"King of Speculation" Jessie Fermor's highest level of trading: the inverted pyramid method of increasing positions
"In 1907, he correctly judged the stock market crash and earned $3 million in one day. In order to save the market, the financier Morgan sent a special envoy to ask him not to short again, and he agreed; in 1921, during the economic recession and the stock market downturn, He entered the market to go long; in 1929, he accurately shorted before the big crash, earning $100 million and reaching the peak." He is the king of speculation, Jesse Livermore, a milestone legend on Wall Street. What we are discussing today is mainly Jesse Livermore's stock operation rules.
01 Pyramid operation method
The pyramid operation method is an original secret book of Livenmore, and no one has clearly proposed a similar operation method before him. This method of operation is based on a speculative common sense: no one can 100% predict the trend of the market. Fortunately, even if it is impossible to predict, we can circumvent this problem through certain speculative disciplines. This discipline is the inverted pyramid method of increasing positions.
In short, the inverted pyramid method of adding positions is a tentative operation strategy. Before buying any stocks, first establish a small position. Overweight. He always executes the operation of equalizing the highs when the price is rising, rather than leveling the lows when the price is falling. At any time, novices in the stock market like to flatten down, so that it seems that their holding costs are getting lower and lower, but their losses are getting bigger and bigger. If the tentative operation strategy is very successful, it means that the probability of trend reversal is getting higher and higher, because the stock price has been rising at an incredible speed for a long time. At this time, Livermore paid full attention to the signs of the stock's reversal. Once he saw the signs, he left the market decisively, and even went short. All Livermore has to do is identify a potential turning point in the market and establish the timing of the first entry (a small test trade) as the market explores that price area. If the market shows a willingness to continue acting as expected, he may add to his position. If the market moves upwards as expected, the analysis is proven correct. He will enter the market to increase his position in the second stage, the market will continue to rise, and he will continue to increase his position when he enters the third stage. Until the end, when the new trend direction is about to appear, I have already left the market. Don't forget that the trade has shown a paper profit, which provides a nice safety buffer. You can even use this to set your breakeven point as a stop loss. Livermore believes that any profitable stock always makes money at the beginning of the tentative operation, and the profits will continue to grow by itself after that, and you don't need to pay attention to it all the time. And those stocks that made you lose money at the beginning, you'd better stop the loss immediately, because the loss also has a tendency to roll up.
02 The inverted pyramid method of increasing positions is also applicable to foreign exchange transactions
If you are an avid speculator like Jesse Livermore, then you can also choose the inverted pyramid method of adding positions. Strictly speaking, as Livermore practiced, the inverted pyramid method is well suited to a form of margin trading, where you borrow money against paper profits in order to increase your position on the same trade. The inverted pyramid method of adding positions is also suitable for markets with large trading volumes, such as gold ETFs, commodities, foreign exchange and index transactions. But please note that Jesse Livermore's method is very risky. If you can't manage the risk of senior investment, don't try this aggressive investment method, or this greedy investment choice. The key to this investment discipline is to keep an eye on total portfolio risk. It is best to keep your portfolio risk within the 2% maximum. In other words, even if you are forced to stop trading, the loss on your account should not exceed 2%. If you have a $10,000 trading account, you should not risk more than 2%, or $200 per trade. When the investment target moves in your favorable direction, the possibility of it continuing to rise will be greater, and the risk will be reduced due to the profit. But when the trend reverses and the choice of the time to leave the market are matters that any investor must pay attention to. Although Mr. Jesse Livermore did not achieve a good start and end well, and ended up in an extremely tragic end, but as the biggest myth of Wall Street in the 20th century, both his followers and rivals admit it—Jesse Livermore Is one of the most outstanding stock market operators. With his original ideas, he explored what works and what doesn't work in the stock market, and pointed out a clear way for countless traders.
03 Specific applications in different market conditions:
1. Bull market position management Generally, the market and most individual stocks have effectively stood on the first half year line and the year line again after many years. In addition, the macro and policy aspects have a bull market foundation, and the bull market will gradually deduce. The overall rise and the profit-making effect are the main market characteristics. . It is the best operation to follow the trend and not move. a. Short-term investors: Can operate with full positions, have a certain level of technical analysis and short-term skills, and can be the leader of hot spots in the market at that time, but try to pinch trends or small bands after opening positions, and it is not suitable for ultra-short-term. b. Mid-line investors: about 80% of the positions, about 50% of the positions are established in the early stage of the bull market, and they continue to increase their positions during the upward trend. Select companies with both industry and concept highlights to hold the mid-term trend. When the market sends out a more obvious signal of phased adjustment in the middle of the bull market, the position can be appropriately reduced. c. Long-term investors: more than 80% of the positions, most of the positions are established at the end of the bear market and the beginning of the bull market. Choose 3 or so individual stocks to hold mainly, and wait for the market and some index stocks to signal a general trend reversal or the market is seriously overvalued, and gradually withdraw positions in batches.
2. Oscillating market position management It is relatively difficult to operate in a volatile market. Most of the market and individual stocks take the elevator back and forth, and it is rare for individual stocks to stand out and continue to rise. a. Short-term investors: It is recommended to take a position of less than 60%, and you can repeatedly operate more active concept stocks, but if the market breaks the consolidation pattern and breaks down, you need to choose to exit. b. Mid-line investors: 30-50% of positions, choose stocks with interesting industries and companies. The performance of such stocks in a volatile market is often impressive. c. Long-term investors: In the volatile market on the way down, wait and see, and there is still great uncertainty in the general direction of the market, so it is not an ideal opportunity to open a position. If the market was in a historically low valuation area at that time, you can start to select severely undervalued targets to try to deploy.
3. Bear market position management Under the background of bear market characteristics, the market systemic risk is obviously released, and most individual stocks are dominated by continuous decline. Going with the trend, cash is king is the best coping strategy. a. Short-term investors: Most of the time, they are short-term, predict that the market will be seriously oversold and then oversold, and when there is a repairing technical rebound, they can attack short-term heavy positions under the background of setting strict stop losses. Generally, within 5 days, regardless of profit or loss, they can choose to sell out. The key to the operation is to have a good grasp of the rhythm of the market trend, have certain timing and stock selection capabilities, reduce the frequency of transactions, and increase the winning rate of transactions. In the case of a bear market, profits can also be realized. b. Mid-line investors: defense first, wait patiently, short positions are advisable. c. Long-term investors: focus on waiting, improve internal strength, and study individual stocks. In the middle and late stages of the bear market, you can start to gradually build positions on stocks that are optimistic about the long-term. Issue a reverse signal to continue increasing the configuration.
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