The Role of the Turning Point! : Jesse Livermore

Jesse Livermore

table of contents

• Buy in fear, sell in greed!
• The Concept of Correction!
• Abnormal Correction!
• The Role of the Turning Point!
• Summary of Livermore's Concepts of Correction and Turning Point!

Buy in fear, sell in greed!

In Jesse Livermore's investment theory, 'correction' and 'turning point' are two concepts that significantly influence the liquidity and success of stock trading.

Livermore emphasized that understanding the flow of the market and strategically approaching it is the key to success.

Although these concepts may seem somewhat complex, they enable investors to make clearer judgments and respond more quickly. This article will delve deeply into Livermore's concepts of correction and turning point.

The Concept of Correction!

According to Livermore, stock prices can easily rise without correction. However, a normal price correction is a necessary process.

A correction refers to the temporary decline in stock prices after a rise, and this correction can be seen as a preparatory stage for the next upward trend.

During a normal correction, stock prices typically experience a decline of about 15% from their peak. At this time, trading volume tends to decrease significantly compared to before the decline.

For example, if a stock with a clear brand like Apple shows an upward trend and then experiences a slight downward correction, it indicates that there is a possibility for the stock price to rise again.

“Should I hold on or let go? I end up feeling conflicted and eventually shrink back. However, there is a fact that should not be forgotten.”

This is that after the correction period, the market often rebounds and sets new highs. If such a rebound does not occur, it is necessary to judge that the stock has lost its strength and to sell decisively.

In other words, the correction process that occurs after a rise should be viewed as an essential element.

Abnormal Correction!

However, not all corrections are encouraging, and special caution is needed when abnormal corrections occur.

An abnormal correction refers to a situation where stock prices sharply decline unexpectedly after a rapid rise. In such cases, the downward trend may easily continue or become prolonged.

For instance, a company that belonged to a traditional industry may see its stock price soar due to expectations of entering a promising industry, only to quickly decline based on analyses indicating low growth potential.

When an abnormal correction occurs, investors should immediately exit the market.

Stocks that have experienced rapid increases in the past require particular caution during such corrections, and prior information and market analysis are essential to minimize damage after the correction.

The Role of the Turning Point!

A turning point refers to the point at which stock prices break through support and resistance levels in either an upward or downward direction.

Livermore emphasized the need to take immediate action at turning points. According to him, when analyzing stock price patterns, major position decisions should typically be made within 48 hours.

At this point, quick judgment is crucial, and if that judgment is incorrect, one should sell immediately to minimize losses.

For example, if a stock price surpasses a resistance level, it can be interpreted as a signal of upward movement.

However, if the trading volume is low at this time, caution is warranted as the price increase may be temporary. Conversely, if the price falls below a support level, decisive selling is necessary.

Thus, judgment at turning points is very important, and investors should recognize that even slight delays can lead to losses. Investors should carefully observe these turning points and act appropriately according to the market flow.

Summary of Livermore's Concepts of Correction and Turning Point!

Jesse Livermore's analytical method is based on stock price corrections and turning points. Stock prices require corrections to rise, and if these corrections are normal, they should inevitably lead to a subsequent upward trend.

Abnormal corrections should be approached with caution, as ignoring these signals can result in significant losses. Additionally, quick reactions at turning points serve as a key factor in determining investment success, necessitating special attention.

Through Livermore's strategies and principles, investors can respond flexibly to market trends with sufficient analysis and quick responses, free from emotional influences.

By keeping these principles in mind, you too can position yourself more effectively in the potentially volatile stock market.