How the World’s Greatest Trader Started at Zero
Jesse Livermore started trading at the age of 15 after running away from home, and made thousands of dollars profit before he was 20 years old. He became one of the world’s trading greats, making and losing several fortunes trading stocks and commodities such as wheat and coffee. He was reputed to have made over $100 million in one day in the stock market crash of 1929, an amount that would be equivalent to billions of dollars in today’s money.
In his day, Jesse Livermore was a larger than life character, with his 300 foot yacht, and opulent lifestyle and was noted as playing the short side of the market on an enormous scale. How did he make so much money, and what can we learn from his life story?
Jesse Lauriston Livermore was born in 1877. He was always very good with numbers, and ran away from home (with his mother’s blessing) to work as a board boy in a stock broking firm. It wasn’t long before he was tracking how individual shares traded, and he made his first successful trade in a bucket shop with $5 of his savings. Bucket shops were disreputable brokers that “bucketed” the customer’s trades, automatically closed them out if the trade went to a loss of 10% and kept the money and took the opposite side of the trade and reluctantly paid out in the event of a win.
Livermore quickly learned the benefit of the automatic stop loss provided by bucket shops, and rapidly started making a lot of money out of them. Not surprisingly, he was banned, and looked for real brokers to start trading stocks.
In his day, the ticker tapes were often substantially behind the market. By the time Livermore placed a trade, the market had already moved away. He quickly lost his money. He started making it again when he understood that money was made with the large movements, not the small ups and downs that most traders pursue. In addition, he had his own special trading room, with board markers updating trades directly from the floor. In this way, he had the most up to date information available. He used his own pattern recognition approach:
All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.
While he was refining his methods, Livermore was sometimes left without a trading stake. He played with huge amounts of money and leverage, and took on enormous risks, and sometimes he was on the wrong side of trades. This typically happened when he ignored his own personal rules, or trusted someone else instead of relying on his own judgement. Later in life, he took special measures to isolate himself from market gossip and set up multimillion dollar annuities to ensure that he always had income to start again.
In time, Livermore developed a good sense of the markets. But instead of placing his entire trade at once, he used “probes”, which were smaller trades to test the direction of the market. If they went his way, he invested more into the market, until his entire trade was placed. He did the opposite of what traders do when they average into a losing position.
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Tags: Jesse Livermore, millionaire trader, stock trader, Trader biography