. Do your own work.

Page 55 – “ Few people ever make money by trading on the occasional tips

or recommendations of others.”

In stock trading, you must know that no matter how hard you work or how

much studying you have done you could always be wrong in your stock

selection. Thankfully, good money management will save you in case the

market goes wrong.

Page 8 – “ Markets are never wrong – opinions often are.”

2) Selecting the Best Industry Group

By looking at Chart 4, you know that the overall market is bullish. It has

been in an upward trend for several years. So, which industry groups have

been leading the way? This step is very important. This is where the best

trading action is.

Page 33 – “ Confine your studies of movements to the prominent stocks of

the day. If you cannot make money out of the leading active issues, you are

not going to make money out of the stock market as a whole.”

Page 33 – “As they go, so goes the whole market. In the course of time new

leaders will come to the front; some of the old leaders will be dropped. It

will always be that way as long as there is a stock market.”

The best place to begin the identification process of stocks with the

Livermore Trading System is through free websites like The Wall Street

Journal, Market Watch or Big Charts as they allow you to freely scan the

industry groups.

29

Through these sites, you will need to find the “Markets” or “Industries”

section. From there, you will need to scroll down to Industry Sectors or

Industry Groups. As an example, type into your favorite search engine “Big

Charts”, “bigcharts.marketwatch.com” should come up. Make that

selection.

Underneath the homepage heading, you will see different selections

available on the Big Charts site. Look for the link tab - “Industries”. This

link will provide you with all the group information needed to select your

potentially winning stocks from the best industry groups.

You know that in Chart 4 the market is bullish and still headed in an upward

trend. Where is the best action in this market? It is time to look at where

this upward trend is coming from. You will focus in on those groups or

industries that currently have the greatest upside potential or those that are

now in a strong upward trend. “Follow the Leaders.” As of this writing of

the Livermore Trading System in early 2014, the best performing industry

over the past 3 months has been the Aluminum industry.

Page 32 – “ What I wish to impress upon you is the fact that when you

clearly see a move coming in a particular group, act upon it.”

Page 10 – “ Experience has proved to me that the real money made in

speculating has been in commitments in a stock or commodity showing a

profit right from the start.”

Chart 5

30

The Aluminum industry as represented by the Dow Jones U.S. Aluminum

Index and the Aluminum industry is in the Basic Materials Sector – IYM.

Chart 5 is the ETF, IYM - Basic Materials sector with a 34 SMA. In

addition, in early 2014, the Dow Jones U.S. Aluminum Index is up over

18.90%; for the past 6 months, it is up over 34%!

Again, when the “Industries” tab was selected in early 2014 the “3 Month

Top Performer” was the Dow Jones U.S. Aluminum Index. In fact, at that

time the Dow Jones U.S. Aluminum Index was the best performing group

and equally the Dow Jones U.S. Business Training & Employment Agencies

Index was the worst performing industry group.

Page 32 – “ But do not let yourself act in the same way in some other group,

until you plainly see signs that the second group is in a position to follow

suit.”

Additionally, the ability to select the performance time period to sort the best

and worst industry performers over different time periods is also available.

Always check the 1 month, 3 month and 6 month periods. Initally, make

your stock trade selection off of the top 1-month performer list. As you

become at ease with this system you can go to the best 1 month performer.

You know that the Dow Jones U.S. Aluminum Index has been the top

performer in all three time periods in early 2014. In this index or industry

group, what are the top individual aluminum-related stocks and which ones

should be traded?

The actual “Best Performing Stocks” and the “Worst Performing Stocks” in

the DJ Aluminum index are displayed. On display are the stocks quote

symbol, company name and the percentage change numbers over the

selected time period are shown.

It’s here that your challenge really begins; which stock do you choose to

invest in? Should you select the top performing stock or the one with the

most “name recognition”?

Now that you have determined the market trend is moving upward and that,

the Aluminum index is the best performing industry over the one, three and

six month time period, the final step is to select those stocks that are the best

to trade.

3) Selecting the Best Stock in the Best Industry Group

31

The very first thing that you will see when you scan the three month “Top

Performer” list is that many stocks in that group are doing very well. It is

now known that in early 2014 that the top performing industry group was

Aluminum as reflected by the performance of the Dow Jones U.S.

Aluminum Index.

As stated earlier, when you select the Dow Jones U.S. Aluminum Index on a

service like Big Charts, you will see those “Best Performing” stocks in this

index. In addition, you automatically see the three-month returns of those

best performing stocks and equally the returns of the worst performing

stocks in that industry group. With the ten top performing stocks displayed

in the top industry group which one should you select to trade. How should

you decide?

