Jesse Livermore’s Rules for Money Management


For all of those who may not know Jesse Livermore, he was one of the greatest traders of the 20th century. He started out in bucket shops and was later able to amass a fortune equivalent to billions of dollars today. Livermore’s rules for trading are timeless. These money management principles are just as valid today as they were when the market crashed in 1929.

Rule 1: Don’t Lose Money

This is a simple of enough concept. If it was this easy, we all would be millionaires. However, Jesse Livermore is laying out the basic tenet that a “speculator” should do everything in their power to stay in the trading game. So, one should not place all of his trading capital into one position. Also, it is not in the best interest of a trader to establish his entire position at once. Jesse Livermore believed that traders should enter trades in lots, where you would purchase your first 25% of shares at a pivot point and then continue to add to this position until you are able to take a full stake. The goal here is to add to a position as it goes in your favor, which again will prevent the loss of funds, because if you are wrong you can easily exit the position. This may work well for larger investors, or investors with longer timeframes, but may not be appropriate for daytraders.

Rule 2: Always establish a stop

Jesse Livermore stated that an initial protective stop is one of the most important components of trading. Livermore felt that a stop should be established prior to entering a trade. This stop should take in account for the size of your account and the volatility of the stock you are trading. Livermore’s personal rule was that he would not risk more than 10% on any one trade. Livermore also stressed the fact that your stop, if hit, should not generate a margin call. He felt that the last thing a trader should do is fund his account for a margin call. This is a recipe for producing massive losses, which is a direct contradiction of Rule#1. Livermore called traders who did not establish stops, “Involuntary Investors”. Livermore described involuntary traders as people who buy and hold stocks in hopes that they will rally. These traders will not sell their stocks for any reason until their targets are met.”

Rule 3: Keep cash in reserve

Livermore felt that cash is king.

A trader without cash is equivalent to a store with no inventory. Livermore stressed that traders must fight the urge to constantly be in a position. This desire to constantly trade will tie up capital that should be saved for more promising opportunities. Jesse Livermore felt that traders should always keep a portion of their account in cash, so that they are armed to take what the market offers them. Patience is the key to success.

Rule 4: Let the position ride

Livermore believed that a trader that is able to keep his losses small and let his winners run would ultimately be successful at the game. He felt that if you were right in your position and nothing about the trade told you otherwise, that you should hold that trade as long as possible. Traders should be overly concerned and monitoring losing positions, but with winners, you should just let them run with a trailing profit protecting stop.

Rule 5: Take the profits in cash

Jesse Livermore felt that after a huge winning trade, you should take 50% of that and place it in cash. This money should be put aside in the bank, hold it in reserve, or lock it up in a safe-deposit box. Then you have a free trade and cash reserves.