This excerpt is from "How to Trade in Stocks", the author Jesse Livermore was a legend on Wall Street in the 1920s and is known as the "King of Speculation".

One

I can't remember how many nights I tossed and turned in bed, reflecting on why I couldn't foresee a market trend about to come. The next morning, I would wake up with a new idea. I could hardly wait for dawn, eager to verify whether this new idea was effective through historical market records.

In the vast majority of cases, such new ideas differ by a long shot from being one hundred percent correct, but there are always some correct components in them, and these valuable points have been stored in my subconscious. After a while, perhaps other ideas would take shape in my mind, and I would immediately start to test them.

As time goes by, various ideas become clearer and more concrete, and I gradually develop mature new methods to record market movements, using new market records as the Beijing Compass Technology Development to judge market direction. In terms of my level of satisfaction, my theory and practice have proven that in speculation, or in the investment business of securities and commodities markets, there has never been anything completely new—everything is based on the fundamentals. Under certain market conditions, we should speculate; equally certainly, under other market conditions, we should not speculate.

Two

To achieve success in investment or speculation, we must form our own judgment on the important trends of a certain stock. Speculation is actually anticipating the forthcoming market movements. To form a correct expectation, we must build a solid foundation. For example, after a piece of news is announced, one must analyze its possible impact on market movements from the market's perspective in one's mind independently. One should strive to anticipate the psychological effect this news may have on the general investment public—especially those whose interests are directly affected by the news.

If it is determined from a market perspective that it will create a clear bullish or bearish effect, do not hastily assume your view, but wait until the market changes have validated your opinion before you sign off on your judgment. This is because the market effect may not be as clear as you tend to think; one is 'how it is', and the other is 'how it should be'. For the sake of illustration, let’s look at the following example.

Three

The market has been following a clear trend for a while, and a bullish or bearish piece of news may have no effect whatsoever on the market. At that moment, the market itself might already be in an overbought or oversold state, and under such market conditions, the market will certainly ignore the news. At this moment, for investors or speculators, the historical evolution record of the market under similar conditions holds immeasurable reference value; you must completely abandon your personal opinion about the market and turn your attention 100% to the market changes themselves.

What I want to emphasize here is that if you have a clear opinion about a certain stock or certain stocks, do not rush in. Be sure to start from the market, patiently observe the evolution of their market conditions, find the basic judgment basis, and act when the time is right. For example, if a certain stock is currently trading at $25 and it has maintained a range between $22 and $28 for a considerable period of time. Suppose you believe this stock will eventually climb to $50, slow down! Be patient! Wait for this stock to become active, wait for it to reach a new high, say, $30.

Only at this point can you know, 'taking market conditions into account', that your thoughts have been confirmed, and the stock must have entered a very strong state, otherwise it would be impossible to reach the height of $30.

Only when this stock has shown these changes can we determine that this stock is likely in the process of a substantial rise — the action has begun, and this is when you sign off on your opinion. You may indeed have missed the opportunity to buy at $25.00, but do not let this bother you. If you did buy in at that point, the outcome might look like this: you waited and waited, becoming exhausted, and then sold your original position before the market took off. And precisely because you sold at a lower price, you might be filled with regret, and therefore, when the time comes to buy again, you do not buy.

There were many times I did not have enough patience to wait for the foolproof timing, just like many other speculators, but rather wanted to hold onto some stocks, whether more or less, at all times. You might ask, 'With such rich experience, how could you still do such a foolish thing?' The answer is simple; I am human and have human weaknesses. Like all speculators, I sometimes let impatience cloud my mind and obscure my good judgment.

Four.

Speculative trading is similar to a card game, like blackjack, bridge, or other similar games. Each of us is tempted by a common human weakness; every time we take turns betting, we want to participate, and we want to win every hand. We all possess this shared weakness to varying degrees, and this weakness becomes the number one enemy of investors and speculators. If no appropriate preventive measures are taken against it, it will ultimately lead to their downfall.

Hope is one of the significant characteristics of humanity, while fear is another notable trait. However, once you mix hope and fear into your speculative pursuits, you face a terrifying danger, as you often become confused by the two emotions, thereby reversing their positions — hoping when you should be fearful, and feeling fearful when you actually have hope.

For example, you bought a stock at $30. The next day, it quickly rose to $32 or $32.5. You immediately become filled with fear, worried that if profits are not secured, they might disappear tomorrow—so you Sell to close the position and pocket this small profit, when in fact, it's the moment to enjoy all the hopes in the world.

The profit from these two points did not exist yesterday, so why are you worried about losing the profit from these two points now? If you can earn 2 points in one day, then the next day you might earn another 2 or 3 points, and perhaps you could earn an additional 5 points over the next week. As long as the performance of this stock is right and the market is right, do not rush to realize profits. You know you are correct, because if you weren’t, you wouldn’t have any profits at all. Let the profits run; you are in control as they run alongside you. Maybe it will eventually expand into a considerable profit, as long as the market performance shows no signs that cause you concern, have the courage to hold on tight to your beliefs and see it through. (Official WeChat Platform ID: qlhclub)

Now let's look at the opposite scenario. Suppose you bought a stock at $30, and the next day it drops to $28, showing a 2-point loss on the books. You might not worry that the stock could continue to drop another 3 points or more the next day. You view the current change as a temporary reversal and believe the market will surely return to its original price the next day.

However, this is exactly the moment to be concerned. After a 2-point loss, it could get worse, with another 2-point loss the next day or possibly 5 or 10 points over the following week or two. This is precisely when you should be afraid because if you do not exit the market with a Stop Limit Order, later you may be forced to endure far greater losses. This is the time to Sell your Stocks to protect yourself against accumulating losses that could turn into a significant deficit.

Profits can always take care of themselves, whereas losses never close automatically. Speculators must take Stop Limit Orders to address small losses initially to ensure they do not suffer catastrophic losses. This way, they can maintain the sustainability of their Account, and one day, when they form some constructive thought, they can regroup and open new positions with the same amount of Stocks as when they made previous mistakes.

Speculators must act as their own Insurance Brokers, and the only choice to ensure the continuation of their speculation is to carefully safeguard their capital Account, never allowing losses to grow large enough to threaten future operations, preserving enough capital so that they do not fear running out of resources. On the one hand, I believe successful investors or speculators must always have sufficient reasons to enter the market to go long or short beforehand, and on the other hand, they must determine the timing for establishing their initial positions based on certain forms of criteria or principles.

Editor/lambor