George Taylor emailed me asking why I don’t share the complete details of my personal trading methods. While I’m more than happy to talk about the general principles of how to trade and how Jesse Livermore’s view of trading can still be used as the basis of a trading system today, I won’t share specific details of my own techniques. Here’s why:
If you have a trading system that gives you an edge, you don’t go sharing it - not if you want to keep using it profitably. Think of it this way:
Imagine you discovered that at 4 a.m. each morning 100 gold coins would magically appear, scattered over a local beach. Getting up in the middle of the night is a pain but for 100 gold coins – well it’s good money. After a few days, in a generous mood, you share your secret with your best friend. Next morning at 4 a.m., you’ve got company on the beach. Your friend is there too – following an identical strategy to yours, gathering up the coins. From now on, you’re averaging only 50 coins a night.
Things go from bad to worse. Your friend tells his brother and his brother tells his uncle about the coins. Now you’re averaging 25 coins a night. Before too long, over 100 people know about the beach and then thousands have learned the secret. People are now making more money from selling books about gold coins on the beach than they are from actually going to the beach.
Arriving on the beach at 4 a.m. is no longer a useful strategy. It costs you more getting to the beach than you’ll be able to take in profit.
I hope that helps.
6 Responses to “Tell Me All Your Secrets”
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May 27th, 2008 at 1:07 am
You must trade a mechanical system. Otherwise, I don’t know why your so worried?
May 27th, 2008 at 3:03 am
Hi yoni,
You’re right - it’s mechanical/formula trading that I prefer not to talk about. Longer term trades made on the basis of economics - such as oil - I’m happy to talk about more freely.
What I said on my “about” page is:
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Trading:
My trading is discretionary, based on economic analysis and Livermore’s trading rules, especially:
* Buy rising stocks and sell falling stocks.
* Trade only when the market (or individual stock) is clearly bullish or bearish.
* Only enter a trade after the action of the market confirms your opinion.
* Continue with trades that show you a profit, end trades that show a loss.
* End trades when it is clear that the trend you are profiting from is over.
* Never average losses by, for example, buying more of a stock that has fallen.
* Never meet a margin call - get out of the trade.
More than that I won’t say because some parts of my trading strategy – possibly the elements that give it an edge – have been hard won and are not well-known.
Future Trading:
I’m experimenting with mechanical trading models with the aim of:
* Providing excellent profitability under normal market conditions.
* Lowering risk when markets are under extreme stress. (In case you’re wondering how this could be done: if you’re trading stocks you could do it by, for example, holding a short position in a downtrending stock for every long position in an uptrending stock. In the event of a catastrophic, market-wide price shift, the gains on the short positions should balance the losses on the long positions.)
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May 27th, 2008 at 3:31 am
Very interesting Mr. Lamb!
As I understand, you trade professionally now. How long did it take you to get there? To achieve profitability, and confidence.
May 27th, 2008 at 6:30 pm
I’ve been investing/trading for 10 years now. I gave up the day job in 2004.
Initially I had read a few books and thought I would be able to grow my money as a fundamental investor. (In Jesse’s words, which I didn’t read until later, I would have been a semi-sucker with hints of beginning sucker.)
I didn’t so much have to achieve confidence - I had too much of it - misplaced unfortunately.
You’ll see from one or two of my posts that I didn’t do very well at fundamental investing so I began paying more attention to the price trend which stopped me losing money and went on from there. Losing money does tend to bring down your confidence levels and it did mine.
Rather than confidence, I try to think in terms of rational decisions and irrational decisions - to keep my trading as unemotional as I can. I consciously make an effort to treat each trade as a data gathering experiment as opposed to a money gathering endeavor. I stop the experiment (get out of the trade) if the numbers go too far in one direction and continue it otherwise. I talk very little about my trading. It’s between my computer and me. These actions reduce the pressure I feel from trading and, if I’m under less pressure, I suppose you could say it improves my confidence. However much I try to make myself trade with all the emotional involvement of Mr Spock, a series of drawdowns easily undermines confidence. Money management keeps the losses lower than they would be otherwise and then it’s important to remind myself that I’m using tested, rational methods that should, on average, take money out of the markets. I wrote a little about how I test rational trading methods in my How I Try not to be a Fool post:
http://www.jesse-livermore.com/blog/how-i-try-not-to-be-a-fool/
May 30th, 2008 at 7:33 am
awesome.
Do you run your mechanical system parallel to your discretionary ideas? i.e. you take mechanic signals on instruments and place speculative bets using T/A and F/A separately
Or (and this is what I’m thinking) you integrate both, so you will look for confluence with your tape reading / T.A / and mechanic system?
if everything holds then this can turn into a long-term holding with a discretionary exit.
June 3rd, 2008 at 5:13 pm
There’s no integration.
The discretionary is based on economic analysis and Livermore’s trading rules
The mechanical is pure TA, based on trend following principles and takes no account of FA.