Created on: 12/27/2011 2:30:40 AM Last Update: 12/31/2011 8:34:53 PM Posted by: RTT
WARNING: This entry is 1919 days old. It may contain broken links, out-dated or misleading content. Please read on with caution.
Jesse Livermore, Investing for dummies (1600)
Newbie's to the stock market game are often advised they should read the Jesse Livermore book called 'Reminiscences of a Stock operator - Stock Trading Strategy'. We agree with this advice, and it is a good read, but there is not a single stock chart in the book explaining Livermore 'pivot point' method. There should be because Livermore strategy is a good one.
Reference: Jesse Livermore website , Jesse Livermore secret to success
It must be noted first, that much of Richard Wyckoff methods are born from the interview he did with Jesse Livermore. Market phase and price to volume relationships is critical to both traders methods. However Jesse Livermore focused on determining 'pivot points' in the market for his new trading positions, where as Wyckoff tool is a accumulation/distribution pattern approach. We know that Jesse Livermore didn't use charts, and solely relied on the ticker tape and fundamentals, yet we feel that if Jesse was around today he may concur with our approach.
Definition: A Livermore 'pivot point' is the moment in the trend if price action fails to support the current trend, then the trend will most likely be judged to be over or at the very least the pace of the trend seriously halted. Livermore would study price action and volume relationships around the selected 'pivot point' to determine that it was true (rising prices with rising volume, much the same way Richard Wyckoff understands volume).
Sidetrack for a moment: A word on the Mr Market behavior during a 'Livermore pivot point'. Large accounts who wish to accumulate stock share float (that is in limited in supply) that is undergoing a strong bullish trend wish to do so when prices are falling, otherwise they will be bidding prices up against themselves. This means large accounts will use all the tricks in the book to shake out the weak bullish positions, to allow them to buy the newly released float on dips. They can do this for a period of falling prices until other large accounts see price reaching a technically critical trend point (Livermore pivot point) that attracts them to jump and buy, and this usually results in a buying frenzy that sends stock prices sharply higher. This is why when you review past price moves, the move started just after a sell off. If the 'Livermore pivot point' holds true and the long term trend continues then the trend is healthy, if it fails, then there is more selling going on and the trend may be over or slowed down for a period of time (an accumulation or distribution pattern may develop). Lets get back on track..
Note: To learn more about Mr Market and his inner workings read all the books listed on our Wyckoff page.
Method of Determination: The newbie will be thinking that double tops, head and shoulders, price at the 200 day simple moving average, price at the long term trendline and the like could all be considered possible price zones that would support a Livermore pivot point. Not so fast, it is not that easy. A double top could morph into a triple top, a triple top could morph into a rectangle that ends up being a trend continuation pattern and not a reversal Livermore pivot point. In the end most technical methods can be curve fitted to get the desired outcome the technician wants, one should use a technical approach that holds a stronger constitution against curve fitting to determine true Livermore pivot points.
We use Wyckoff 2.0 to provide the stronger technical test to find Livermore pivots points.
1) Price must be in either in a Wyckoff mark down or up phase: Or more simple lower lows and lower highs, or higher highs and higher lows respectively.
2) Price must be holding true to a Gann Angle of acceptable pace price to time.
3) A dominant Hurst cycle must confirm peaks and troughs.
Even though the above three tests are technical in nature equal weighting must be given to the fundamentals, price action may discount some fundamentals and then again it may not. Time in the game is your only education here, but it all matters.
Real Life Application: Let's review the time frame on the Dow Jones Industrials where Jesse Livermore made his fortune.
1) Yes the Dow is in Wyckoff 2.0 mark down phase: Lower lows and lower highs.
2) Price is holding true to the 2x1 (time x price) Gann Angle. Pace is moderate.
3) A dominant cycle of 120 daily periods highlights critical peaks for market timing.
The above technical test is not in hindsight the test above could be established early on the Dow down trend. Also the dominant cycle was found via our RTT Cycle Finder tool.
We think this chart highlights Livermore pivot points that Jesse would seek to profit from. The RTTHurstDPO and RTTHurstROC are proprietary tools to monitor Hurst Cycles (The 'Rate of Change' [ROC] is a more aggressive monitor than the 'Detrending Price Oscillator' [DPO]). The lines marked 1x1 and 2x1 are Gann Angles.
The above was in the 1930's. But just to prove the more things change, the more they stay the same. Have a look at this chart from 2011.
Blog Post: Gold Gann Angle and Cycle review : Gold is approaching a Livermore 'Pivot Point', will it hold or break? The chart below shows that since 2009 all the cycle lows have been ideal an Livermore pivot point to buy gold. The most recent challenge is no doubt the current trend greatest test, at the moment the EURUSD is sinking hard, forcing the US dollar higher. Gold has a negative correlation to the US dollar and hence the reason for the current correction. So will gold hold or break, watching the gold chart below and intermarket charts of the Euro and US dollar will disclose all in a short while.
Click for popup. Clear your browser cache if image is not showing.
Final Newbie Advice: Yes, the newbie investor should become a Livermore 'Pivot Point' trader. The above approach is a solid strategy to profit as a position trader. There is no need to be an intra day trader, you can still hold down a job, be a corporate leader, doctor or mother and still find time to execute the Livermore 'pivot point' approach. Sign up to readtheticker.com and start your Livermore pivot point research with Wyckoff 2.0 now.
NOTE: readtheticker.com does allow users to load objects and text on charts, however some annotations are by a free third party image tool named Paint.net
..."Mathematics is the only exact science. All power under heaven and on earth is given to the man who masters the simple science of mathematics."...
William D Gann
..The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell"..
In the short run, the market is a voting machine, but in the long run it is a weighing machine.
Novice Traders trade 5 to 10 times too big. They are taking 5 to 10% risks on a trade they should be taking 1 to 2 percent risks.
The minute you get away from the fundamentals – whether it’s proper technique, work ethic, or mental preparation – the bottom can fall out of your game.
Basketball Legend Michael Jordan.
We at readtheticker.com hold the view that a mix of stock chart technical analysis, Richard Wyckoff, William Gann and Jim Hurst methods plus market fundamentals allows the investor to formulate a very sound market opinion. These attributes are mutually inclusive and must be weighted equally before investing or trading in any Stock, ETF, Currency, Bond, Commodity, CFD or Mutual Fund
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