1

Jesse Livermore came out with a set of rules in his book "How To Trade In Stocks" in 1940.

One of the rules is that price of particular asset should deviate by 6 points from the last pivotal point in order to safely call it change in trend's direction.

"You will notice that from then on I never deviate from these points. I make no exceptions" says Jesse on page 86.

"Point", in my understanding, is the smallest price change to the left of decimal comma.

How do I count 6 points (and how Jesse did that with Wheat and Rye) if price of underlying asset is smaller than $1?

3

I'm just guessing but I doubt that Jesse Livermore was trading stocks under $1. Trading systems are adjusted according to relevant metrics. As an unrelated example, with Point & Figure charting, the box size is adjusted according to the price of the underlying:

  • $5 to $20: 1/2 point box
  • $20 to $100: 1 point box
  • $100 to $200: 2 point box
  • and so forth

I'd suggest that you see if Livermore's rules work on mainstream stocks that trade at much higher prices. If you can find some semblance of return there, then prorate the values down (if a 6 point reversal works on a $100 stock then try various amounts in the vicinity of 60 cents on a $10 stock).

My two cents is that a fixed 6 point rule makes no sense at all. Consider Google at $1,085 versus AT&T at $31. You need something more flexible.

2
  • Deeper search through the book revealed "...this formula is designed for active stocks selling above an approximate price of 30. While the same basic principles are of course operative in anticipating the market action of all stocks, certain adjustments in the formula must be made in considering the very low-priced issues". I guess the upper band for his formula is around 200. Jan 9 '19 at 14:53
  • I'd say that if you wait for a stock to move 20% in the opposite direction (6 points on a $30 stock), you don't need Jesse Livermore's rules to know that the trend has changed. It's also horrible risk management. Jan 9 '19 at 17:01
2

On page 47 of his book, Jesse wrote ”If the 40 point has been pierced but not by the proper extent of 3 points, then it should be bought as soon as it advances to 43.” He was writing about a theoretical stock with a pivotal low price of $40, and he was instructing that the price, after turning and trending up to $49 then turns down again through 40 (but not through 37, which would break the pivot point) “then it should be bought as soon as it advances to 43.” It is unequivocal that he meant 1 point = $1. But we should remember that although the 3 and 6-point rules apparently worked for Jesse during the thirties, today we can only hope to understand his general principles. We should also remember that he was a unique plunger. He was able to make and lose legendary fortunes but he tragically ended it all with suicide and a self-assessment of failure. He was already hinting in his book that times were changing and his methodology would require tweaking when confronted with technological progress.

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