1877 - 1940: 'Buy or sell at the psychological extreme (the danger point), where the risk is lowest.'
1873 - 1934: 'Until you can completely ignore the financial news, you will never be successful in the markets.'
1899 - 1974: 'Limit your position to one or two stocks only. Minimize your time in the market. Do not diversify.'
Market Masters: Livermore, Wyckoff & Loeb
The trading method that is implemented by my firm is patterned after the three masters above.
The following is a brief summary (along with source data) on their trading techniques, research or money management styles. Each of these masters brought their own unique approach to the markets. In their simplest form, those techniques are summarized below:
Jesse L. Livermore: Strategy
Over the course of many years trading in the early bucket shops and then via brokerage houses to the NYSE and the Consolidated Exchange, Livermore’s method was ultimately strategic in nature.
His objective was to identify what was going to happen in a big way. Look for a move or condition that had the potential to be sustainable thus generate gains for doubling and tripling (or more) of the original line.
Once the opportunity was identified, initiate or continue research on the idea to generate a firm mindset of the possibilities.
Then, with general conditions in place, begin to look for the entry point. This point is referred to by Livermore as “the danger point”. It is the location of maximum psychological extreme.
Note: The 'danger point' is not necessarily the top or bottom of a move. It is the location on the chart where the largest numbers of participants are in the greatest amount of pain. Price action could go either way.
Once the danger point is identified, initiate a position and be prepared to exit immediately if the position begins to erode.
If the market goes in your favor, then “sit tight” and allow the full extent of the opportunity to come to fruition.
Richard D. Wyckoff: Tactics
Few in the industry know that it was Wyckoff who defined the following terms:
In his seminal work, Studies in Tape Reading, Wyckoff discussed the above terms (although in somewhat archaic language such as "point of resistance").
Wyckoff saw that the markets had an energy of their own that had nothing to do with fundamentals.
It's no mistake that Wyckoff is not mentioned on news channels or other corporately generated financial media. My former mentor, David Weis stated: 'It's the best kept secret on Wall Street'.
Wyckoff's work contains the truth of price movement.
He sought to understand the market “by its own action”. The market itself identifies the next most likely move.
By Wyckoff’s own admonition, it takes years and many losses to master the art of reading the tape. The "tape" in today's markets is represented by the price-bars and volume: Nothing more.
There are no indicators (moving averages, MACD) on a chart that has used original Wyckoff analysis.
Once the professional speculator has mastered the art of reading the tape, it can be determined form the chart the next likely (most probable) direction of the market.
Gerald M. Loeb: Focus
As the former Vice Chairman of E.F. Hutton, Loeb stated in his text The Battle for Investment Survival, that if you do not understand the markets, you diversify.
Diversification is the “averaging of errors”. Such averaging by its own nature always results in mediocre performance.
His view was that good and sustainable opportunities are few. The speculator must do his research and determine where the opportunities are; Then focus specifically on them.
When, and if a good opportunity presents itself, one must use it to its maximum extent.
Loeb's admonition was that one's entry into a position should be instantly profitable. If your market analysis is correct, then the position will move in the anticipated direction immediately and show a profit.
He emphasized that money is not ‘at work’ in the markets; Money is 'at risk' in the markets.
As a corollary, he was one of the first to emphasize minimizing time in the market (counter to buy-and-hold). Market speculation is a dangerous game in a dangerous place. Capital is at risk. Identify the opportunity: Get in and get out … quickly.