10 10 2007


This chapter focuses again on the human side of trading. While in the poor-house, Larry is offered assistance by a brokerage firm with special needs. While working within this firm, Livingstone lets his feelings win over his judgement again and makes a mistake that he regretted more than any other he made on Wall St. One can repay money with money, kindness and favours must be paid back in kind. This is where Larry undid himself, by allowing himself, unknowingly, to be used by a brilliant and cold-blooded businessman.

An interesting theme in this book is repeated in the way the character reacts once he realizes that he has been used. Even though he was hurt and angry, he simple thanked his sponsor and left. He was as angry at himself for the markets were trading well and he was reading it accurately, but he let his own gratitude tie his hands. Following this involvement, the markets went flat – no profit to be made – for five years where Larry lived again in the poor-house. But worse, he was not only broke, but now he was greatly in debt.


This was a great chapter for me to read at this time in my life. It focuses on the importance of self-study. One must work out internal conflict to be able to trade the market effecively.


Coffee example – a trader must be prepared for the unexpected and the unexpectable!


Avoiding Punishment is the mistake

30 09 2007


This chapter gives several examples of different peoples method of placing their trades, and uncovers the difficulties that many people have in following a trading method. Much of the difficulties lie in the behavior pattern of avoiding punishment. A speculator may make mistake and know that he is making them, but not why. He simple calls himself names and lets it go at that. 

Mistakes are always around if you want to make a fool of yourself. Mistakes are part of the human condition, and should not cause lost sleep. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.  

Trading Commodities rather than stocks partakes more of the nature of a commercial venture than trading in stocks does. Commodities are governed by one law in the long run, supply and demand.  Fundamental information is more concrete than in Stocks, where the investor must guess about many influences.  

Technical analysis, or tape reading, works exactly the same for stocks as for cotton or wheat or corn or oats. Still, the average trader from Missouri everywhere will risk half his fortune in the stock market with less reflection than he devotes to the selection of a car. Today the popular analogy is that most people spend more time planning their vacation than they spend planning for their retirement.  

The speculator wishes to profit by either a rise of fall in prices. The thing for the speculator to determine is the line of least resistance – and wait for the moment when the line defines itself. Getting in to early will often cause you to be whipsawed.  Best to define areas of resistance, and wait for a breakout.  Once prices breakout, the patient trader will have two forces in his favor 1) underlying conditions and 2) traders who were wrong and have to cover their positions. News items often come out to explain why prices broke through and are often unexpected by the trade.  It is human nature to exaggerate bull news in a bull market and to ignore bear news, and visa vera in a bear market – yet people will always express astonishment at this fact. {this is the basis of The Reversal Thingy of Mikey’s Methods to Money or Madness}  

The speculator is not an investor, who wishes a steady return at a good rate of interest, nor a gambler, who hopes for a great big profit, but a speculator looks for smaller but much more probable profit from either a rise or fall in prices.   Larry’s system of placing his bets incorporates the key importances of Phantom’s Rule #1 and Rule #2.  Often this system would show and initial loss in testing a market. Once the correct timing occurs on entry, the initial loss is easily recovered and, using Rule #2, greater position size is added when the trade is proven correct.  

In order to proactive what you preach, you must trade according to your own nature. There is another example given of the Pat He arne method of placing his bets, and of covering his positions. A workable system that was implemented by another trader, with much poorer results, because he was not able to make himself follow the rules.  Even though he knew he was ten thousand kinds of an ass for not sticking to that style of play, he repeated his costly mistakes.   Human weakness that may make you likeable to others, that are not so dangerous in other venues, are fatal in speculation.  A man has to ‘reverse what you might call his natural impulses’, or, use a counter-intuitive principal.  The correct emotional responses are to fear that your losses will get larger, and hope that your profit will grow.  Instead, most investors lose money trying to avoid a loss – they hold a loser hoping it will reverse, and when they show a profit, they fear the market will take it away, and so take the profit to quickly.  

The last chapter brings up the re-occuring theme that no man can beat the market.  Or as Phantom puts it – trading is a losing game.  Throughout these pages, the correct manner of entering and building a position are both geared to reducing the risk of loss – to avoid damage to your pocketbook and your soul.

Trading is a high stress occupation

25 09 2007


Trading is a high stress occupation, and frequent holidays are important. Larry removes himself from even hearing about the markets by going out on a fishing boat. When he does finally hear about the market while on holidays, Larry often cuts his holidays shorter than planned if he sees that the market is ready for it’s next movement. Before going on holidays, all positions are liquidated.

After this fishing trip, Larry returns to the quotation board and watches the tape for an idea of the market’s mood. Although he is generally bearish, the short-term indications seem to point him to long one particularly active stock. He explains his reasons for buying the stock and puts on a large line. As it turns out, the position wasn’t proven correct so he bales out – then shares his observation of others who stayed long and started to sweat, and to hope. ‘The only thing a man can do when he is wrong is to be right by ceasing to be wrong’. In exiting his position, Larry sells at the market. Although one can lose a few ticks on poor execution by a broker, setting a limit order is often worse. Often your limit isn’t hit, and you get stuck with a bigger loss when you try to get out later. When you want to get out, get out.