First, always keep the selection process simple. You must begin to narrow

your focus by selecting those companies that primarily offer name

recognition. Do you recognize the company? If you do not know the

company then pass it over for the next name on the list.

Second, what is the price of that recognized company’s common stock?

You can easily find the stock’s price by selecting the “Charts” tab beside the

listed company to find its price. Initially, only focus in and trade those

companies with stock prices over $5.00 per share with good volume.

In other words if the stock is price below $5.00 per share do not consider it

for trading. Even at $5.00, volume makes the difference.

It is your focus to become a successful stock trader. Successful traders do

not make money on every trade. This should be understood. What makes

them successful is that they have a trading plan that will keep their losses

small and let their profitable trades continue to run upwards.

Page 36 – “ For a new age of markets has been ushered in – an age that

offers safer opportunities for reasonable, studious, competent investor and

speculator.”

It is worth repeating, you will likely have a general idea of what your

selected company does to generate profits if you recognize its name. This is

the stock to trade now. That said, do not be caught up in the day to day

operations of the company or be concerned about earning projections or

market analyst projections rather you just need know what the company

does. Why are investors buying this stock? It does not matter, what is price

telling you.

32

Page 88 – “ If you wait until you have the reason given you, you will have

missed the opportunity of having acted at the proper time! The only reason

an investor or speculator should ever want to have pointed out to him is the

action of the market itself.”

What is the chart showing you? This is really all about making you think

about yourself, your trading business and your trading future.

Page 14 – “ Successful speculation is anything but a mere guess.”

Now it is time to dig deeper into the Top Performing Industry group. In this

system, we will stay with our earlier example of the top-performing industry,

which was the Aluminum industry as reflected by the performance of the

Dow Jones U.S. Aluminum Index. When looking at the companies that

make up the Dow Jones U.S. Aluminum Index the first thing that you will

notice are the “Percent Change” numbers and they are impressive returns.

Thresher Industries (THRR) had returned over 100% over 3 months and

Norsk Hydro ASA (NHYKF) had returned over 21.5%.

Yet, this trading system calls for “name recognition”. The average U. S.

consumer does not know Thresher Industries or Norsk Hydro ASA.

However, they do recognize another name in this best performing industry

group, Alcoa (AA) and it returned over 18.4% during the same 3-month

period.

Immediately the trading plan calls for you to focus in on Alcoa and not the

other two. Now, should we even follow the price of these top stocks? No.

This system will not be using the combined price of two stocks as Livermore

did in any group to recognize a trend since by definition the listing of the

“top performing” group is in already in a trend. Livermore did not have this

luxury.

Also, remember that you are only to trade those companies with stock prices

over $5.00 per share.

This is also different from Livermore’s recommended $30.00 price share.

Thresher Industries and Norsk Hydro ASA were both well below level in

2014. Their price removed them from any consideration, as they are below

the required minimum price of $5.00 per share.

33

Page 15 – “ one can with a fair degree of accuracy forecast coming

movements of importance. But it takes patience to do so. Familiarize

yourself with a stock, or different groups of stocks, and if you figure the time

element correctly in conjunction with your records, sooner or later you will

be able to determine when a major move is due.”

This is what you will be doing with the Livermore Trading System. You will

make money trading.

Chart 6

You have the right industry and have narrowed down the to the right stock.

So when do you commit to purchasing the stock and place a buy order?

Again, all stock trading decisions and transactions are based off the selected

stock’s weekly closing price. We will be using Alcoa – AA in early 2014 as

our trading example.

The two technical indicators used with your Livermore Trading System will

be the weekly 21 SMA and volume. Nothing else is needed.

As you may know, generally a potential positive upward change of stock

market direction is signaled by the weekly stock’s price bar crossing from

below and closing on the opposite upward side of the weekly 21 SMA line.

Momentum has now potentially changed to the upside.

However, with this system a stock’s crossing and closing above the 21 SMA

is only an early notice of a potential trading opportunity. This is not a clear

signal to place a buy or sell. This is not a buy signal, yet.

34

Again, the selected stock’s first weekly price bar to close on the opposite

side of the 21 SMA will only initiate the beginning process of looking for

a change in direction of the selected stock and therefore a potential trade.

To even think about placing a buy order the stock must have a weekly close

above the 21 SMA. However, no trade is ever placed on this single event.

