These are the tried and true money management rules for traders, given to us by the greatest trader of all time.  I felt obligated to share these points as I read through them- even though I am more of a long term investor.

I have always said that there are many ways to make money in the market and that you can always learn from others.  That said, please take these words of Mr. Livermore and figure out what they mean to you and your investing or trading plan.

1) Don’t lose money.

Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line.
There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.

2) Always establish a stop.

A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital.
I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining, tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take your losses quickly and get out.

Remember, never meet a margin call, and never average losses.
Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me:J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right, and I would sell out of my position in the blink of an eye.

I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes.

Take your losses quickly. Easy to say, but hard to do.

3) Keep cash in reserve.

The successful speculator must always have cash in reserve for exactly the right moment. There is a never-ending stream of opportunities in the stock market and, if you miss a good opportunity, wait a little while, be patient, and another one will come along. Don’t reach for a trade, all the conditions for a good trade must be on your side. Remember, you do not have to be in the market all the time.

The desire to always be in the game is one of the speculator’s greatest hazards.
When playing the stock market, there are times when your money should be waiting on the sidelines in cash waiting to come into play. Time is not money “ time is time, and money is money.

Often money that is just sitting can later be moved into the right situation at the right time and make a fast fortune. Patience is the key to success, not speed. Time is a cunning speculator’s best friend if it is used wisely.

4) Let the position ride.

As long as the stock is behaving normally, do not be in a hurry to take a profit. You must know you are right in your basic judgment, or you would have no profit at all. If there is nothing basically negative, then let it ride. It may grow into a very large profit. As long as the action of the overall market and the stock do not give you cause to worry, have the courage of your convictions, and stay with it.
When I was in a profit on a trade, I was never nervous.

Of course the opposite is true as well. If I bought a stock and it went against me I would sell it immediately. You can’t stop and try to figure out why a stock is going in the wrong direction. The fact is that it is going in the wrong direction, and that is enough evidence for an experienced speculator to close the trade.
I do not and never have blindly bought and held a stock.

To buy and hold blindly on the basis that a stock is in great company or a strong industry, or that the economy is generally healthy, is, to me the equivalent of stock market suicide.

Stick with the winners. Let them ride until you have a clear reason to sell.

5) Take the profits in cash.

I recommend parking 50 percent of the profits from a successful trade, especially when the trade doubled the original capital. Set the money aside, put it in the bank, hold it in reserve, or lock it up in a safe-deposit box.

Like winning in the casino, it’s a good idea, now and then to take your winnings off the table and turn them into cash is the single largest regret I have ever had in my financial life was not paying enough attention to this rule.

More great information on Livermore can be found here.

Have an awesome day!

Historically speaking, the volatility we’ve witnessed has not been normal. And after almost five years of below-average volatility levels, the past few weeks have felt even worse. Recently a closer look at volatility in U.S. equity markets was studied within a historical context.

Market Volatility Over The Century

The statisticians went as far back as 1900 to gather points of data on all instances when volatility significantly deviated from the historical long-term average (for you statistics gurus, that’s +/- 1 standard deviation from the norm). I’ll continue to refer to this anomaly as a “surge in volatility”.

As observed in the chart below, it is evidenced that aside from the past few weeks there have been four specific instances in history when we have seen an extreme surge in volatility – October 1929, February 1938, October 1974 and October 1987 (notice the frequency that the month of October occurs).

Based on a comparison of these historical periods, here are some observations:

•  The increase in volatility occurs very quickly.
•  In three out of four times, the market bottomed within one month after the initial surge in volatility (in ‘74, the market bottomed two months after the initial surge).
•  In all but one period, the stock market was up in the 12 and 24 month periods following the surge. The exception was the period following October 1929 which stands to reason given the extraordinary economic headwinds of the era (the Great Depression).

 What does this mean for investors?

If the chart is any indication, a surge in volatility may be one indication that we are seeing the “darkest before the dawn”. It’s very important to note that this analysis isn’t meant to signal that a market bottom is around the corner. Rather, it suggests that periods of extreme volatility like the one we’re experiencing today have tended to represent important turning points in the market.

Of course the standard disclosure always applies in that “past experience is no indication of future performance”, but my view is that history is all of the information that we have to analyze.  Therefore, I take the stance that this compilation of information is better than no information at all.

I suppose that only time will tell if the extreme volatility in the equity markets during October 2008 was yet another indication of a market reversal.  

Chart Courtesy RBC Capital Markets

First, let me tell you that there are many technical analysis strategies and indicators that traders use to make money in the stock market. In this post I will go through the basics of two distinct technical analysis strategies that are used to make money in the stock market.

1.)   Many technical analysis strategies are based on momentum. That’s right, forget buy low and sell high; buy what’s going up and sell it when it goes up more. This is what technical analysts refer to as buy high and sell higher.

One popular momentum based investing style, CANSLIM, was developed by Investors Business Daily founder William O’Neill. This strategy identifies companies with accelerating earnings and revenues, along with a strong market and increasing investor sentiment (more money managers and mutual funds buying the stock).

Let’s face it,  Economics 101 says that price is based on supply and demand.  That said,  and the average investor cannot move the price of a stock. Only the “Big money” such as mutual funds and pension funds can produce enough volume to significantly move the price of most stocks. You can learn more about CANLSIM at Investors Business Daily and see it used in real life over at Chris Perruna.com.

2)   Other strategies look for reversal patterns in the charts. Some technical analysts will watch for increasing volume and stabilizing or rising stock prices to signal the reversal of a downtrend.

In markets that are downward trending, technical analysts will use price and volume, along with other indicators, in an attempt to find the bottom of a downward price trend.

Traders watching for these reversal situations will also monitor the previous support and resistance areas.  If the stock has had previous support at a certain level, technical analysts will watch for that support to continue as the price drops to that level again. It is considered a Red flag when the price of a stock drops below its previous support level. 

I know that I have been very vague and brief in my descriptions of these strategies. However, I always found it easier to understand when the information was explained without the jargon.

I sincerely hope that this has helped you to understand a little more about some technical analysis indicators.  While I don’t use these to trade stocks, I do use some of these strategies to look for entry points to buy stocks that are already on my watch list for long-term buy and hold investment. 

At that time, the stock price was around $120.00.  Today the stock closed at over $140.00.

Yes, hindsight is 20/20 but we must learn from the past or we are bound to repeat it!

What can we learn?

Because it is such a short time period, we must look to learn more from technical analysis than from the fundamentals. 

• Study the price and volume action at that time.  What do you see?
• Study the price and volume today.  What do you see?
• What are the differences and what are the similarities?
• The support level then was at $110.00.  Do we see evidence of a new support level while looking at today’s chart? 

All of these points are something to think about as we look at some elementary technical analysis indicators.