Jesse Livermore on Trading Psychology

Jesse Livermore is regarded as one of the greatest stock traders in history. His principles of trading are still relevant today.

But he also had significant ideas about emotional discipline, trading strategy, and the psychology of trading.

His 1940 classic “How to Trade in Stocks” is a groundbreaking guide that reveals his systematic approach to trading, market timing, emotional discipline, and the importance of combining price and time elements for successful trading.

Jesse Livermore’s take on trading psychology

Livermore suggests that traders fail because they are human, and being human means being susceptible to emotions like hope, fear, and hesitation.

These emotions cloud judgment and make it difficult for traders to stick to a plan and follow a disciplined approach.

Here are some of his ideas on trading psychology

1. Emotional weakness
   Livermore emphasizes that emotions like hope (believing the market will turn in their favor) and fear (closing trades prematurely due to anxiety) are destructive to successful trading. These emotions are part of human nature but must be controlled in trading.

2. Lack of Discipline

   He notes that many traders lack the discipline to execute a well-thought-out plan, especially when faced with unexpected market movements. This hesitation or deviation from a strategy is what leads to losses.

3. Hope and Fear in Reverse

   An unconventional idea Jesse Livermore offered is that traders often experience hope and fear in reverse. They hope when they should be fearful (e.g., holding onto losing trades) and fear when they should be hopeful (e.g., cutting profits short).

4. Failure to Stick to a Plan

   Livermore stresses the importance of having a “guide” or system to counteract emotional decision-making. Traders fail not because they are inherently gamblers but because they don’t follow rules or use tools to override their emotional biases.

5. Difference Between Trading and Gambling

   He firmly believes trading is a business, not a gamble. However, when traders treat it as a game or adventure, they fall prey to the same mistakes as gamblers—impulsiveness, overconfidence, and failure to manage risk.

6. Human Nature vs. Market Nature

   Livermore argues that markets operate independently of individual desires or emotions. Traders often fail because they impose their emotional needs (e.g., wanting a stock to recover) onto the market instead of observing and reacting to what the market is objectively telling them.