Any actual trades would be placed later after a trend confirmation signal,

which will be called our version of the “Key Price”.

Page 85 – “ Thus, a positive change of the trend must be confirmed by the

action of the Key Price.”

The Livermore Trading System has developed its own version of

Livermore’s “Key Price”. Today’s technology has allowed simplification

of his concept into a usable, practical application.

Page 58 – “ It would not surprise me if the persons who in the future follow

my method of keeping these records get even more out of them than I have.

This statement is based on the premise that, whereas I arrived at my

conclusions some time ago, as a result of my analysis, those beginning to

apply this method may very readily discover new points of value that I

missed.”

This is important to remember, when the stock’s price bar crosses the 21

SMA and closes on the upward opposite side of the 21 SMA; this price bar

will becomes a Signal Trend Reversal Bar (STR); our Key Price.

No stock trades are ever made or taken off a STR bar itself. It is only a

reference point to begin looking for the buy entry price. Again, this is

today’s version of Livermore’s Key Price equation.

Page 85 – “ Thus, a positive change of the trend must be confirmed by the

action of the Key Price.”

Page 87 – “ From these records one can visualize a map useful in

determining the approach of important price movements.”

Below in Chart 7, AA crosses the 21 SMA and closes on the opposite side of

the 21 SMA. As you can see there are numerous STR bars, both up and

down, again these STR bars do not signal that a trade should be made.

35

These are only a notification that a potential change of trend direction could

happen.

The STR bars simply put you on “notice” that a potential change in trend

direction could be in the near future. This is why it is so important for you

to check your selected top performing stock price each week.

Page 87 – “ From these records one can visualize a map useful in

determining the approach of important price movements.”

Chart 7 is a chart of AA and it is over a 56-week time period. There are

numerous Signal Trend Reversal bars - STR’s, as the stock closes on either

side of the 21 SMA. Important both up and down, STR’s are formed. Please

remember that these STR’s are weekly price bars of the selected stock and

that this is normal behavior of any stock.

Also remember it is only at the end of each week that our price bar is

actually completed. This is the beauty of the Livermore Trading System.

The attractiveness of the Livermore Trading System is that you only need to

check the closing price of the selected stock once per week on the weekend.

Chart 7

So, what actually initiated the AA buy signal? First, anytime that a STR bar

has formed you will immediately get to “work” to determine the actual buy

entry price.

36

This STR signal will initiate the counting process for the “all-clear” buy

trade signal to enter the selected stock (AA) with your trading dollars. This

work will result in the actual price signal that would tell you when to place

the buy order and at what price. You will be ready to move forward.

This will provide a clear confirmed change in the direction of your selected

stock. You will know when to buy your stock in advance because you did

this simple mathematical work.

Page 87 – “ Someone has said that success rides upon the hour of decision.”

Page 89 – “ Remember: there is always a reason for a stock acting the way

it does.”

The Livermore Trading System will look to buy the selected stock on

the weekly close of the first closing price bar that is at least a 5% higher

in price difference from the last current weekly STR bar closing price.

Or said another way look to buy the selected stock if the stock’s weekly

close is at least a 5% higher price difference from the most current STR bar

closing price.

As in the example in Chart 8, the AA weekly price bar close was $8.25 on

October 11, 2013. This close would now be above the 21 SMA; therefore, it

is now a new STR bar. The 21 SMA line is at the $8.03 level. Going

forward, you will never need to know the 21 SMA price level; it is only

given in this one example.

This new STR bar on October 11, 2013 would now signal you to begin the

counting process as you look to purchase AA stock. Simple math is now

performed to determine the entry price.

A clear signal to buy AA would be given should a 5% or higher closing

price happen from the October 11, 2013 STR bar closing price of $8.25.

This buy signal would be taken without hesitation. A weekly close at or

above $8.66 was the buy signal price. This signal happened the week of

10/25/2013 and a market order to buy AA was entered on the following

Monday morning after the weekly closing price of $9.17.

This purchase order of AA would take place when the AA weekly price

bar closes at or above the $8.66 level without first closing back below

the 21 SMA. A close back below the SMA would invalidate the current

upward STR bar.

37

To review, on the weekly close of October 11, 2013, AA did close above the

21 SMA. It had a closing price of $8.25.

It now became an upward STR bar and has the potential to show a change in

market direction, so this initiated our counting process to define the actual

buy order purchase price.