Market behavior and people behavior are not the same. After an outrageous rally in a bear market, people started to talk bullish again. The course of the market, however, said the rally had run it’s course. And Larry sold. His profits reminded him that he was right and he sold more. After four months of trading on the bear side, the markets began to slow down. Larry cleaned up operations and took a holiday in Europe for the summer. Returning early from this trip as well because of market conditions, we are again given the inside view of the ‘other’ traders mind. The market was megaphoning it’s warning to the world until the day of reckoning for the bulls that, ‘dreading the pain of a small loss at the beginning, were now about to suffer total amputation – without anesthetics.’ The mouse in the glass bell analogy fits perfectly.

The rest of the chapter talks about the tightness at the bottom of the bear market, the profits that our character has pulled from the markets, and finishes with a great quote; ‘But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear-cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class’

Independent Thinking in Trading

22 09 2007


Independent thinking – separation from the opinions, surmises and suspicions of other people, however friendly and able they may be – is a vital key to trading the general market swings. You must go by your own meaning of the facts you observe. This is the only way you will bump up against the truth. Only through this process do you gain confidence in that events, and not vanity, proves that you can read the tape well enough to win. With this insight, one is also able to remain distant and objective even when the market unexpectedly, or even illogically goes against your position.

One should let their mind dwell on the general market that one is trading in, bull or bear, then put into practice a method of anticipating probabilities. One drawback is that one has to have a trading stake large enough to trade this way.

Once he started looking at the general market outlook, he was no longer satisfied merely reading the tape and ceased to be concerned with the daily fluctuation of individual stocks. In sizing up the general market, Larry spoke of the value of the daily dope, or the news off the wire. At every angle he gave them low marks, but pieced the news together himself. He looked to where the money was flowing in the economy of the world at the time and gives picture that we see, in hindsight, see to be a prophetic crystal ball. A major bear market was in the developing stages and he could see nothing to prevent it.

Larry outlines his expectations, his trades, his losses, another attempt, another loss and another quick covering of his short positions…losing money. Each time the market showed weakness, as he correctly foresaw, he would put out a large line, only to have the market continue to advance… While outlining the actions he took, Larry adds hindsight to his commentary to reveal the mistakes that were his undoing. At the time he could only see the inevitable – the sure trade, and it lead to another financial ruin. He was forced to get credit from his brokerage firm.

Now, after a series of spankings from the market, he was less careless – he simply had to be sure this time. In retrospect, Larry points to this as the first campaign along the lines that he had followed since. He waited and sold more intelligently. A little of this, a little of that on more weakness. The whole list was soft as mush. Then, on a small rally, he recalls the advice and beliefs of others. And begins to observe their rationalizations, but can ignore them because he still sees the general market direction. In his selling, he speaks of seeking out the weaker ones and letting them have it. I think he refers to using relative strength on charts, or technical analysis. However, even the stock showing weakness last will have to follow if the underlying conditions prevail against it, just don’t become impatient.

Once the market broke, Larry added to his winning positions using the method of placing bets as outlined in Chapter VII.

Larry introduced his method of testing the market for confirmation before putting on his full position, so the reader would more clearly recognize the damage – the avoidable damage – that poor risk control did to his trading stake.

Once his timing was correct, and he added on his correct assumptions, he made great profits! When the move had lost it’s momentum, Larry liquidated, took a vacation and gave the markets no thought for some time.

The Negetive Effects of Listening to Tips

1 09 2007


This Chapter focuses on two topics. First, Larry gets a Hunch that turns out very profitable. Second, we get to walk through the negative effects of listening to tips – even from intelligent, non-biased sources.

The Hunch is not a logical trading decision, but purely a gut feeling. As I read this chapter it seemed to me that Larry’s discussion with his friend would be the internal thoughts and battles one would be having as they tried to understand why they were compelled to follow the Hunch; should they stick with it etc… The counter-intuitive judgement? Or it may idea be the Creative Mind at work, subconsciously assembling all the gathered information until – the Hunch forms. Once the Hunch proved itself correct, Larry did the only thing he could do – add to the position. His strategy here is in complete accordance with Phantom of The Pits – Rule #2.

The second theme centered on the perils of acting on someone else’s market tip – even if the are in a position to get inside information. This is a reoccurring example of having to have faith in your own judgment and trading.

The correctness of the tip is less important than the process of gathering the information needed to form a certain opinion as to the market direction.

The different processes used to make money leave different echo’s on your psychological perspective – which can alter your judgment. This painful experience, Larry says, completed his education as a trader. I found this to be a very heavy statement.

