How to Trade In Stocks | By Jesse Livermore

BOOK REVIEW

By Cam R

Title: How to Trade In Stocks

Author: Jesse Livermore

After finishing Reminiscences of a Stock Operator (Review Here) and with my interest well and truly captured by the exploits of Jesse Livermore, I went searching for more information on the man. He was truly in a class of his own, with trading skills that (to borrow an observation from a financial commentator of that era) ‘should Livermore be shorn of every dollar, given a small brokerage credit, and locked in a room with tickers and phones, he would re-emerge with a new fortune.” How cool is that?

Anyway, it was surprising to find only one other book of much significance, which is How to Trade In Stocks, that presumes to shares his formula for successful trading. Authored by Livermore himself, does it do what it claims to do? Let’s check it out below.

Packaging - 2/5

A typical paperback, with slightly rough but decent quality white paper. The cover design is fine, but I felt the title was too generic somehow. After all, it’s authored by one of the greatest traders ever. It could definitely do with a iconic or stronger title than the boring generic one it has. It makes it looks like it’s from the range of ‘Dummies guide’ or ‘Learn ______ in 24 hours’.... The packaging could certainly use some improvement.

Writing Style - 4/5

Straight-forward and no nonsense style. Livermore writes in a matter-of-fact way, as someone who is very self-aware and self-assured in his ways. I get the sense that he is putting this book out there and will be happy if someone who is genuinely interested in studying about stock speculation (as opposed to the many I imagine who approach him only interested in soliciting tips) finds some benefit in the ideas he has put forth in the book. Even if no one does, it does not bother him since he is confident in his ability.

From his pen: “I have come to the conviction, however, that larger numbers of people interested in stock-market investment and speculation would be willing to work and study to attain sensible results, if only they had a guide or signpost pointing them in the right direction. And it is for them that this book is written.”

Trading Methods (Specifics) - 3/5

Livermore does indeed disclose and fully share his method of trading here, of which includes his theory of ‘time element’ in trading, amongst others. But he does it in a big picture sort of manner. There are no specific stock examples, but the way he describes his method is easy enough to grasp.

Here is how he goes about introducing stock speculation:

“To invest or speculate successfully, one must form an opinion of 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, but one has to be careful because people are often not predictable – they are full of emotion – and the market is made up of people. The good speculators always wait and have patience, waiting for the market to confirm their judgement. 

For instance, analyse in your own mind the effect, marketwise, that a certain piece of news which has been made public may have in relation to the market. Try to anticipate the psychological effect of this particular item on the market. If you believe it likely to have a definite bullish or bearish effect marketwise, don’t back your judgement “until the action of the market itself confirms your opinion.” The effect marketwise may not be as pronounced as you are inclined to believe it should be. Do not anticipate and move without market confirmation – being a little late in your trade is your insurance that you are right or wrong.”

He then goes on to talk more about other stuff he watches and monitors, along with an extended explanation on how to judge the ideal timing in which to get into and out of the stock. The end of the book also has the Livermore market key, which basically shows he keep tracks of key price changes, or pivot points as he terms them, in his notebook.

The content is rich and probably deserves a 4 rating. However, the book had a commentary by a man called Richard Smitten. I have no idea who he is, but the body of the book had him trying to explain his interpretation of Livermore’s method. Frankly, it is unnecessary and not in the least bit useful. I’m not even sure if he can actually trade. I didn’t find much value in Smitten’s portion of the book, and would advice readers to just skip it.

Trading Management (Soft Skills) - 4/5

Again, Livermore explains his thinking behind his management of the trade in a big picture manner and also stresses the importance of patience.

How he makes a compelling argument for the necessity of patience:

“The point I would emphasize here is that after forming an opinion with respect to a certain stock – do not be too anxious to get into it, Wait and watch the action of that stock for confirmation to buy. Have a fundamental basis to be guided by.

Say, for instance, a stock is selling around $25.00 and has been consolidating within a range of $22.00 to $28.00 for a considerable period. Assuming that you believe the stock should eventually sell at $50.00 and it is 25.00 at the time, have patience and wait until the stock becomes active, until it makes a new high, at around $28-29. You will then know that marketwise you have been justified. The stock must have gone into a very strong position, or it would not have broken out. 

Having done do, it is altogether likely that it is starting a very definite advance – the move is on. That is the time for you to back your opinion. Don’t let the fact that you did not buy at $25.00 cause you aggravation. The chances are if you had, you would have become tired of waiting and would have been out of it when the move started, because having once gotten out at a lower price, you would have become disgruntled and would not have gone back in when you should have.”

Wise words indeed, and he goes on to elaborate further on the above.

It also drives home again that the price of the stock does not really matter. Before I traded, I found the statement inexplicable to say the least, and maybe readers who are non-traders may find it so too. Perhaps it might help to think of it in this way. Imagine if you are interested in buying an apple which costs $1. You go back the next day and see it is at $2 now. Most people would not buy it because the price has increased by $1. They will only buy it if the price goes back to $1, because $1 is anchored in their mind.

But to a trader, the original price at which the apple was at is not as important as the question of whether the price will continue to increase with a high degree of probability. Whether the apple is bought at $2 and sold off at $4 the next day, or bought at $50 and sold at $52, you will still get the same $2 profit in both cases.

Instead of the typical 'buy low, sell high' mantra, it would be more useful to think of it as ‘buy high, sell higher’, (or ‘sell low, buy lower’ for shorting). Emphasis on the exit price. I think this was probably one of Livermore’s key ideas that he shared amongst his many insights. And it comes through more in this book.

Trading Psychology (Mindset) - 3/5

Livermore’s interest in psychology, though not explicitly stated in the book, comes across quite strongly when he talks about speculation. And there is a nice chapter where he talks about the human traits of being hopeful and fearful. He definitely has a very keen insight into human psychology, and he does share his insights and recommendations in here.

Longevity - 2/5

Very grounded in the practical basics. I find myself occasionally flipping back just to reread some of his practical advice.

Value - 4/5

Well worth a read through. Some of the examples are fresh, and the introduction at the beginning about his ‘eccentricity’ at the bank was interesting to say the least. It would be interesting if someone actually does it in this time and day.

Things to Watch Out For -

His exact market key probably won’t be of much use in the modern markets of today. And it could probably do with a reissued version that has just the original text of Livermore and none of that Smitten commentary.

Overall - 3/5

Very educational book about stock trading, though it is probably not as widely cited as Reminiscences. This is likely due to its more factual tone. Think of Reminiscences as the guided tour while this is the blueprint. They are for different audiences, but I do feel this makes a nice supplement to anyone who has read Reminiscences. Livermore’s aim was to act as a signpost for anyone wanting to learn about speculation, and I think he does a mighty fine job here.

Score Recap:

Packaging - 2/5

Writing Style - 4/5

Trading Methods (Specifics) - 3/5

Trading Management (Soft Skills) - 4/5

Trading Psychology (Mindset) - 3/5

Longevity -2/5

Value - 4/5

Overall - 3/5

Where to Buy:

If the above review was useful to you and you want to buy the book, please consider buying it through my Amazon affiliate link below. The prices are competitive, and any purchase goes a long way in supporting this site. Thank you!

Related Books
If you have not yet read the biography of Jesse Livermore titled Reminiscences of a Stock Operator, be sure to check it out. It's a marvellous book. My review has more information, and the link is here for your convenience. (Review Here)

Thank you very much for reading!
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