Trading 101

Jesse Livermore's 1940 book, "Reminiscences of A Stock Operator", is considered the Bible of the trading world (guess I should read it then, huh?). I saw the following written on Friday and felt it was worth posting for my own reminder, as well as anyone else who may gain some wisdom from it. From Jesse's book:

"The speculator's chief enemies are always boring from within. It is inseperable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day - and you lose more than you should had you not listened to hope - to the same ally that is potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon...etc."

The translation: Unlike our spiritual lives, hope is our worst enemy in trading when we are holding a losing position and fear is our greatest enemy when holding a winning trade. As Jesse Livermore writes elsewhere, we are to fear that our losses get worse and hope that our profits grow larger, but as humans we tend to cut our profits short, fearing they will grow smaller, and we allow our losing trades to remain intact, hoping that they will turn for the better. Rarely, however, do they.

To this end, the worst trading advice anyone can be given is "You never go broke taking a profit," for that literally forces one to take profits early...to cut them short...to abandon trades that are working well, almost certainly at that point in time when they are going to begin working even better. Poor speculators, poor investors, the poorest of traders take small profits...dozens of them...hundreds of them, and yet bury themselves with one or two enormous losses, all the while telling themselves, "You never go broke taking a profit." Yes, you do; Yes, you really, really do.