Reminiscences of a Stock Operator Summary

Reminiscences of a Stock Operator is book about trading the markets in the early 20th century. And even though it's a semi-fictional book from 100 years ago, the lessons remain relevant even today. 

The book is based off the life of one of the most successful traders of all time - Jesse Livermore. Livermore made and lost millions trading stocks and commodities... And then made and lost millions again.

Livermore had many tips and quotes for successful stock speculations. He was successful when he followed his rules. But his biggest speculative blunders occurred when he ignored his rules and thought he was smarter than the market.

Seeing the results of going against ones trading rules makes this book particularly instructive. Most traders spend time reading about trading strategies and technical analysis. But the big money is made and lost through the psychology of speculators - in between our two ears. 

Let's continue on to learn the lessons to make smart trading decisions... And to avoid the blunders made by unsuccessful investors.

The Market as a Teacher

The best trading lessons come from the market itself. Livermore said,

There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!

Every time we book a loss, we should analyze the trade closely. See what happened and if we can avoid making the same mistake in the future. 

Winning traders learn from their losses.

Market Psychology & Trading

Most traders, even novice traders, have sufficient knowledge to make money in the markets. But we all have one big enemy... That chief enemy is ourself.

Traders need to be able to learn from their mistakes and at the same time not become shell-shocked. They have to take action when the market price action dictates it. And follow their plan. 

Livermore's top trick to market speculation is to add to winning positions... And never add to a losing position. But it's difficult to mentally follow this strategy. Especially after a few losing trades. But if that's the strategy, we have to be mentally prepared to do that. And to avoid the temptation to take a quick profit.

Guard Against our Own Nature

Speculators often fall victim of their own weaknesses. They listen to the wrong person who tries to persuade them to buy or sell something that they don't actually want. Speculation is a dangerous game because it involves taking risks. But there are ways to avoid being one of those speculators who lose money.

The most important thing you must do is understand what drives you. What motivates you? Why do you trade? Do you like making money? Or do you enjoy trading? If you're motivated by making money, you'll probably end up losing money. You'll find yourself jumping into trades that make no sense. And you'll likely see some pretty big swings in your account.

If you're motivated by enjoying trading, you'll take fewer risks. You won't be afraid to miss out on a few trades. And you'll keep your emotions under control.

For example, let's say you're a day trader. You wake up early every morning, check the market, and decide whether or not to go long or short. Then you place your trades. This might work great for a while. But eventually, you'll start missing opportunities. Your emotions will get the best of you. And you'll begin to panic about getting caught short. So you'll start selling off positions. And you'll become fearful of buying again.

You'll notice that you're starting to feel guilty about missing out on potential profits. And you'll start feeling anxious about having taken too many losses. All of this will lead to another round of missed opportunities. And you'll start panicking about getting stuck in a losing position.

So you'll start overreacting to small moves in the market. And you'll start worrying about how much money you've lost. And you'll start thinking about quitting.

This happens because we humans tend to act according to our nature. We follow our instincts. And we tend to ignore our rational side. Our emotional side.

What does this mean for traders? It means that we need to guard against our own nature. Because if we fail to do this, we risk falling victim to our own weaknesses.

And if you're a trader, you could easily fall prey to these tendencies.

It was my sitting that made me money

"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!" - Jesse Livermore

As traders we often want to take advantage of every move in the stock price. But it's important to remain patient. Sometimes the best trades are taking no trades at all. 

We must understand the market we are in and trade with the market. Successful traders don't try to fight the market. They find... 

The Line of Least Resistance

A line of least resistance refers to the path along which prices tend to move.

If you're in a bull market, the line of least resistance is higher. If you're in a bear market the line of least resistance is lower. 

Successful stock traders will look at the overall market to see if we're in a bull or bear market. Then they look for individual stocks that are trending in the same direction and invest in those. Finding stocks trending inline with the market is one of the best ways to make money in the market.

This concept is based on the idea that prices are attracted to areas of support and resistance. If a stock moves into a new area of support, it tends to continue moving upward. Similarly, if a stock breaks out lower of a previous range, it typically keeps moving downward.

Be Careful Trying to Pick Tops and Bottoms

One of the hardest things to do in the market is to pick a top or a bottom. Many people try... It's the hero trade. But the unpredictable markets make this a losing strategy. The market movements tend to last longer and move further than traders think. 

The old adage saying, "the markets can remain irrational longer than you can stay solvent" rings true. 

In the stock market, there are many different ways to make money. We don't need to pick the hardest ways to do so. 

Livermore says 

One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.

More profitable words have never been spoken. 

Many More Great Lessons Inside This Book

This book is full of insights on how to extract money from the financial markets. Wall Street doesn't have a monopoly on making money. And Jesse Livermore can help traders pull regular wages out of the markets.

We've barely scratched the surface in this article. Anyone wanting to trade in the markets to make real money should read this book.

Livermore is proof that if we take the time and learn successful trading strategies and apply the proper psychology, we can beat the market. That's what we preach here at barbellalpha.com.

Novice investors and experienced traders alike can learn from this financial classic. 

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