The Livermore Market Key


MANY years of my life had been devoted to speculation before it dawned upon me that nothing new was happening in the stock market, that price movements were simply being repeated, that while there was variation in different stocks the general price pattern was the same.

The urge fell upon me, as I have said, to keep price records that might be a guide to price movements. This I undertook with some zest. Then I began striving to find a point to start from in helping me to anticipate future movements. That was no easy task.

Now I can look back on those initial efforts and understand why they were not immediately fruitful. Having then a purely speculative mind, I was trying to devise a policy for trading in and out of the market all the time, catching the small intermediate moves. This was wrong, and in time I clearly recognized the fact.

I continued keeping my records, confident that they had a genuine value which only awaited my discovery. At length the secret unfolded. The records told me plainly that they would do nothing for me in the way of intermediate movements. But if I would but use my eyes, I would see the formation of patterns that would foretell major movements.

Right then I determined to eliminate all the minor movements.

By continued close study of the many records I had kept the realization struck me that the time element was vital in forming a correct opinion as to the approach of the really important movements. With renewed vigor I concentrated on that feature. What I wanted to discover was a method of recognizing what constituted the minor swings. I realized a market in a definite trend still had numerous intermediate oscillations. They had been confusing. They were no longer to be my concern.

I wanted to find out what constituted the beginning of a Natural Reaction or a Natural Rally. So I began checking the distances of price movements. First I based my calculations on one point. That was no good. Then two points, and so on, until finally I arrived at a point that represented what I thought should constitute the beginning of a Natural Reaction or Natural Rally.

To simplify the picture I had printed a special sheet of paper, ruled in distinctive columns, and so arranged as to give me what I term my Map for Anticipating Future Movements. For each stock I use six columns. Prices are recorded in the columns as they occur. Each column has its heading.

  • First column is headed Secondary Rally.

  • Second is headed Natural Rally.

  • Third is headed Upward Trend.

  • Fourth is headed Downward Trend.

  • Fifth is headed Natural Reaction.

  • Sixth is headed Secondary Reaction.

When figures are recorded in the Upward Trend column they are entered in black ink. In the next two columns to the left I insert the figures in pencil. When figures are recorded in the Downward Trend column they are entered in red ink, and in the next two columns to the right, the entries are also made in pencil.

Thus when recording the prices either in the Upward Trend column or in the Downward Trend column I am impressed with the actual trend at the time. Those figures in distinctive ink talk to me. The red ink or the black ink, used persistently, tells a story that is unmistakable.

When the pencil remains in use I realize I am simply noting the natural oscillations. (In the reproduction of my records later on, bear in mind that the prices entered in light blue ink are those for which I use a pencil on my sheets).

I decided a stock selling around $30.00 or higher would have to rally or react from an extreme point to the extent of approximately six points before I could recognize that a Natural Rally or Natural Reaction was in the making. This rally or reaction does not indicate that the trend of the market has changed its course. It simply indicates that the market is experiencing a natural movement. The trend is exactly the same as it was before the rally or reaction occurred.

I would here explain that I do not take the action of a single stock as an indication that the trend has been positively changed for that group. Instead I take the combined action of two stocks in any group before I recognize the trend has definitely changed, hence the Key Price. By combining the prices and movements in these two stocks I arrive at what I call my Key Price. I find that an individual stock sometimes has a movement big enough to put it in my Upward Trend column or my Downward Trend column. But there is danger of being caught in a false movement by depending upon only one stock. The movement of the two stocks combined gives reasonable assurance. Thus, a positive change of the trend must be confirmed by the action of the Key Price.

Let me illustrate this Key Price method. Strictly adhering to the six-point movement to be used as a basis, you will note in my subsequent records that at times I record a price in U.S.Steel if it only has had a move, let us say, of 5 points because you will find a corresponding movement in Bethlehem Steel, say, of 7 points. Taken together the price movements of the two stocks constitute the Key Price. This Key Price, then, totals twelve points or better, the proper distance required.

When a recording point has been reached—that is, a move of six points average by each of the two stocks—I continue to set down in that same column the extreme price made any day, whenever it is higher than the last price recorded in the Upward Trend column or is lower than the last price recorded in the Downward Trend column. This goes on until a reverse movement starts. This later movement in the other direction will, of course, be based on the same six points average, or twelve points for the Key Price.

You will notice that from then on I never deviate from those points. I make no exceptions. Nor do I make excuses, if the results are not exactly as I anticipated. Remember, these prices I set forth in my records are not my prices. These points have been determined by actual prices registered in the day’s trading.

It would be presumptuous for me to say I had arrived at the exact point from which my record of prices should start. It would also be misleading and insincere. I can only say that after years of checking and observation I feel I have arrived somewhere near a point that can be used as a basis for keeping records. From these records one can visualize a map useful in determining the approach of important price movements.

Someone has said that Success rides upon the hour of decision.

Certainly success with this plan depends upon courage to act and act promptly when your records tell you to do so. There is no place for vacillation. You must train your mind along those lines. If you are going to wait upon someone else for explanations or reasons or reassurances, the time for action will have escaped.

To give an illustration: After the rapid advance all stocks had following the declaration of war in Europe, a Natural Reaction occurred in the whole market. Then all the stocks in the four prominent groups recovered their reaction and all sold at new high prices—with the exception of the stocks in the Steel group. Anyone keeping records according to my method would have had their attention drawn very forcefully to the action of the Steel stocks.

Now there must have been a very good reason why the Steel stocks refused to continue their advance along with the other groups. There was a good reason! But at the time I did not know it, and I doubt very much that anyone could have given a valid explanation for it. However, anyone who had been recording prices would have realized by the action of the Steel stocks that the upward movement in the Steel group had ended. It was not until the middle of January 1910, four months later, that the public was given the facts and the action of the Steel stocks was explained. An announcement was made that during that time the English Government had disposed of over 100,000 shares of U.S. Steel, and in addition Canada had sold 20,000 shares. When that announcement was made the price of U.S.Steel was 26 points lower than its high price attained in September 1939 and Bethlehem Steel was 29 points lower, whereas the prices of the other three prominent groups were off only 2.5 to 12.75 points from the high prices that were made at the same time the Steels made their highs.

This incident proves the folly of trying to find out “a good reason” why you should buy or sell a given stock. If you wait until you have the reason given you, you will have missed the opportunity of having acted at the proper time!

The only reason an investor or speculator should ever want to have pointed out to him is the action if the market itself. Whenever the market does not act right or in the way it should — that is reason enough for you to change your opinion and change it immediately. Remember: there is always a reason for a stock acting the way it does. But also remember: the chances are that you will not become acquainted with that reason until some time in the future, when it is too late to act on it profitably.

I repeat that the formula does not provide points whereby you can make additional trades, with assurance, on intermediate fluctuations which occur during a major move. The intent is to catch the major moves, to indicate the beginning and the end of movements of importance. And for such purpose you will find the formula of singular value if faithfully pursued. It should, perhaps, also be repeated that this formula is designed for active stocks selling above an approximate price of 30. While the same basic principles are of course operative in anticipating the market action of all stocks, certain adjustments in the formula must be made in considering the very low-priced issues.

There is nothing complicated about it. The various phases will be absorbed quickly and with easy understanding by those who are interested.

In the next chapter is given the exact reproduction of my records, with full explanation of the figures which I have entered.

Part of “How to Trade in Stocks” by Jesse Livermore.


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