Rules of Stock Trading from Jesse Livermore

Wall Street Traders

Jesse Livermore’s 5 money management rules.

These are the tried and true money management rules for traders, given to us by the author of How to Trade In Stocks and one of the greatest traders 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!


  1. They are good rules for traders (not for longer term investors, which is another set of “rules” alltogether).

    That said, I have always had difficulty in accepting the trading rules of a man who went broke three times and, in the end, took his own life. Livermore often attibuted his financial reverses to a failure to follow his own rules. If true (and I have considerable reservations about that), then a sixth rule should be added – stay focused, disciplined and unemotional.

  2. I tend to agree with all the above:

    Stops: I generally lose a lot when I move my protective stop away. It is much better to take a loss, and if one is comfortable with the direction of the stock, to get back in again.

    Let the position ride: It is better to go for 2:1 reward to risk, which means one has to do better than 33% correct to be profitable. The worst for novice is scalp where reward:risk is less than 1:1. These look easy but should be avoided. The pros can do them, not the novices.

    Thank you for a great post 🙂

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