Chart 8

October 11, 2013 AA closing price - $8.25

$8.25 x .05 = .41 $8.25 + .41 = $8.66

Buy AA if the closing price is $8.66 or higher on a weekly close without the

STR first crossing back below and then closing below the 21 SMA. This

would void the initial upward STR bar and the potential upward trend

change. The original downward trend would have remained intact.

AA closed at $9.17 on October 25, 2013. A buy market order was entered

the following Monday morning to buy 100 shares of AA. The order was

filled at the opening price of $9.15 on October 28, 2013. At the time the

purchase order was placed, we also placed a “stop loss” order at $7.75. You

will soon learn more about a stop loss order.

Page 89 – “ The intent is to catch the major moves, to indicate the beginning

and the end of movements of importance. And for such purpose you will find

the formula of singular value if faithfully pursued.”

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It is important to remember that in this trading game you could always be

wrong. Always place a initial stop loss order to get out of the stock should

you be wrong. Learn to live and fight another day!

Before going further into positioning a stop loss order, you need to learn

more about volume and the role that it plays in your trading.

Volume is so very important. It is the second piece of data used in your

technical analysis of your top stock. Once you learn to understand this

indicator, you will be able to identify powerful explosive movers. It should

be called the “Master Key to Riches”!

When you look at the volume of AA at the time of its purchase over 7.5

million shares traded in the month of October 2013. The twelve months

prior it had only averaged around 4 million shares monthly.

Volume shows you the strength of a particular move. In other words, it

shows how powerful the buyers are in your stock. Moreover, this is

important because for the market to work correctly every buy order must

have a sell order as well. Now if there is a buy order for every sell order

then how does volume actually show movement of the stock in your desired

direction?

Easy, there are many more buy orders hitting the market from ever

increasing buyers wanting more and more of your selected stock and the

limited number of sellers of the stock just keep raising their prices as they

want more money for their shares that they are selling.

It could be called the ultimate game of “tug of war”. The stronger

participant with the strongest desire will always win.

You must always have increasing volume when buying your selected stock.

It is the “life blood” of successful trading.

Page 21 – “ At the beginning of the move you will notice a very large volume

of sales with gradually advancing prices for a few days.”

Volume is certainly an important indicator that will often help determine if

you are successful. Later you will learn how volume can help you exit with

“maximum” profits. Another and equally important observation that

separates successful traders from the rest of the market participants is that

they have a clearly defined plan for getting out of their trade.

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Whether it is at a loss or a profit. Knowing when to exit is supreme.

Nothing is more important.

“Cut your losses and let your profits run”; you will sell either at a profit or at

a loss. When you cut your losses, you sell your stock at a small loss so that

you ensure that further larger losses are not sustained.

Additionally you let your profits run upwards so that they will continue to

perform in the projected manner, not selling them too early. Your aim is now

to determine how far it will run upwards before you sell at a profit.

Like every plan, the Livermore Trading System appears easy but it is a

challenge. The challenge that most people have in doing this is that when

they cut their losses they are admitting that they were flat wrong. “Losers”

hate this thought. Because of that, they are soon out of money by letting

losses grow.

Page 17 – “ Therefore the investor must guard his capital account just as the

successful speculator does in his speculative ventures.”

Page 18 – “ Speculators in stock markets have lost money.”

Traders will often play games with themselves by telling themselves that

“maybe if I wait another week it will come back up”. A week goes by and

their stock sinks even further then they say, “it’s down too far to sell now, so

I’ll just wait until it comes back up!”

Being “wrong” simply destroys many novice traders. However, it is

essential that as a successful trader you are able to handle being wrong, you

must learn that it is OK to be wrong. And, it’s even better to find out why.

You must be humble and understand that you must always know that you

could be wrong. Cut your losses is the most important trading rule. Your

first loss is the best loss. You do not have to like it but get comfortable with

taking a loss. It is OK.

Trading is a very interesting dichotomy; you must be humble and yet be able

to take risk. You must learn to let your profits run.

Page 21 – “ When a stock gets into a definite trend, it works automatically

and consistently along certain lines throughout the progress of its move.”

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Most people in this world take profits too quickly because they fear losing

them. When they see money “on the table” proper trading logic disappears

and they want to ‘take the money and run”.

Page 24 – “ You have had patience to stay with the stock all during its

natural progress.”

When faced with a profit you must be prepared to let that winning position

continue and possibly develop into a more profitable position.

This sounds easy but your instinct will be to lock in your profit while you

can and not risk losing it, even though you have the opportunity of a greater

profit potential. The second most important trading rule is to let your profits

run.

