Jesse Livermore Truism: The trend is your friend

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The great thing about excellent advice is that it lasts for a long time. In the case of Jesse Livermore, his gift to the financial world was a wonderful book called “Reminiscences of a Stock Market Operator.” Written under the pen name of Edwin Lefevre, it goes into great detail about Jesse Livermore’s philosophy of stock trading in the 1920s. What’s amazing is how durable his information has been. And one of his basic priniciples is as true today as it was then.

The general trend of the stock market is a hugely powerful influence and cannot be ignored.

“The trend is your friend is basically” what Livermore preached, as well as practiced. When the market was bullish, he went long. When the market went bearish, he shorted. In fact, during the Great Depression he made $100 million dollars shorting the market. Looks like trend following paid off for him and it’s something you should become aware of in your trading career. Going against the overall trend of either a market, a sector, or a stock is something you never do. Trading on momentum works because of human pyschology, so the fact it worked in 1920 means it still works today. Humans don’t change that much. If everyone is bullish about a certain stock in a certain sector during a bull market, you would be CRAZY to go against all of them to attempt to profit.

When you look into buying a stock, check out how the other companies in the same industry are doing, and see how well their stock has performed. You want the relative strength of your stock to be as high as possible, especially if you’re looking to cash in off of a short-term trend

Here’s what you can look for in a winning stock:

1) The sector is hot with sales way up
2) The company is hot…a clear number one in the sector
3) The economy is hot, or least heating up

If you combine these three in a pick, you’re looking at picking up a gain by their next earnings report.

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