Your One Job in the Market – Risk Management in Stock Trading

Risk Management in Stock Trading
Your One Job in the Market - Risk Management in Stock Trading

Jesse Livermore (1887–1940) was one of the great stock market traders of the 20th century. He enjoyed a lifestyle that most of us can only dream about.

Few people in the markets have accumulated and lost money as quickly as Livermore.

At the height of his wealth he owned massive estates in many countries, Rolls Royce cars, and huge yachts. He was famous for his opulent parties and success with the ladies.

At the end of October 1907, after the panic of that year, it is believed Livermore made his first million.

In October 1929, after the panic of that year, Livermore was up $100 million.

Yes you read right. 100 mln US dollars in 1929. In today’s money that’s around $1.3 bln!

We know that from one of Livermore’s subsequent biographers, Richard Smitten, who had access to the family archives.

It’s rumoured that a furious president of the United States telephoned Livermore at the time and told him in no uncertain terms to ‘stop shorting the market’.

Livermore made more than one fortune over his lifetime.

Having said that, the Jesse Livermore story doesn’t have a happy ending.

Rumour has it he suffered from severe depression.

However, we leave that story for another time.

Livermore did leave us with some very special quotes. These are the kind that only a real trader can give. Here’s one we can fully identify with…

Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong — not taking the loss — that is what does the damage to the pocket book and to the soul.’

Your job in the market is to do one thing: manage risk.

This is what Livermore is trying to point out.

Sound easy? It isn’t.

The most important factor in trading markets is mastering your own emotions and psychology.

It directly impacts your risk management. The problem for a lot of people when they make a trade is that they don’t just put money down.

They put their ego and self-worth down as well. A lot of bad decisions can flow from that dynamic.

Beware: it is human nature to hope the trade will turn around and go your way.

This is where you can get into trouble. You start hoping and wishing for your stock to turn around. But the market doesn’t care about your hopes. It will do its thing regardless.

That’s why you must take your losses quickly.


Imagine you own and run a small business.

One of your employees is coming to your attention in a negative sense.

He’s often coming in late, returning late from lunch, and you’re getting negative feedback from frustrated clients that he’s not returning their calls.

What do you do to such a troublesome employee?

You fire him of course!

You have to take this approach to your share market investments. If your stocks are not doing what you want them to do, fire them!

The sooner the bad ones are gone, the better.

A curious thing happens when you do that.

You’re just left with hard working employees creating revenue for you, doing exactly what you want them to.

We can’t emphasise this point enough.

If the trend is in doubt, get out.

By taking your loss quickly, you take all the emotion out of it.

If you are not firm with your stop loss and start to fiddle with it, you’re setting yourself up unnecessarily to take a hit.

And you may have noticed the lower the share price goes, the tighter you want to hold the stock.

You think things like, ‘I can’t sell out now, I’ll lose too much!’

See how the trade can become emotional and you lose control of the situation?

You then find yourself in the position of holding based solely on hope. Hope that the share price will recover and let you get your money back.

That’s not a place you want to be.

Never put yourself in this position. Never.

Waiting and hoping for stocks to turn around is a recipe for disaster.

Slumping stocks may take years to come back up, if they ever do.

Always place a stop loss at the time you enter the trade.

The amount of stock you buy is based on your stop loss. Do the sums. You buy as much stock as you are comfortable with, should your stop-loss be taken.

If the amount of money you risk losing should worry you, buy less stock!

This is how you manage risk.

Giving advice on stop-losses is not easy.

Here’s why. One, because there are so many different methods you can use.

And two, traders and investors (always a murky distinction there too) come to it from different angles.

Some investors use charts and some don’t.

Some are trading the daily chart in and out of stocks in a matter of days or weeks. And some are long term investors.

And there are subtle differences with each approach.

Find out what works for you.

Best wishes,

Callum Newman Signature

Callum Newman (& Terence Duffy)
Editor, Profit Watch