Back to Library

Trade Like Jesse Livermore

by Richard Smitten (2001)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

Trade Like Jesse Livermore

By Richard Smitten

Quick Summary

A detailed reconstruction of Jesse Livermore's complete trading system, covering timing, money management, and emotional control. Richard Smitten, who spent years researching Livermore's methods and interviewing surviving family members, presents the specific technical formulas, pivotal point analysis, and money management rules that enabled Livermore to amass fortunes including over $100 million from the 1929 crash.

Executive Summary

"Trade Like Jesse Livermore" is the companion technical volume to Smitten's earlier biography of Livermore. While "Reminiscences of a Stock Operator" (by Edwin Lefevre) described what Livermore did, this book explains how he did it. The system is organized around three pillars: Timing (when to pull the trigger using pivotal points, continuation signals, and reversal patterns), Money Management (the five rules for position sizing, loss limits, and profit protection), and Emotional Control (maintaining psychological discipline against internal impulses). Smitten drew on interviews with Paul Livermore (Jesse's son) and Patricia Livermore (daughter-in-law) to reconstruct methods that Livermore kept secret during his lifetime.

The Livermore Trading System

Timing: Pivotal Point Trading

Livermore's central concept was the "pivotal point" -- a price level where a stock's trend is likely to change direction or accelerate. He identified two types:

  • Reversal Pivotal Points -- Price levels where trends reverse, identified through pattern recognition and volume analysis
  • Continuation Pivotal Points -- Points where stocks break out of consolidation to continue existing trends

One- and Three-Day Reversal Signals

Specific candlestick-like patterns Livermore used to identify short-term trend changes, combined with volume analysis for confirmation.

Money Management Rules

  1. Probe System -- Enter positions incrementally, testing the market with a small position before committing full size
  2. 10% Loss Rule -- Never allow a single position to lose more than 10% of its value
  3. Cash Reserve -- Always maintain a cash reserve; never be fully invested
  4. Sell on Reason -- Do not sell simply because of a profit; require a reason to buy and a reason to sell
  5. Windfall Rule -- After a windfall profit, put half in the bank immediately

Emotional Control

Livermore considered this the most difficult aspect of trading. Key principles include preparing mentally and physically for each trading day, maintaining absolute secrecy about positions, and recognizing that the biggest battles are internal.

Critical Assessment

Strengths

  • Based on primary source interviews with Livermore family members
  • Provides specific, actionable trading rules
  • The probe system and money management rules remain highly relevant
  • Applicable across any time frame from day trading to long-term investing

Limitations

  • Some rules have been romanticized through retelling
  • The software product mentioned in the book appears to have been unsuccessful
  • Modern markets are far more liquid and electronic than Livermore's era
  • The book lacks rigorous backtesting of the system on modern data

Conclusion

Smitten's reconstruction of the Livermore system provides a valuable framework built on timeless principles: trade with the trend, probe before committing, cut losses quickly, and let profits run. While the specific historical context has changed, the underlying logic of pivotal points, risk management, and emotional discipline remains as relevant today as it was a century ago.