What is the best way to initially cut your losses and let your profits run? The

best way to cut your losses is to use a “stop loss”. A stop loss is set at a

predetermined price level at which your stock position is closed and you no

longer own the selected stock. This happens when you are wrong about the

direction of your stock. It goes against you. Setting stop losses and holding

fast to them is critical to your trading capital’s survival.

You will always be prepared for a losing trade and make certain that you do

everything you can to protect your assets. You must understand that losses

are a normal part of trading. This is why not everybody is a trader. Very

few people can handle a loss. How about you could you handle three losses

in a row? It could happen, so you must protect your capital by keeping your

losses small.

There are many ways of selecting a stop loss. You are going to keep it

simple. There are quantities of books on the different ways of setting stop

losses. All of them work. Initially, you are going to simply bracket a price

bar or a series of price bars.

Earlier we said that a buy market order to purchase 100 shares of AA was

entered and filled. The order was filled at the opening price of $9.15 on

Monday, October 28, 2013. At the time of the AA purchase, a stop loss

order was also entered at $7.75. So, what does this mean?

Should we be wrong in our analysis and AA drop like a rock instead of

going up then our stop loss order price would be “hit” or realized and we

would have been taken out of the market with a $1.40 per share loss.

This is really a much larger loss than is normally acceptable.

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Very often, the largest loss potential is when the stop loss is placed with the

initial buy order. Why, you need to give your top stock some “wiggle”

room. Livermore traded this way.

Never set your stop loss too close to your entry price. You need to allow

your stock price some freedom to act normal. You could potentially be

stopped out only to look at it again months later at trading at all time highs.

Most important, stop loss orders are never moved downward. If that thought

occurs to you then stop trading and exit all shares. Never lower a stop loss

price. You are fooling yourself. A loss is not personal.

Chart 9

In both Charts 8 & 9, you see that the stop loss price is right at the “support

level” of AA. This is a clear Pivotal Point.

A support level is a price level that AA has moved down to and has

remained there as if it were resting on an “invisible glass floor”, Pivotal

Point.

The consensus of buyers and sellers has decided that the price of AA has

gone down far enough. It has found support at the $7.50 - $8.00 price level.

Soon we will talk about “resistance levels” or his Pivotal Points when we

look to exit with a nice profit.

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Resistance is a price level that the price of AA moves up towards but seems

to fade and not go any higher, as if there was an “invisible glass ceiling” that

was keeping it from moving higher.

Support and resistance, Livermore’s Pivotal Points, are all about supply and

demand. In Chart 10, can you imagine a “glass” floor and ceiling in AA?

Chart 10

Before moving on to exiting with your hard earned profit you need to know

more about entering a stock position. As you saw, we entered AA as price

broke above the 21 SMA and there was a nice increase in volume. We were

in the right industry group and our stock selection met our system’s

requirements.

Nevertheless, what would happen if we had waited longer to enter and

completely missed the first entry signal? Let us just say that we were “late

to the party”.

Let us say that you did not notice AA until sometime in late December 2013.

You saw that on Friday December 27, 2013 that it closed at $10.64. It had

everything that you were looking for, the best performing industry group,

name recognition and great volume.

It was your best selection in the best group. What should you do?

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Place a buy order on the following Monday morning at the opening price,

which was $10.63. In addition, you would place your stop loss at the most

recent low which was during the week of December 13, 2013.

You are going to make money, so do not worry about where you entered,

simply get in the game. When you do, you must protect yourself! Always

use an initial stop loss!

Chart 11

You can always enter a stock that has already begun to run upwards. It’s

never too late to buy!

However, to make sure that you can make money in it you should be aware

of the next “resistance” price level. Why is this Pivotal Point important?

You may not want to buy if the stock is near a recent resistance level. A

decision like this often depends on volume. There is an extra section on

volume at the end of the book.

In Charts 10 and 12, AA run into trouble in both 2010 and 2011 and in both

cases the stock turned down when it hit its resistance price levels.

Interestingly, the more times that resistance area is tested the stronger the

potential of a bullish breakout move to the upside.

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This time AA could have enough strength to break through that glass ceiling.

If it does get ready for a nice run up as the next resistance level for AA is in

the $16.00 - 17.00 range! If it moves upward through the $16.00 - 17.00

range the next stop might be in the $30.00 range.

Should you purchase AA at the last current price of $13.52 in Chart 11? Not

necessarily. Even though the probabilities are in your favor that AA is going

to continue to advance it may not be enough to warrant an initial purchase

now. Many professional traders are beginning to think about exiting AA

with a nice profit in the resistance zone of $16.00 to $17.00. They like to

lock in profits, as they know they can always buy it again should it break

through the overhead Pivotal Point resistance.

