In this chapter, Livermore shared the whole process of a wheat futures transaction that made a profit of 3 million, and gave a detailed explanation of the situation in this process. Let's interpret it from three aspects.
1. Advantages and disadvantages of the first half of this transaction
Livermore waited patiently for the trade to go long after the key point was broken, and doubled his position after the next key point was broken. However, he only made a small profit and exited the market.
He concluded:
"I realized that I had made a big mistake. Why should I be afraid of losing something that I never really owned? I was too eager to achieve success and convert my paper profits into real cash. I should have been more patient and had the courage to hold my position to the end. I knew that once the time was right, when the market finally reached a certain key point, it would send me a danger signal and leave me plenty of time."
In fact, we often encounter this mistake, commonly known as "not being able to hold the order"
2. The highlights of the second half of this deal
After realizing his mistake of exiting the market too early, Livermore re-entered the market at a higher price. This time he kept going until the "abnormal retracement" stage as he defined it. At this critical point, he closed his long position and opened a larger short position. In the end, he made a profit of more than 3 million on the wheat trade.
Making mistakes is not a terrible thing. What is terrible is being tripped up by mistakes and not daring to move forward.
3. There are a few scattered flashes in this chapter
a. When judging the key point of "abnormal retracement", he referred to rye, which was strongly correlated with wheat, and tested the market's ability to bear the rye by short selling.
In the case of strongly correlated varieties, varieties with small volume and shallow depth may enter a reversal early
b. When buying and closing the short position of wheat, he issued a transaction order at a specified price before the market opened. In his own words, "The temptation of emotion defeated rational judgment."
It can be seen that the control of emotions is also a "key point" that a trader needs to be vigilant at all times.
c. Short selling can stabilize prices
“The value of allowing short selling in speculative markets is that people who hold short positions become active buyers, and in the event of a panic, active buyers can provide much-needed stabilization.”
The more extreme the market situation, the clearer the feeling will be.
The question in this chapter is: If the first transaction fails, do we have the courage to continue the second transaction? You can discuss in the comment section.
Next, enter "Chapter 8 Livermore's Market Analysis Method"
