Preface
Are you a trader or an aspiring trader and have never heard of the classic book Reminiscences of a Stock Operator? If that's the case, go get it now. It's an amazing book that can teach you a lot. If you're not much of a book reader, I hope this article will show you a little of what the book can teach you (and maybe convince you to read it?).
Reminiscences (for short) is a pretty old book (1923) that tells the story of Jesse Livermore, a very successful speculator in the markets of that time. The age of the book only makes it more impressive how its teachings can still be applied today to markets that look completely different from the markets of old.
"How so?", you might think. How can we apply techniques used in bucket shops, where prices moved slowly (people needed to manually change the prices on the boards!) and you had to physically go to there to trade, with the virtual cryptocurrencies, that run on distributed computer networks, with hundreds of markets in dozens of exchanges, where you can buy and sell with the click of a button at your own home (hell, you can even do it in the bus -- or in an airplane! -- using your smartphone)?
Tape reading in the old days. Source.
The world has changed in the past 100 years, but people haven't changed that much. The things you can learn from this book can be applied to all types of trading be it 100 years ago, today or, very possibly, 100 years from now.
You realize while reading the book how simple (or even obvious) some things are. So simple that you might even doubt their veracity. But the simple ideas are usually the ones that yield the best results. After all, they are not just simple ideas: they are the result of years and years of experience and trial, of a mixture of countless worthless ideas that in the end resulted in a set of ideas that simply work. It's an indication on how simple things are for someone that is an expert in their field.
I wanted to make one short summary of the most important things I learned by reading the book, but it was impossible. I ended up with 7 thousand words highlighted in the entire book. After going through the highlights multiple times I decided to split the book in two and do an article for each part and later an extra article for the great story of the old turkey. This is the first of the 3 articles.
This article is based on selected quotes from the book, that can be applied to cryptocurrency markets, and my comments on them. I try to make the thoughts as simple and short as possible, straight to the point.
Highlights from Reminiscences (part #1)
It's all about being right
It's good being right in the market by using your head (not others' ideas or tips) and your own plan. The only way to know if you're right is testing your plan against the market and putting your money into it. It's absolutely not the same if you're not putting money on the line.
If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.
...and the only thing to do when a man is wrong is to be right by ceasing to be wrong.
What is the use of being right unless you get all the good possible out of it?
There's no bull or bear side to the market, there is only the right side.
The bear side doesn't appeal to me any more than the bull side, or vice versa. My one steadfast prejudice is against being wrong
Create a plan and trade your plan
Stick to your plan. Things will try to move you away from it; don't let them.
My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I'd have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game -- that is, to play the market only when I was satisfied that precedents favored my play.
If you don't know what is happening in the market, you won't know what can happen. Don't touch a coin you don't know what is doing. That's part of having a plan.
If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.
The point is not to buy at the lowest or sell at the highest, but to do it at the right time. The most comfortable time to buy is when it's going up. The most comfortable to sell is when it's going down.
Remember that stocks are never too high for you to begin buying or too low to begin selling.
Trade on breakouts. Keep adding shorts/longs if (and only if) you're right.
In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be -- up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.
He should accumulate his line on the way up. Let him buy one-fifth of his full line. If that does not show him a profit he must not increase his holdings because he has obviously begun wrong; he is wrong temporarily and there is no profit in being wrong at any time... But as I have said before it doesn't pay to start wrong in anything.
Minimize your losses, maximize your wins.
It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were.
Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and so well known to me that even now I marvel at myself for doing the reverse.
Learn, learn, learn
Winning and losing is part of the deal. Learn from your losses as well as from your partial wins.
There is nothing like losing all you have in the world for teaching you what not to do." "There was as much to learn from partial victory as from defeat.
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.
The succession of spankings I had received made me less aggressively cocksure; perhaps I should say less careless... 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.
No matter how good you are or how much experience you have, there's always something more to learn. Expect and prepare for the unexpected.