If you have not purchased your selected stock, the best buying advice as it

approaches its most recent resistance zone is to wait, monitor and if it breaks

upward through that overhead resistance, Pivotal Point, then place your buy

order.

Page 20 – “It may surprise many to know that in my method of trading,

when I see by my records that an upward trend is in process, I become a

buyer as soon as a stock makes a new high on its movement, after having a

normal reaction.”

The stock could then be in for a big move. (Do not forget to place a stop loss

order).

Chart 12

45

In way of review, you know the importance of placing your stop loss and the

role that understanding how a stock’s support and resistance “Pivotal Points”

levels could play into your trading decisions. You know you must live by

the saying “Cut your losses and let your profits run”.

This is all so very important to your trading life but like most traders, you

need to know when and how to actually take your much deserved profits.

You have let them run and now you need to take your profits.

This is just as important as cutting your losses. Remember this, your profits

are to be larger than all of the small losses that you incurred.

It is of great importance that you have taken steps to make certain that you

get the most out of your profits. Unbelievably you can go broke taking

profits. You may ask. “How is that?” Easy, you take your profits too early

and they do not offset your past losses.

Livermore knew to give his stocks room to move around with the overall

market. You cannot be worried about losing your profit. No trader know

matter how accomplished can exit at the high of every move. It is

impossible.

Moreover, if they have it is only because of dumb luck. 99.99% of the time

a stock’s high price will have already happened before you will make an

exit.

In fact, this is actually, what you want to happen. You must allow your

stock to run up as much and as far as it can. It will only be in hindsight that

you actually know where the high of the stock was.

There are many different strategies available when exiting a stock position.

While some exit strategies are better than others are but their use is

mandatory. You must have an exit strategy that works for you.

In the Livermore Trading System, the stock’s price is what took us into the

market and therefore it will let it take us out of the market. The same

techniques for entry will be used only in reverse for your exit. Again, you

must learn the importance of understanding volume when exiting a position.

Page 24 – “ You have had patience to stay with the stock all during its

natural progress. Now have the courage and good sense to honor the

danger signal and step aside.”

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It cannot be stressed enough, learn all you can about volume. The majority

of traders do not understand volume. If you know how to interpret volume,

it will place you far above the trading crowd and their noise. The last

chapter will cover volume in more detail. At the time of this writing our long

2014 AA stock position is still in play and no profits had been taken. It is in

a profit position. The profit taking techniques described here will be used to

exit the current AA position when its price dictates that we exit.

Page 27 – “ If you have timed the movement correctly, your first

commitment will show you a profit at the start. From then on, all that is

required of you is to be alert, watching for the appearance of the danger

signal to tell you to step aside and convert paper profits into real money.”

In this exit example, a past move of AA will be used. The upward move

from April 2009 – February 2010 will be examined and explained from

purchase to profit. In March 2009, AA was coming off an extreme low. All

stock markets had “crashed” in 2007. There were buying opportunities

everywhere but investors and traders alike were shaken to their core from

this 2007 - 2009 meltdown. The media was buzzing with their unending

noise saying that this time the “market crash” was different.

It is never different; it is always the same. Moreover, it is because the

market participants never change. With humans, it is all about fear and

greed. In Chart 13, AA decline over 86% from May 2008 – March 2009.

The Livermore Trading System either had you out of or short the market!

Chart 13

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For this example, it is assumed that AA was the “Best Performing” stock in

the best performing index, the Dow Jones U.S. Aluminum Index in early

2009.

Chart 14

In the chart above AA had shown great strength. With a significant amount

of volume, its decline was stopped and its direction was changing.

It took massive buying power to accomplish that move. Think of driving a

car down a steep mountain and the power need to change that direction. AA

was not going down any further.

Three weeks later AA formed a STR bar as it closed above the 21 SMA.

That signal trend reversal bar was marked and the needed simple math was

performed. On April 9, 2009, AA had a closing price of $8.36.

$8.36 x .05 = .41 $8.36 + .41 = $8.77

Buy AA on weekly close of $8.77 or higher. This order would be invalid

should AA close back below the 21 SMA before $8.77. It would have

formed a STR bar in the downward direction, so that the original trend was

still intact.

On Friday May 1, 2009, AA closed at $9.08. The purchase order to buy 100

shares of AA was placed on the following Monday morning before the

market open. The buy order was filled at $9.45.