It was not just learning to follow his own assessment, rather than following the tips of others, but that he gained the confidence in himself necessary to entirely shake off his old way of trading.

Stock Gambling vs Stock Speculation

29 08 2007


Noting the behavior of a stock and studying it’s past performance is a very old art form. Even at the turn of the century, traders were keeping monthly charts and intra-day charts, they studied seasonal patterns as well. But it is easy to suffer from over-specialization if the analysis doesn’t appraise the market conditions as a whole.

Larry tells us his main trouble – that he was blind to and that cost him so dearly – was in not recognizing the difference between stock gambling, betting on fluctuations, and stock speculation, anticipating inevitable advances and declines. This is one of the mistakes that the average trader makes year in and year out. One his third entry into the New York Exchange, Larry’s expectations were more patient and long-term. For a paragraph, the author explains his perspective on how trading is balanced with other aspects of living once the markets were closed. Though he lived well and denied no wants, he knew that could never afford anything that kept him from feeling physically or mentally fit, and emphasized the importance of a good nights sleep for Balance in the rest of his living. He was not over-specialized. His first change in trading was in the aspect of time. He looked for the long-term advances and declines and studied trade reports, railroad earnings and other statistics. In a Bucket Shop, he only considered studying the past hour of price activity!

If I had lost oftener, it would have lead me to more continuous study… Larry says, and gives us his method of studying new ideas; Before I can solve a problem I must state it to myself. When I think I have found a solution I must prove I am right. I know of only one way to prove it; and that is, with my own money. Later he adds that there is as much to learn from partial victory as there is from defeat.

Larry found a mentor among the crowd of average customers. An old man who listened politely to everybody, but traded differently. He sat unconcerned when minor price fluctuations made everyone else flee. He held a long term perspective on the direction of the entire market, knowing that the big money was not made in reading the tape, but in sizing up the entire market and it’s trend. Here, Larry reflects over his life of trading and confirms this reality stating:

It was never my thinking that made the big money for me. It was always my sitting

Men who are right and can sit tight are uncommon, he explains, because most become impatient or doubtful when the market takes it’s time doing what you figured it must do. It takes brains and vision to put on a position at the beginning of a reversal of general directions. It is against the opinion of the majority. This emphasis on longer-term trading in the book makes me re-think the value of TWMPMM, and makes me think a Book Report on the Edward’s and Magee classic; Technical Analysis of Stock Trends would be a great addition to my list. The major reversal patterns and consolidation patterns, along with volume, divergence’s and relative strength patterns, should be studied more closely.

Larry comments that the intelligent patience to sit tight was the hardest thing for him to learn. It is very difficult to un-learn bad habits from the past. With faith in your judgment, you can sit without a twinge of impatience, even in the face of a set-back. He began to treat his paper-profits differently than his initial equity – more willing to risk open equity for the opportunity of catching the big swings, that’s what makes you the big money. Larry makes a remark that closely parolees Dan Millman’s ‘Stages of Awareness’ in learning.

If I learned all this so slowly, it was because I learned by my mistakes, and some time always lapses between making a mistake and realizing it, and more time between realizing it and exactly determining it.

Outside of trading, the book’s character lives the high life of style and taste. He is not yet looking at his life in the long-term, and has not yet seen the value of a nest-egg.

In order not to lose money

26 08 2007


Larry went back home. But as soon as he was there, he knew that gathering a stake and returning to New York was his one mission in life. He was compelled, and confident he would succeed. At first, he was rejected from his old stomping grounds. The old Bucket Shops still would not take his orders. In a conversation with other traders, Larry makes the comment that the game cannot be beaten because of the slippage in order fills, especially when you trade using market orders. As it turns out, he repeats this warning in the last paragraph of the book, leaving an ominous ring in the reader’s ear.

After talking with another trader, Larry investigates a local brokerage firm, and relates all manners of underhanded tricks they use to take money from the suckers and newbies. Having no intent on following their tips, or believing their lies, or worse yet, letting them trade his money for him, he went and spoke with the manager of the firm. He was assured that they have great execution – he was able to trade just like in a Bucket Shop. After learning all he could, he set up a small office and ran direct wires to three brokerage firms. For a time he traded slowly and fought for his view when their accounts and records didn’t match his own. These mistakes were uniformly against him, or course. After a while, and a couple instances of being cheated by the tricks of a crooked firm, Larry decided to turn the tables and play the scam on the scammers. He gives a detailed look at how the market can be manipulated for a short period.

For a year, Larry lived a life of balance and patience. He set aside money for his stake, but also allowed himself to live very comfortably as well. Once he had a fair sized bank roll, he set out for New York, his third attempt. He had built himself to ten thousand, and lost that “because I traded out of season all the time…went in and gambled…I hoped to win.” Then he built himself to fifty thousand and lost it in one day – due to the “laggard tape and the unprecedented violence of the movements on that awful day.”

“When you know what not to do in order not to lose money, you begin to learn what to do in order to win.”