Among the hazards of speculation the happening of the unexpected - - I might even say of the unexpectable - - ranks high. There are certain chances that the most prudent man is justified in taking - - chances that he must take if he wishes to be more than a mercantile mollusk. Normal business hazards are no worse than the risks a man runs when he goes out of his house into the street or sets out on a railroad journey.
There's a tuition to learn the markets. Use your losses to learn.
But fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill, knowing you have to pay it, no matter what the amount may be.
I was twenty when I made my first ten thousand, and I lost that. But I knew how and why -- because I traded out of season all the time; because when I couldn't play according to my system, which was based on study and experience, I went in and gambled. I hoped to win, instead of knowing that I ought to win on form. When I was about twenty-two I ran up my stake to fifty thousand dollars; I lost it on May ninth. But I knew exactly why and how.
On making "predictions"
Don't guess, anticipate the inevitable. Anticipate probabilities.
But this time I was cold-bloodedly right, not because of a hunch or from skillful reading of the tape, but as the result of my analysis of conditions affecting the stock market in general. I wasn't guessing. I was anticipating the inevitable. It did not call for any courage to sell stocks. I simply could not see anything but lower prices, and I had to act on it, didn't I?
[when he was starting to learn how to read markets in a more broad spectrum, not by just seeing fluctuations in the tape, looking at bigger timeframes] It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.
But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear-cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class; I had at last learned to trade intelligently in a big way. It was a day of days for me.
The "tape" (price movements, which you can also read as technical analysis) does not predict the future, it shows probabilities, paths of least resistance.
To read the tape is not to have your fortune told. The tape does not tell you how much you will surely be worth next Thursday at 1:35 p.m. The object of reading the tape is to ascertain, first, how and, next, when to trade -- that is, whether it is wiser to buy than to sell.
For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance.
Trends and long term trades
The big money is in the big swings. No one can catch all the fluctuations.
I began to realize that the big money must necessarily be in the big swing.
Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see -- or if you prefer, until you think you see -- the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this;
Start right then sit tight. Sitting is a big part of trading.
If you begin right you will not see your profitable position seriously menaced; and then you will find no trouble in sitting tight.
People and their impulses
People are biased, wishful thinking. After a break, a small recovery will set everyone in a different mood. Remember the breakouts during Bitcoin's bear run from January, 2018; how many times did you think the bear market was over?
It was very curious how, after suffering tremendous losses from a break of fifteen or twenty points, people who were still hanging on, welcomed a three-point rally and were certain the bottom had been reached and complete recovery begun
In a bull market bear factors are ignored. That is human nature, and yet human beings profess astonishment at it.
Buy the dips, sell the tops.
[The successful trader] he has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.
People follow the herd and go after the easiest path. People are easily persuaded, they want and follow tips of any kind.
You know how people are. I suppose it is the contagion of example that makes a man do something because everybody around him is doing the same thing. Perhaps it is some phase or variety of the herd instinct.
I have learned that a man may possess an original mind and a lifelong habit of independent thinking an withal be vulnerable to attacks by a persuasive personality.
You are your worst enemy.
The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day... And when the market goes your way you become fearful that the next day will take away your profit, and you get out -- too soon.
The market will do whatever the market wants to do. Trade your plan and don't lose your temper.
I don't know whether I make myself plain, but I never lose my temper over the stock market. I never argue with the tape. Getting sore at the market doesn't get you anywhere.
Price predicts news, not the opposite.
You will find in actual practice that if you trade as I have indicated any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance.
This is the first of three articles of my quote-based takeaways from the book Reminiscences of a Stock Operator. Come back in the future for the next ones!
Stay tuned for more posts. Until then you can check my previous posts at:
- (from April 11) Capital preservation and the 2%
- (from April 7) Moving Averages (SMA, EMA): How to use and calculate them (spreadsheet and code included
- (from March 31) An all too ordinary story of an inexperienced crypto trader (#2)
Disclaimer: This is not financial advice, I write for informational and educational purposes only. This article expresses solely my opinion, make of it what you wish.
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