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In addition, a stop loss order was entered right below the most recent low at

$7.65. This was very important. Always use good judgment. The stop loss

was placed at $7.64.

Chart 15

AA continued to do as planned, go up in value. While it is never a “sure

thing”, the initial stop loss was there in case the purchase was wrong. It is

always placed for initial protection. The stop loss was placed wide enough

away from the entry to give AA room to move normally as it should.

Chart 15 shows that AA’s movement came close to the stop loss one week

later before moving higher to its first resistance level, Pivot Point.

AA was determined in its climb. The trading plan was coming together

nicely. It was also predetermined by chart examination that its first real

price resistance or Pivotal Point would come in the $11.50 price range.

This AA price resistance zone had been tested previously in both 2008 and

earlier in 2009. That resistance zone was tested again during the week of

June 12, 2009 as seen in Chart 16. AA hit that price level and retreated

down to its previous support level at the $8.50 price range.

During the second week of July 2009, it gathered volume and moved

decisively higher. The “glass ceiling” was broken that first week of August

2009.

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Page 20 – “It may surprise many to know that in my method of trading,

when I see by my records that an upward trend is in process, I become a

buyer as soon as a stock makes a new high on its movement, after having a

normal reaction.”

Chart 16

As displayed in Chart 16 what was once “resistance” now becomes

“support”. Both are Pivotal Points, with a support level of $11.50, it would

now be safe to move up the initial stop loss to the level of the last significant

low. That last significant low was during the second week of July 2009 at

$8.49.

The stop loss was now set at $8.48. This would be the last time the stop loss

would be manually entered. Going forward AA’s price along with the 21

SMA will now dictate our exit strategy.

AA was moving perfectly according to the trading plan. Preparations had

been taken to cut any losses with the stop loss should a quick downturn take

place. It was now time to let profits run knowing that the stock itself would

signal when to exit.

Page 23 – “ Don’t let the stock go stale on you. After attaining a goodly

profit, you must have patience, but don’t let patience create a frame of mind

that ignores the danger signals.”

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Chart 17

In Chart 17, AA continued upwards until hit another long-standing

resistance level. This resistance level goes to as far back as 1997 ($16.55)

and 1999 ($17.15). Old Pivotal Points, which are price resistance levels, can

be hard to break. In addition, notice the increased volume spike.

At a new high, increased volume is a sign of heavy selling into continues

buying from the public, has this upward trend in AA ended? It appears that

there was selling at a previous Pivotal Point.

On Monday January 15, 2010, AA hit a new 52-week high of $16.75. A

large number of sell orders took place and the volume showed AA’s

intention. AA was going down but how far? No one knew at the time, as

only hindsight will tell.

In Chart 17, the following week after the 52-week high AA closed below the

21 SMA and a new downward STR bar was formed. Would this downturn

be short lived before it returns back to its upward trend or was this decline

going to be much greater in nature? No one knew, no one ever knows

during the moment.

A stock’s price movement does not matter to the successful trader when a

new STR bar is formed, the stock trader gets to work. The January 22, 2010

STR bar closed at $12.75. The trader’s work began.

$12.75 x .05 = .63 $12.75 - .63 = $12.11

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Exit AA on a weekly close of $12.11 or lower. As shown in Chart 17, the

weekly closing price of AA on Friday, January 10, 2010 was $12.11. This

was the exact exit signal price of $12.11.

The following Monday morning the market order was placed to sell AA.

That week AA profits were realized because of the Livermore Trading

System. On February 1, 2010, AA was sold for $12.36 per share. Our

$945.00 was now $1236.00 dollars.

The AA trade was held for 39 weeks and returned over a 30% gain.

This is what the Livermore Trading System can do for you. In fact, it

can produce even greater returns as market volatility increases in the

years ahead.

(All actual AA prices are used and were not adjusted for any dividends or

splits)

Now on to volume, could it be a more important technical indicator than

price?

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Bonus - Livermore Trading System - Volume

This may come to a shock to you but is it possible that Volume is a more

important indicator than the actual price of a stock? Think about it, volume

shows the struggle between buyers and sellers. This struggle is always

reflected in a stock’s price movement.

Many wish that Livermore had written more about volume. It is clear that

he used it in defining his trades.

Page 21 – “At the beginning of the move you will notice a very large volume

of sales with gradually advancing prices for a few days.”

Think about a stock that has a three-point rise on volume of 1,000,000 shares

that represents $3,000,000.00, but a three-point move in that same stock on

5,000,000 shares represents $15,000,000.00 dollars. Which trade do you

want to be in?

