• Max

Book Review #1 : Reminiscences of a stock operator

1. Introduction

Reminiscences of a stock operator is a novel written by Edwin Lefèvre. It recounts the life of a very famous American stock trader, Jesse Livermore. This book is very interesting because it is packed with very useful and still valid advices. This article is not going to be a plain review of the book. To make it more interesting and helpful, I'm going to combine the takeaways with some of my actual experiences.

2. Your attitude matters !

To become a consistent trader, being technically good is not enough. There's a whole psychological dimension you'll have to master. You have to change your attitude towards trading.

Clear thinking is critical to avoid what I call "emotional mistakes". I make the difference between two types of mistakes :

  1. Emotional mistakes

  2. Technical mistakes

If you don't learn to think clearly, you'll be prone to making emotional mistakes. Typical emotional mistakes include : not cutting your losses, taking advices and tips from other people, hoping, fearing, acting too soon/late and so on.

Technical mistakes on the other hand, are part of the game. They are the price you have to pay to gain experience and education. Let me be clear here, losing money on a trade, doesn't necessarly mean you've made a mistake ("outcome bias"). You'll have to discern between "normal" losses (it's all about probabilities, remember !) and losses caused by your mistakes.

Now, there's two things I do to keep track of my mistakes, both emotional and technical :

  1. Cause of error document : which basically contains all the technical mistakes I've ever made (inspired by Nicolas Darvas and his book "How I Made $2,000,000 in the Stock Market")

  2. Monthly reviews : during my trading days, I'm basically gonna take notes on whatever pops into my mind and at the end of the month, I'll do a full review and write down the key takeaways for the month. Then, I regularly read the reviews.

Why am I doing this for ? I know I can't recall everything. So by writing everything down and coming back to it regulary I want to avoid making the same mistakes twice.

Not only you have to learn from your mistakes, but also have to learn from your victories. In the novel, it is made very clear, that you also learn a lot by analyzing both, winning and losing situations. Yes. You might be "right", you might have made a profit, but did you execute flawlessly ?

You can always improve. Practice makes progress.

"If a man didn't make mistakes he'd own the world in a month. But if he didn't profit by his mistakes he wouldn't own a blessed thing."

"I convinced myself that whatever was wrong, was wrong with me and not with the market"

"My biggest winning were not in dollars but in the intangibles"

"The speculator's deadly enemies are : ignorance, greed, fear and hope"

3. Scale in, scale out - Probing the market

You probably already heard that "you should never average your position". I think that "you should never average your position, UNLESS it's part of your trading strategy". In fact, I do believe that averaging, is one of the most powerful tools when it comes to getting the most out of your trades.

Jesse Livermore basically used to "probe" the market. Before he put his whole position at stake, he bought a small amount of shares to see if the market went in his direction. He thought that, the best way to start a trade, is to start it right. Starting right, he says, helps you being more patient, "sitting tight".

Probing the market, is very useful. If you buy 1/2 of your position and the trade goes against you, you have lost only 1/2 of your risk. If the trade goes in favour, you can easily buy more shares at some predefined levels. Now, this means, that overall, you'll most of the time only lose 1/2 of your risk. But whenever the trade works out, you get as much as if you had purchase your whole position at once.

Obviously, by averaging up, in the end, you'll lose a few percentage of profits, but it is really a negligible amount.

As an example, your plan is : Buy at 6.00, sell at 7.00, 1000 shares, risk $250. By buying your whole position, if the trade works out, you made $1000.

By using the averaging up technique, let's say you bought 500 shares at 6.00 and 500 shares at 6.20, it gives you an average of 1000 shares at 6.10.

Now, by using your whole position, you made $100 more than by scaling in.

What if the trade goes against you ? If your risk was $250, well, you'd lose $250, otherwise you'd lose only half, that is $125.

What I also do, is scale out of my positions. Why ? Because I would like to catch as much of the swing as I possibly can. Imagine a scenario where you're into a position and you've met your risk-to-reward, let's say 1:3. Should you sell your position only because you've reached your target ? Obviously not ! If what you see on the chart, tells you that the stock is going further up you shouldn't sell.

In this case, you could just take gradually your profits off. Now, the exact rules to all this stuff, is up to you and also depends on the situation. Sometimes I scale in 1/2 and scale out in 1/4, vice-versa. That always depends, it's up to you to evaluate what's worth doing.

I'd like to provide you with an actual example of a trade where I made 1:6 instead of 1:3, just by gradually scaling out (in this case I scaled out in 1/2).

The original plan was to buy around 3.30 and sell around 4.00.

This is what happened :

Scale out selling
3.2 Sell

I started by selling half of my position at my target, 4.00. Then, I sold at 4.40 (this is also the reason why you should also learn from your "wins", on that one, I sold way too early). After taking these profits, I already banked more than I had planned. So I just let what was left of my position run, until I saw that the uptrend was losing momentum and finally sold at 7.30.

In short, scaling in allows you to minimize your losses, scaling out allows you maximize your wins.

"The price, per se, has nothing to do with establishing my line of least resistance"

"A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him"

"Instead of hoping he must fear; instead of fearing he must hope"

"I never buy at the bottom and always sell too soon" "Never try to sell at the top"

I hope that you enjoyed this article and learned something new. If you have any question, suggestion or idea, do not hesitate to leave a comment below. You can also send me a message through the "Contact" page.

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Thank you !

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