Who was Jesse Livermore? The two books behind the rules
Livermore was born in 1877 in Shrewsbury, Massachusetts. At 14 he took a job posting stock quotes on the board of a Boston brokerage office, and soon he was betting on price moves in bucket shops, where customers wagered on quotes without any shares changing hands. Other traders called him the “Boy Plunger”. He traded stocks and commodities such as cotton for decades and died in New York in 1940.
Reminiscences of a Stock Operator began as twelve articles in The Saturday Evening Post in 1922 and 1923 and appeared as a book in 1923. Edwin Lefèvre, a financial journalist, wrote it in the first person as “Larry Livingston”, a thinly veiled character widely read as Livermore. Most of the famous lines are the narrator’s, written by Lefèvre.
How to Trade in Stocks, published in 1940 under Livermore’s own name, is short and more technical. Its subtitle is The Livermore Formula for Combining Time Element and Price, and it has chapters on the pivotal point and on the Livermore Market Key, his hand-kept method of recording prices.
Many “Livermore rules” lists online blend these books with later paraphrases and invented quotes. This guide sticks to ideas found in the two books and labels the modern versions as ours.
Jesse Livermore trading rules at a glance
The drawing at the top of the page shows most of the rules at once: a sideways area under a prior high, a break above that pivotal point, a run along the line of least resistance, and adds made only while the trade is in profit.
- Trade with the line of least resistance: long when the trend is clearly up, short when it is clearly down, out when it is unclear.
- Wait for the pivotal point: act when price reaches and crosses a key level, not in anticipation.
- Let the market confirm: a stock that crosses its pivotal point and then fails to follow through is a warning, not a dip to buy.
- Cut losses quickly: a small loss is the price of being wrong.
- Add only to winners (pyramiding): start with part of the position and add only if the first part shows a profit.
- Never average down: do not buy more of a position that shows a loss.
- Be patient: wait for the setup, then sit tight while the trend lasts.
- Line of least resistance
- The direction in which price moves most easily at the moment. In Reminiscences, the trader’s job is to find it and trade with it.
- Pivotal point
- In Livermore’s 1940 book, a price level where a move begins or where a trend shows it is resuming. Not the same as daily pivot points.
- Pyramiding
- Adding to a position in steps as it moves in your favour, usually in smaller amounts each time, while raising the stop.
The line of least resistance: trade with the trend
In Reminiscences, the narrator says prices, like everything else, move along the line of least resistance. He does not try to predict; he watches which way price travels more easily, trades that way, and stays out when the answer is unclear, as in a sideways market.
A modern, testable version uses swing structure, as in the drawing below: higher highs and higher lows define an uptrend, so you look only for longs. A lower high followed by a close below the last higher low (marked CHoCH) says the line may have changed, so you stop buying. See market structure.
Hypothetical: a stock on a daily chart makes higher lows at $40 and $44 and higher highs at $46 and $50. The line points up. Later it stalls at $49, a lower high, then closes at $43.50, below the $44 higher low: no new longs until a new structure forms.
Failure case: in a range, swings alternate and the “trend” flips every week, and each flip produces a losing entry. The fix is a rule, not a feeling: no trades while price is inside the last range, only after a close outside it.
Livermore’s pivotal points: wait for the market to confirm
In How to Trade in Stocks, Livermore wrote that he should wait for the market to reach a pivotal point before trading. A stock that crosses its pivotal point and then fails to act as it should, he warned, is a danger signal. Later writers often split pivotal points into reversal points, where a new trend starts, and continuation points, where a pause ends. They are not the daily pivot points calculated from yesterday’s high, low and close.
Reminiscences gives a concrete case: the narrator’s old theory that a stock crossing 100, 200 or 300 for the first time tends to keep going. When Anaconda crossed 300, he bought; had it fallen back instead, he would have judged the move fake and himself wrong. Confirmation and exit were decided together.
Modern rule: buy only a close above a prior high that caps a tight sideways area, as in the drawing below, ideally on well-above-average relative volume. Put the stop under the base low, and exit early on a close back below the pivotal point within three sessions.
Hypothetical: Stock B trades between $58.50 and $60.00 for three weeks, under a prior high at $60.00. A daily candle closes at $60.80 on about twice its average volume. Buy at $60.80 with a stop at $58.40: $2.40 of risk per share. Risking 1% of a $20,000 account ($200) allows 83 shares; the pyramid below starts with 80.
Failure case: the next day closes at $59.70, back inside the base. That is Livermore’s danger signal, and exiting at the close costs 80 × $1.10 = $88. If bad news instead gaps the stock open at $57.00, below the stop, the loss is 80 × $3.80 = $304: a stop limits risk but cannot prevent gaps. More in breakout trading.
Pyramiding: how Livermore added only to winners
In Reminiscences, the narrator buys in parts. He describes starting with one-fifth of the full position and adding nothing if that first part does not show a profit, since a loss means he began wrong. He buys as the price rises, never as it falls.
The drawing at the top of this page shows the idea: each add comes only after price has moved in favour, and the stop line steps up under each one. A common modern version, used below, makes each add smaller and raises the stop each time.
