Livermore is a trader I particularly admire, and many friends must have read his book "Reminiscences of a Stock Operator."

Opinions about him online are mixed; some people deify him because he started trading at the age of 14 after graduating from junior high school. Throughout his life, he experienced four major ups and downs, made a fortune four times, and went bankrupt four times, eventually ending his life in suicide. His life is very legendary.

In my view, life is a journey, and the process is always more important than the outcome. We can certainly judge Livermore based on our own understanding, but I believe what's more important is whether his trading experiences and methods can provide help for our trading.

So today, I will deconstruct his trading logic and methods, as well as whether his trading logic still fits the contemporary market conditions, which I believe can inspire everyone.

1. Livermore's Trading Logic

A: Identifying Key Points.

The era in which Livermore traded was before 1940, a time without computers, instant communication tools, or candlestick charts.

At the beginning of the book, Livermore emphasizes that traders should keep their own records of prices. An important purpose of keeping price records is to identify key points in the market.

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In Chapter 5 of the book, Livermore explains in detail what "key points" are. These key points are what we now refer to as important critical positions in the market.

Livermore's basic trading logic is to trade on breakouts. After the market breaks through a key point, it will continue to move, and the trend will keep breaking through one key point after another.It must be emphasized that his selection of break points is very strict, and it is the key break points of the large cycle, after all, only the break of the key points of the large cycle can lead to a big market trend.

In practice, there are many important key points that can be adopted in our actual combat, such as integer points, historical key prices, high and low points of the consolidation pattern, etc. (more than a hundred years ago, Livermore also used these technical standards as key points), the financial market has passed a hundred years, and its underlying logic has not changed.

B: Breakthrough key points to open positions.

In the book, Livermore said that his trading process requires opening positions after the market breaks through the key points.

And it is mentioned that because he did not continue to trade cotton futures five times at the time of the market breakthrough, he suffered a loss of 200,000 US dollars. After continuous stop losses, he lost interest and patience in the cotton long position, and withdrew the cotton market quote machine, but two days later, the cotton futures began to rise.

According to his original plan, he wanted to gather 100,000 long positions in batches after the market broke through the key points, and the plan had already been formed in his mind, but he did not act according to the plan. This made him miss a big market for cotton futures long positions and missed a profit of 1 million US dollars.

He also mentioned in the book: as long as you wait patiently for the market to reach the "key point" I said, my trading can always make a profit.

Here we can reflect on our own trading, as long as it is the original plan of the position, as long as you wait patiently and execute, the probability of profit is very large. And many times the loss is due to the destruction of the original plan, and the random pursuit of rising and falling.

The trading problems faced by Livermore a hundred years ago are also the problems we are facing now.

Back to the "key point" technology, speaking of this, everyone is not unfamiliar with this trading model, this trading method is exactly the same as the current market break-in entry.C: Increase position by widening the distance.

Livermore was able to make a very high profit in a wave of the market because of his trading logic of increasing position in line with the trend.

He would increase his position after the order made a profit, and when the price broke through the next key point.

This operation is a bit like a grid. In the trade, the position is profitable, the market continues to push, forming a new key position breakthrough to increase the position in line with the trend, and insist on holding the position.

D: Close the position when a dangerous signal is found.

After entering the market and increasing the position multiple times after breaking through the key point, if the market forms a signal to stop, it will choose to close the position.

The book talks about a stock's integer point as a key point in the operation of the market. After the market breaks through the integer point of the stock, it should continue to rise due to inertia, but if the market breaks through and the amplitude of the inertial rise does not reach a reasonable level, it is considered a dangerous signal that the market is about to reverse.

Examples of key point trading in the book.

(1) Confirm that the key point of the stock of the Anaconda company is $100.

(2) Buy 4000 shares when the market breaks through $100, and the stock price immediately rises to 105, and continues to rise by 10 points that day.(3) When the market breaks through $200, continue to buy in the same manner, with the bullish trend remaining firm.

(4) When the market breaks through $300, buy again, but the transaction price is only $302. The reduced momentum of the market's upward rush implies that the market is already flashing a dangerous signal. At this point, choose to sell gradually.

The above method is a summary of the trading logic discussed in the book "Reminiscences of a Stock Operator."

2. Real-time trading examples of the logic in the book

When we look at the trading logic mentioned above, we will find that it is not profound, or even very ordinary.

As told in "Reminiscences of a Stock Operator," the speculative market is as old as the hills, and there is nothing new under the sun. The logic from 100 years ago is still applicable today.

The chart shows the 4-hour K-line of spot gold.

The market formed a double bottom consolidation pattern at a low level, with 1675 being the key point of breakthrough. After breaking through the key point, the market consolidated at a high level and then quickly surged, which is in line with the logic of a bullish trend.

Subsequently, the market formed another consolidation near 1710, followed by a breakthrough. This position meets the standard for adding positions after a breakthrough, and after adding positions, the market rose strongly again.

