(Last Updated On: October 16, 2019)

Jesse Livermore’s $100 Million

Jesse Livermore was a well known and respected trader that dominated the market in the 20s and 30s. In the fall of 1929, the Dow was up big after a steady 6 year run. Euphoria took over the market and everyone was getting in on it. Brokers promoted loans so that people could buy stocks… and the people couldn’t get enough. The outstanding loan totals ballooned, reaching $8.5 billion.

The market levels off and starts to decline into September 1929. Jesse Livermore spots an opportunity. “Boy plunger” or “The Great Bear of Wall Street” as he was referred to, despite the cautioning of everyone else, begins to heavily short the market. About as contrarian​ as it gets… bold to say the least.

The Crash

In the weeks that followed, the market went through what is now referred to as “The Great Stock Market Crash of 1929.” We’re talking stupid, insane drops. It still remains the most destructive stock market collapse in history. On October 24, Jesse Livermore's Method - black tuesdaythe market dropped 11% on very heavy trading. The huge volume meant that the report of prices on the ticker tape at brokerage offices throughout the country was hours late, meaning traders had no idea what most stocks were actually trading for at that moment, which only increased the panic. This crash included a two-day, 25% fall on October 28 & 29 of 1929, two dates now referred to as “Black Monday” and “Black Tuesday.” In Dow fell hard in the weeks, months, and years, nearly 50% from the highs it hit in September. The official low wasn’t put in until in 1932, resulting in an 89% drop in just 3 years.

jesse livermore - depression

The “plunge protection team” existed back then too. On October 29 of 1929 (Black Tuesday), William C. Durant met with members of the Rockefeller family and other financial giants to buy large quantities of stocks to attempt to show the public that they were confident in the market (think modern day Carl Icahn, Warren Buffet, George Soros, etc.), but their efforts couldn’t stop the market from continuing the fall. The market as a whole had lost over $30 billion in just two days which included the $14 billion loss on October 29.

So many believed that the stock market would just continue to rise forever. People freaked. Wall Street freaked. This crash, which followed the September crash of the London Stock Exchange, is essentially what began the 12 year period that we know today as “The Great Depression.” I can imagine the nation in a panic and Wall Street in a selling frenzy, while Livermore just stood there smiling, knowing what he had accomplished. The man saw astronomical gains while so many lost everything. Gains simply unheard of at the time. His profit, not only from the initial fall but also the continued decline, is still referred to as one of the largest wins by a trader in history, totaling approximately $100 million. In today’s figures, that equates to approximately $1.3 billion! Think on that for a minute…

Livermore’s Method

Jesse’s methods were fairly simple, but two key characteristics were necessary – patience and discipline. Not much of a surprise from the man who dropped the famous quote, “Men that are both right and sit tight are uncommon.” While Livermore practiced several rules when trading, his primary form of analysis is what’s intriguing. He used what he referred to as “pivotal points” to determine entries and stop levels. These points were things like what we know today as support, resistance, swing highs, swing lows, HOD, LOD, etc. The crazy part? Livermore didn’t use charts. He was a ticker tape junky, and developed these pivotal points based on reading the ticker tape quotes.

He developed a watchlist of the strongest stocks within the strongest sectors, and as they’d climb, he’d buy as they put in new highs. He’d let the profits ride, and add to positions that kept playing in his favor. He traded in and around price action changes to further boost his returns, and he wasn’t afraid to trade long or short depending on what the market was telling him at the time.

Eventually, his key stocks wouldn’t go any higher, and started to decline. If price couldn’t put in new highs on the retest, he read it as a signal that the broader market would fall. He concluded that if the strongest stocks in the market couldn’t go any higher, it was highly unlikely that the rest of the market would continue higher. It was this method that allowed Jesse to spot the market turn and profit $100 million from the crash in 1929.

Some of his other rules (many of which are staples among traders today) that he used to find entries, exits, and control his trades include:

• Good trades tend to see profits quickly. Let these profits run, and close any losing trades promptly. If using pivotal points to trade, it should become evident within a few trading sessions whether or not the trade is “right” or “wrong.”

• Focus on just a few stocks that are moving well. Don’t over-trade.

• Always trade with a well formulated plan, and never deviate from that plan.

• Buy strong stocks in bull markets. Short weak stocks in bear markets. Only trade with the overall trend of the market.

• If there’s no clear signals, don’t trade.

• Always trade with a stop loss, and honor it.

• Add to positions which show a profit, never add to positions which show a loss.


Jesse Livermore's Method

Jesse Livermore less than 24 hours before his death in 1940

In 1939 Jesse final wrote his own book, which he titled How to Trade in Stocks. In it, he breaks down his personal journey, insights, and trading methods. It deals almost entirely with price action and technical analysis. Livermore shares one tip after another that he used to gain success in the stock market, with one example being that Livermore was very focused on generating profit right from the start. He goes into great detail to describe certain circumstances you should watch for to maximize your profits right from the start. A very valuable lesson for any aspiring trader.

Despite making and losing huge amounts of money in the market, Jesse Livermore is still considered by many to be one of the greatest stock traders of all time. His unbiased ability to capitalize on both uptrends and downtrends is rarely matched, even to this day. On the occasions that he lost large amounts of money, he admitted that it was directly related to him straying from his tested methods.

Even though Livermore experienced overwhelming success, he battled constant depression and eventually took his own life in 1940. These constant bouts with depression, along with other personal issues most likely kept him from ever achieving his full potential. That being said, the lessons he left behind provide traders with valuable insight when it comes to price movement within the markets, which are still applicable even today.

If you haven’t had the pleasure of reading Reminiscences of a Stock Operator, which is a story based on Jesse Livermore, I highly recommend you check it out.


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