The answer may appear to be obvious but what really counts is where was

the stock price when all of this volume activity took place? Was it at a 52

week high or coming off a long down turn? Volume points to price’s

purpose of either buying or selling.

Many stock traders only look at the price of the stock that they are trading.

Many believe that price is the most important and only technical indicator

when trading. While they are correct to a large degree, disregarding volume

is like having an excellent racecar without any gasoline. It sure looks great

but where is it going?

Volume is similar gasoline in that it powers the movement of price. It is the

measurement of buying and selling taking place in a given stock over a

defined period of time. Every trade requires both a buyer and a seller. One

must be willing to sell and the other must be willing to buy at an agreed

consensus of value and price.

All stock traders should learn to interpret volume action and the effect that it

has in an establishment of a potential trend or immediate price movement.

There is always an interesting dynamic involved, what does the seller know

that the buyer does not know and what does the buyer know that the seller

does not know? Can you understand this great live debate between those

two parties?

53

For the most part no one really knows who is buying and who is selling. In

the end, there is only price to say who is right and interestingly we may

never know the names of the winners and the losers. Moreover, this is

where all of this comes together; volume is married to any price movement!

They are inseparable and should never be ignored as they come to the

market as one united tradable unit. They are together in their unity. By

knowing their past movements they will show you a hint of their future.

In order to understand the role that volume plays in price movement it is

necessary to understand the position of that stock at a given time.

High volume periods often signal trend reversals. In bull markets when high

volume spikes at the top of an upward trend with no more price increases or

even downward price movement this indicates that previous owners of the

stock are selling to new buyers coming into the market. In Chart 18 a

reversal in the upward trend has happened in Alcoa (AA) and volume

dramatically increased.

Chart 18

When you experience high volume during an upward trend with no

continuation of price movement, there is a strong suggestion that an

important prior resistance level, a Pivotal Point, has been encountered.

54

In addition, there is a strong likelihood that a correction will ensue. What

was the cause of AA’s reversal during the week of January 15, 2010? Chart

20 says it all.

Chart 19

Page 25 – “ A speculator of great genius once told me: “When I see a

danger signal handed to me, I don’t argue with it. I get out! A few days

later, if everything is looks right, I can always get back in again.”

Page 26 – “ Again let me say, the human side of every person is the greatest

enemy of the average investor or speculator.”

55

Chart 20

In the above daily Chart 20, the opening “gap” up in the price of AA on

January 11, 2010 shows what appears to be a great struggle on the part of

both the buyers and sellers. It was an exhaustion move. Actually, what was

happening was traders were moving out of AA and selling their stock to new

buyers.

Those new buyers were likely “Mom and Pop” long-term investors. The

price gaps, volume and the irregularity of this price movement said that this

move was completely over.

Page 24 – “ Now have the courage and good sense to honor the danger

signal and step aside.”

Page 13 – “ Profits always take care of themselves, but losses never do.”

When a trend appears to struggle and then goes nowhere, as the daily bar of

January 11, 2010, this usually predicts a potential of a sudden reversal but

when combined with previous resistance and heavy volume it is definitely a

turning point, a pivotal moment.

Now in sideways market or “channel”, the direction of the stock’s

movement on increased volume will generally indicate the direction of its

next move, either up or down.

56

Take note of weekly Chart 21

Chart 21

Did the increase in volume predict AA’s next move upward? Yes it did.

Interestingly, the real buying of AA began in April 2013. Perhaps Chart 22

has the answer.

It is always important to watch volume in individual stocks like AA, not

only for the stock itself but also for the general overall market trend.

During this time-period CNBC and the other business shows had many

acclaimed market experts calling for a severe market correction of 20% or

greater.

Listen, you must turn off the noise, please. Livermore was right, these “tip

experts” mean nothing in the real trading world. Maybe the correction will

happen soon and the noisemakers will eventually be proven right. It appears

that someone forgot to tell AA.

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Chart 22

In closing, volume needs to be studied in greater detail by every stock trader.

Without question, it is the most ignored of all technical indicators. Yet, it

will likely tell you exactly what is going on with price, so always study

volume.

Volume should be looked at as a measurement of all market participants

with money entering and exiting a given market. Volume will always show

the level of interest from the market participants. It will show buying power

or selling pressure.

Study the markets and learn all that you can about them for the rest of your

life.

Now go make Jesse proud! Again, learn to enjoy the journey!

Garette Haire

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