The Livermore Market Key

After reading How to Trade in Stocks by Livermore, I decided to make an honest effort with his system.

I found his explanation clumsy, so I haphazardly tried things out. I then went back to his explanation and it made more sense. It goes to show, learning with context is always easier.

Here's an overview of how it works:

(To get a closer view of the screenshots, press CTRL + "+" keys. To reverse effect you use the "-" key instead.)

You record prices in six columns. Which column a price goes in is determined by Livermore's rules. The columns suggest when trends begin and end as well as filter out unimportant price movement.

So far, I've tested the system with over a dozen stocks, each time over a period of a month. Except for once where I broke even, I have always made money. Usually, my monthly growth is between 10-25%. Several times, I had growth over 50%. I am sure in practice, the results will not be as spectacular. I am convinced, though, that this system is a sound trading strategy.

This second screenshot is the results from using only the Livermore Chart. No stock graphs were used. 31% in one month with four trades - not too shabby. And with practice, I am sure to find better results. Currently, I always try to be in the market, so I probably miss signs suggesting that the trend is unclear. That is probably why I was stopped out on the 19th of August, as you can see.

For those who know about the system, I made two changes:

-Livermore only changes columns when there is a big enough price change. He uses six points. He does this to filter out the noise. Myself, if the price changes direction, I always record it. It works fine for me.

-Livermore determined a trend by a change of three points. I use 5% of the initial price.

Perhaps this is why Livermore could use six points, yet I find it unreasonable.

It's nice to think that I can buy and sell stocks a few times a month and still make a profit. All I have to do is keep a record of mid- and end-day prices and watch for trends. If this is true, it's good news for me because I'll be in class most of the day. But then I feel like trading really ought to be more difficult...

I also have used Think or Swim's simulator to "day trade" using Prophet's historical charts. I would change the time period and scale so that every movement forward in time on the graph would expose another 15 minutes. Then, I would record my entry and exit prices in my datasheet. This is a difficult method, though. When the stock moves against you, it is easy to backtrack and change your entry/exit points - "Oh, I didn't mean that." However, day trading in this way, I make a lot more money than I do using Livermore Charts.