Then, the market paused and consolidated near 1760 again. After the consolidation, the market continued to break through, and positions were added again. However, after this breakthrough, the market did not close at a high level with a strong positive line but only rose by a few tens of dollars before starting to fluctuate and consolidate at a high level. This is a signal that the market is starting to weaken, so close the orders and exit with profits.In addition, in Chapter 9 of the book, the details and technical rules of Livermore's trading are discussed. Due to the current trading environment, there have indeed been some changes compared to a hundred years ago. The detailed parameters have become too rigid, such as the rule of a 6-point reversal. The fluctuation ranges of different varieties in the stock market, futures market, and foreign exchange market are not the same, and it is unscientific to operate uniformly according to the 6-point rule. It is not recommended to copy this method for trading.

3. Is this trading logic feasible after all?

Upon reading this, we will find that this trading logic is very similar to the current market-breaking trading. There is definitely no problem with the logic, but there are also its inherent shortcomings.

Advantages of this trading logic:

(1) The trading rules are relatively simple. After the market breaks through the key point, open a position, and if the market moves forward, stay in the position; if it does not move forward, exit. The operation is simple and clear.

(2) The stop loss is not large. The stop loss standard in the above gold breakage case is as follows: according to Livermore's trading logic, after breaking through at the first breakage point of 1675, if the market consolidates at a high level and cannot close with a big positive candle, it indicates that the bullish strength of the market is not sufficient, and a stop loss and position closing will be executed.

The stop loss space in this operation mode is not large, and the profit and loss ratio of the trade is very good.

(3) The profit effect is very good. Because it is all about strong market conditions after the breakthrough, as long as the market moves, profits can be quickly accumulated, and continuous position increases will make the profits very considerable.

Disadvantages of this trading logic:

(1) There are fewer trading opportunities. The "key point" is the core of the entire trading logic. We can use an analogy: the key point is like the headliner of a party, which appears infrequently, but when it does, it is a highlight moment, which is very patient-testing.(2) Selecting key points is challenging. With so many high and low points on the chart that represent support and resistance, as well as critical prices, which point is truly the key?

This requires a wealth of trading experience to discern, as in the market, truly strong breakouts are relatively rare, while oscillating upward or downward movements are more common. A significant amount of energy must be accumulated before a strong breakout key point is likely to emerge.

(3) One must have the discipline to refrain from trading and the patience to endure solitude. Opportunities are scarce, and the most common mistake traders make is the itch to trade when they can't find the key point. They settle for less important "key points" and attempt to trade on them.

Doing so disrupts the original trading rhythm, leads to unnecessary losses, and can affect the trading mentality due to these losses. When the real opportunity arises, either there are no funds left or the mentality is so shaken that one cannot trade.

So, what kind of trader is this trading logic suitable for?

Firstly, you must be patient.

During regular trading, you should have the patience to wait calmly for the emergence of a key point, and remain composed and unruffled during the waiting period, possessing the demeanor to sit steadily like a fisherman on a fishing platform.

If you are the type who likes to know the trading results quickly and to double your money rapidly, this trading model may not be suitable for you.

This trading model is also more suitable for part-time traders who focus on their main jobs while patiently waiting for the emergence of such key points.

Additionally, this trading model requires strong willpower and execution ability.This trading logic requires adding to positions when there is an unrealized profit, and not just once, but multiple times. After consecutive additions, the position can become quite heavy, and even a slight market fluctuation can lead to significant losses, which is a great test of one's mentality.

Traders who are pained by even a small drawdown in their investments are not suited for this trading logic. If it is already difficult to hold a position from start to finish, it becomes even more challenging with added positions, requiring a certain level of composure.

4. The book also contains several insightful viewpoints:

(1) In speculative trading, one should only invest when opportunities arise, not every day.

Speculation implies that we invest when opportunities worth seizing present themselves, rather than jumping at every opportunity.

The fewer the opportunities, the higher their value. Trading is not like working in a factory, where the more screws you tighten, the higher your income. We must wait for the right opportunities to act.

(2) After making a profit, one should withdraw half of the profits and set them aside as reserve funds. This method was greatly beneficial to Jesse Livermore. The only regret is that he did not consistently apply this principle throughout his career, which could have made his investment journey smoother in some instances.

If profits are not withdrawn as reserve funds after making a profit, then all the money is merely on paper, and it also increases one's risk invisibly.

(3) Be a bystander in trading.

The price fluctuations in the trading market have always been repetitive, with not too many new tricks. Although the specific situations of trading instruments differ, and the types of stocks vary, their price patterns are completely consistent.Traders should view price changes from a simple perspective and avoid overcomplicating things. Particularly in today's era of information overload, there will be many complex voices around us. At such times, we must also maintain our rationality and keep our own views on the market trends without being disturbed by noise.

(4) The biggest enemy of a trader is their own human weaknesses.

In the book, Livermore candidly discusses the mistakes he made in his trading, such as entering the market prematurely without patience, and closing positions early out of fear of profit-taking.

Since we are human, we will inevitably have human weaknesses, and we will all have emotions of greed and fear. Do not be afraid to face them.

How we confront, overcome, or even adapt to our own human weaknesses requires long-term thinking and practice on our part.

Looking at some historical figures, their trading strategies are often not as magical as one might imagine. However, what is magical about them is their ability to seize trading opportunities and overcome their human weaknesses to a great extent, withstand psychological pressures that ordinary people cannot bear, and possess extraordinary determination, which is worth our serious consideration.