Hypothetical, continuing Stock B: 80 shares at $60.80, stop $58.40, open risk $192. At $63.20 (+1R), add 40 shares and raise the stop on all 120 to $60.80; open risk falls to 40 × $2.40 = $96. At $65.60 (+2R), add 30 shares and raise the stop to $63.20. If that stop is hit: +$192 on the first 80, $0 on the next 40 and −$72 on the last 30, a net gain of $120. The average cost of the 150 shares is $62.40.
Failure case: the same adds without raising the stop. All 150 shares, average $62.40, keep the stop at $58.40, and a reversal costs 150 × $4.00 = $600, three times the planned risk. Even with the stop raised, a gap can skip it.
- Add only when the open position shows a profit, never to a loser.
- Make each add smaller than the one before.
- Raise the stop with every add, so open risk never exceeds the first trade’s risk.
- Add at a fixed step, such as +1R, or at a new pivotal point, never on impulse.
Cut losses quickly and never average down
Both books press this rule. The narrator of Reminiscences calls averaging a losing trade one of the worst blunders a speculator can make, and his rule of thumb is to sell what shows a loss and keep what shows a profit. In How to Trade in Stocks, Livermore repeats the warning against averaging losses.
Modern rule: set the stop before entry, at the price that proves the idea wrong; never move it down; never add below your entry. The size follows from the stop: shares = dollar risk ÷ stop distance. See stop loss and take profit and the position size calculator.
Hypothetical: with a $20,000 account you buy 100 shares at $50.00 with a stop at $48.00, risking $200 (1%). Price drops to $48.50. Three traders, three outcomes:
- Rule follower: does nothing. If $48.00 trades, the loss is $200, as planned.
- Averager: buys 100 more at $48.50 and moves the stop to $46.00. The average is $49.25 and the risk is now 200 × $3.25 = $650, more than three times the plan.
- No stop at all: price slides to $42.00 and the loss is 200 × $7.25 = $1,450, over 7% of the account in one trade.
Patience, hope and fear: Livermore’s emotional discipline
Reminiscences says the speculator’s worst enemies are inside him: hope and fear. With a losing trade he hopes it will come back; with a winner he fears losing the gain and sells too soon. The book’s advice is to reverse both: fear the loser, and let the winner run. The cycle in the drawing below shows how those feelings follow price.
Patience cuts both ways. The 1940 book ties Livermore’s mistakes to acting before price reached a pivotal point. Once in a good trade, the narrator says the hard part is not being right but holding: “Men who can both be right and sit tight are uncommon.”
Modern rule: turn patience into rules written before the open: a maximum number of new trades per week, entries only at a pivotal point you wrote down, and exits only on the raised stop or a close below the last higher low. A trading plan and the habits in trading psychology help.
Failure case: “sitting tight” without a stop is not patience, it is hope. Holding a loser because the trend “should” resume is exactly the mistake the book warns against.
Why Livermore went broke, and where his rules fail
Livermore’s story has no tidy ending. He went broke more than once and filed for bankruptcy in 1915 and again in 1934; biographers disagree on the details. The man whose name is on the rules is the clearest proof that knowing them is not enough, and that one famous trader’s results are not typical.
The drawing below shows why deep losses are so hard to undo: after −10% you need +11% to get back to the peak, after −25% you need +33%, and after −50% you need +100%. Risk a small, fixed share of the account per trade, often 0.5–1%, set a weekly loss limit, and never borrow more to hold a loser. See risk management.
Even followed exactly, the rules fail often:
- In choppy markets most crossings fail, so expect strings of small losses.
- Gaps open beyond stops, so a planned 1% loss can become 2% or more.
- Late adds near a top are the first to be stopped out, and they give back gains.
- Famous charts are chosen after the fact; survivorship bias hides the many traders who used similar ideas and failed.
- Livermore traded in a different market, with bucket shops, prices in fractions and far looser rules, so his exact habits do not transfer.
How to test the Jesse Livermore strategy today
Here is the whole method as rules you can test on past charts, then in a trading journal, before risking money. The values are examples, not Livermore’s; change them and test again. Later breakout methods such as the Darvas box and the Turtle rules rest on the same buy-strength, cut-losses logic.
On intraday charts, UpTickFlow, our invite-only TradingView indicator, applies a similar wait-for-confirmation idea, so weigh this accordingly: it waits for a candle to close at a level, draws the entry, stop and target before the trade, scores the setup from 0 to 100 and stays quiet in chop. It does not find pivotal points or pyramid: a second check, not a scanner.
- Trend: the last swing high and swing low are both higher than the ones before (daily chart).
- Pivotal point: a prior high above a sideways area of at least two weeks.
- Trigger: a daily close above the pivotal point on volume above its 50-day average.
- Stop: under the base low; skip the trade if that is more than 8% below the entry.
- Size: 1% of the account ÷ the stop distance.
- Failure exit: a close back below the pivotal point within three sessions.
- Adds: at +1R and +2R, each smaller, with the stop raised so open risk never exceeds the first trade’s.
- Exit: the raised stop, or a daily close below the last higher low.