Money Management rules of Jesse Livermore
Don’t buy entire position all at one time.
1. Do not take your entire position all at once.
2. Wait for confirmation of your judgment—pay more for each lot you buy—dollar average upward.
3. At the beginning of each trade first establish in your mind the total, exact amount of shares you want to purchase if all goes well, or specify the amount of dollars you are willing to commit; do this before you begin the trade.
Never lose more than 10% of your capital
The 10 percent loss rule became Livermore’s most important rule for managing money. In some respects, it is also a key timing rule, since it often automatically sets the time to exit a trade—when you have lost 10 percent or more of your invested capital, you must exit the trade. Also, a trader must set a firm stop before opening a trade. The consequences of big losses are drastic—you must gain back 100 percent to cover a loss of 50 percent.
Remember, never meet a margin call, and never average losses.
Always keep a cash reserve
The successful speculator must always have cash in reserve, like a good general who keeps troops in reserve for exactly the right moment, when the odds are in his favor, and then moves with great conviction, and commits his reserve armies for the final crushing victory.
There are times when playing the stock market that your money should be inactive, waiting on the sidelines in cash to come into play in the stock market. It was Livermore’s belief that in the stock market:
Time is not money
Time is time
And money is money.
You need a good reason to buy a stock and also a good reason to sell
Stick with the winners—as long as the stock is acting right, 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, well then, let it ride! It may grow into a very large profit. As long as the action of the overall market and the stock does not give you cause to worry, let it ride—have the courage of your convictions. Stay with it!
Always withdraw the profit
Livermore recommended parking 50 percent of your profits from a successful trade, especially where you doubled your original capital. Set this money aside, take it out of the stock market so you have to make a conscious effort to put it back in. Put it in the bank, hold it in reserve, lock it up in a safe deposit box, stuff it in your mattress—just put it somewhere safe. 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. There is no better time then after a large win on a stock. Cash is your secret bullet in the chamber.
Stay away from cheap stocks
One of the greatest mistakes that even experienced investors make is buying cheap securities just because they are selling at a low price. Although in some instances stock demand may push the stock from a small per share price of say, $5 or $10 a share to over $100, many of these low-priced
stocks later sink into oblivion by going into receivership, or else they struggle for years and years, with only the slightest prospect of ever returning a profit to their shareholders.