First, you must understand: the essence of trading is not to predict the market, but to learn to respect the market and act in accordance with the trend.
Essence One: Trend is king; go with the trend.
In 1907, the famous 'Nickelback Trust Company bankruptcy' incident occurred in the United States, triggering a severe stock market crash. At that time, Livermore observed market trends, decisively followed the trend, and shorted a large number of stocks. He accurately grasped the market's downward trend and earned $3 million in one go, becoming one of the brightest stars on Wall Street at that time.
He later recalled: 'I did not predict the stock market crash; I simply followed the market trend. The market always tells you the direction; the question is whether you are willing to listen.' At the same time, he emphasized entering the market during the mid-term of a trend, rather than at the early or late stages, which is what we now call the 'body of the fish theory.' The core of trading with the trend is to let profits run further until the trend changes; do not exit too early.
At the same time, in the process of trading with the trend, stop loss can be dynamically adjusted according to the market. As the market continues to develop in a favorable direction, the stop loss can be gradually raised to protect profits. Many people lose money because they are too attached to their judgments, going against the trend, and as a result, they are severely punished by the market.
Essence Two: Risk control is more important than making money.
Livermore went bankrupt four times in his life, but each time it was due to uncontrolled risk management. In the book, he frankly states: 'The money I earned was far less than what I lost taught me.'
In the early 1910s, he saw an opportunity for a rise in the cotton futures market and immediately bought heavily. Unexpectedly, the cotton price began to fall the next day. He hesitated and did not stop the loss immediately, but chose to continue to add to his position. He believed he could not be wrong, but the market ruthlessly fell for several weeks. In the end, Livermore had to cut his losses and exit, almost losing all his principal. At that time, he didn't even know how to write the words 'stop loss' (this is reminiscent of many of our trading friends).
These painful experiences made him realize: 'In trading, the most terrible thing is not making mistakes, but refusing to admit mistakes. Mistakes themselves are trivial; insisting on mistakes is a disaster.' He truly learned the lesson of risk control at the cost of countless losses and four bankruptcies.
Essence Three: Patiently wait for the real opportunity.
Livermore later had a habit: for most of the time, he just sat in the office staring at the market, motionless. Others found him extremely boring, but he said, 'There may be only a few opportunities in a year that are truly worth my action. Most of the time, I quietly wait; patience is more important than any technique.'
He once waited for a clear confirmation of a trend for six whole months, just to grasp the safest and most profitable timing. In his view, the market does not have opportunities every day; most so-called opportunities are traps. He likened trading to a lion hunting: most of the time, it is lurking, only decisively striking when a real opportunity arises, striking with certainty.
Essence Four: Never trust rumors.
In his early years, Livermore also believed in 'insider information'. The most painful lesson was the Union Pacific Railroad stock incident. He bought this stock heavily after hearing so-called 'insider' positive news, but unexpectedly, the market fell sharply, resulting in heavy losses.
He wrote painfully in the book: 'Insider information always ends in tragedy; the market knows everything before you do. If the information were useful, Wall Street's secretaries and drivers would have become millionaires long ago.'
He has repeatedly confirmed that rumors are not only useless but often mislead you to enter the market in the wrong direction. The only thing you should trust is the market price itself because the market is more honest and quicker than any source of information.
Essence Five: The essence of trading is to conquer oneself.
In 1929, the most severe stock market crash in American history occurred, causing many people to lose everything. Livermore keenly sensed that the market was overheated in advance. When his friends were frantically buying stocks, he quietly shorted them. At that time, his friends mocked him as timid and foolish, but he just smiled lightly and said a classic quote: 'When shoe shiners start recommending stocks, I know it’s time to leave the market.'
Sure enough, shortly afterward, the market crashed, and the whole of Wall Street was in tears, while Livermore again made $100 million out of thin air, becoming one of Wall Street's most legendary investors.
But after this great victory, he fell back into frequent trading due to arrogance and emotional loss of control, and as a result, he lost all the money he had made in the subsequent market fluctuations.
He said, 'Ultimately, what defeated me was not the market, but my own uncontrollable greed and arrogance.'
I have three emotional management principles in my trading:
(1) Take appropriate breaks from trading.
When I feel overly emotional or about to get carried away, I temporarily stop trading to give myself time to calm down. After calming down, I will re-establish my trading strategy and then enter the market. At this time, stopping trading may mean missing out on a profit of 1,000 yuan, but if you act impulsively, it could lead to a loss of 10,000 yuan.
(2) Have clear trading rules.
To avoid emotional trading, the best method is to establish clear trading rules and form a complete trading plan, including precise entry points, stop loss points, and take profit points. It is best to write the trading plan on paper and keep good trading records afterward.
(3) Reasonable position management.
The risk of each trade should be within a controllable range; without taking risks, one will not be afraid, and emotions will be easier to stabilize. This is just like the concept in the book: as long as you can wait patiently for opportunities, you can become one of the few profitable traders in the stock market.
The essence of this book is not to teach you specific trading techniques, but to constantly remind you:
Controlling risk is more important than making money;
Trading with the trend is more important than predicting market movements;
Managing emotions is more important than learning techniques;
Self-discipline and patience are more important than frequent trading.
These truths are easy to understand, but the vast majority of people will never achieve them in their lifetime. Livermore, with his own life story, four bankruptcies, and several peaks, vividly tells you how severe the consequences of ignoring these principles can be.
To be honest, if you can understand this book, it can save you several years of detours and significant monetary losses. It allows you to foresee the consequences before making mistakes and turn others' lessons into your own wealth.