Project Freedom (12): Livermore Secret Market Key on Price Chart

Jesse Livermore (July 26, 1877 – November 28, 1940) is one of the most famous legendary traders in stock market.  His intriguing hero’s journey in the Wall Street was well recorded in the book – “Reminiscences of a Stock Operator” by American author Edwin Lefèvre.   And, this book is widely quoted in many trading books and recommended in many trading classes.

But, not many people know about his “Livermore Secret Market Key” which was written by himself and published in 1940.  This book can now being found in Wikipedia Link for free download.

Jesse Livermore spent up to 40% of his book in explaining the technical details of his operation in the stock market.  The challenge is for the reader to understand and implement it.

Unfortunately, it is not a simple task to understand the method in table form.  For there was no programming flow-chart during his time, he used a table and long procedures to go through how to fill it up.  Most beginners will lost his way in their first few attempts.

 

The objective of this article is to demonstrate that the 6-columns table can be programmed into 6-levels of band in modern price chart, and it would faciliate the readers to visualize the interaction of Jesse Livermore Secret Key and the stocks. 

Fig 1.  Transformation of Livermore Secret Market Key from Table to Price Chart. 

 

 

Fig 2. The Livermore  Secret Market Key in Action.

 

One of the famous quote from Jesse Liver more is:
"Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes".


So, What do you think?   IF he is still around today and using the same method, written 70+ years ago, can he still make money?

The following are various charts using Livermore Secret Market Key and they clearly demonstrate that he is right.  For this method is advocating Trend Trading and ignore minor noise (which means do not run in and out of a stock too frequently).


A Minor Change in the Rule:

During his time, Jesse Livermore used fixed amount of dollar to define the "Levels of Band" as filter, similar to Point and Figure charting method using 3 point change.  But as of today, there are stocks trade more than hundreds or thousands of dollar, so two types of changes can be applied to the original method to see the effect.  The first change in the method is, logically, using the fixed percentage change, and second, using the fixed amount of Average True Range(ATR) for the band's level.


Fig 3. Livermoare Secret Market Key applied on SnP500 ETF(SPY) (Weekly)
In Figure 3, the upper chart shows the "Fix Percent Band" while the lower chart shows the "ATR Band".




Fig 4. Livermoare Secret Market Key applied on SnP Financial Sector ETF(SPY) (Weekly)


There are two points to be made in Figure 4 (Click and Zoom In).
1) It is Crystal Clear that if one were to follow the weekly chart religiously, he will not suffer from the 2008 financial crisis. For the chart shows a clear down trend.

2) Using "ATR Method"  is superior than "Fix Percentage Method", for every stock/commodity/ETF has its own characteristics in terms of Volatility.  Using ATR method help to adjust the band-level automatically for all vehicles.

So, from here on, the following charts will ONLY use ATR band (Dynamic Band that self-adjust to the stock volatility) as demonstration.



Fig 5. Some Hot stocks - Apple and Google (Weekly).







Yes.  Due to whatever reason, even till today, there are still people using "Buy and Hold" method in the market.  From the above Chart, there are two points we can learn:
1)  IF the Goal is to make profit from the market, follows the trend.  NEVER EVER ARGUE with the price chart.  IF the Goal is to PROVE he is right that the stock will eventually go up again some time in the future while the chart moving down, by all means, let him hold on as long as he like.

2) IF the market is on side-way, using Trend Trading Method would incur in lost, therefore, one need to learn to learn the master the skill of CUTTING LOST.  It would be so much better to acknowledge that was only a small error made in the market rather than let it continue to grow and eventually becomes a BIG MISTAKE.


The following are more charts to illustrate the points mentioned above.

Fig 6. Commodity - Silver and Gold ETFs (Weekly)
.
Fig 7. Commodity - Argriculture and Commodity Index (Weekly)

NOTE: If Argiculture commodity is moving down or in a side way, chances that those related companies are not performing too, even if whatever fundamental data of the stock are strong.  Use the money to invest someway else, and wait untill the relevant commodity to move up, then buy the related stocks.


.
Fig 8. Malaysia KLSE Index and Singapore STI (Weekly)


..
Fig 9. Hong Kong HSI and Japan Nikkei 225 Index (Weekly)

.
It is very interesting to note that Malaysia market has performed so much better among her few Aisa peers since the 2008 global finacial crisis.  My guess is that the DID NOT lose so much money in that crisis in the US Banks as compare to the others. :-)

"There are many times when I have been completely in cash, especially when I was unsure of the direction of the

market and waiting for a confirmation

of the next move...."

Jesse Livermore

Personal Finance (7): Realistically, What’s the Yield Rate for Top Traders?

For many beginners  who come to invest/trade in the stock market, they don’t have a realistic idea of how many percent they might gain over a year.  For years, from the trader library and forums, I figured out that the top number was around 28-35%/year.  And, recently, I discovered that these numbers are way too low for benchmarking at all…  and, that could set an invisible barrier of limit in traders mind.

1) Breaking Through from the Limiting Beliefs:

Here is just a short story of how imaginary barrier can limit people performance and may spark some inspiration in the mind…

* The 4 minutes Barrier

Just like once people thought that the world was flat.  Before 6 May 1954, athletes had never able to run a mile under 4 minutes, and some “experts” at the time even commented that it was physically impossible for a human to do so, or the heart would explode under the pressure to run a mile in under 4 minutes.

Roger Bannister was medical students at that time, not even a professional runner, believed it could be done.  He prepared himself with training and he became the first person to ever run a sub four-minute mile (3min 59.6sec) on 6 May 1954.

More interestingly, 56 days after Roger Bannisters breakthrough, John Landy ran the four minute mile in 3 minutes and 57.9 seconds in Finland. Later Bannister and Landy raced in the Mile of the Century where Bannister won in 3 minutes and 58.8 seconds.

As for today, it is no more any surprise for high school athletes to run a mile under 4 minutes, for that mental barrier had been gone.

ONLY after a person breakthrough from his own limiting beliefs, he can then sail into uncharted waters and has experiences he never had before.

2)      Setting the Right Benchmark or Higher

Recently, I have come to know of an old trader who wrote and trade his own system for 30 years and only work for himself.  He does not sell his system or even signals for trade.

On the other hand, he joins some forums and professional groups to share some valueable views and ideas…  He also presents his research paper freely for others who may interest to read.

For those who may get the ideas from his paper would know that his system is for REAL, and not fantasy.

If you are interested to get into the financial market some day, say in the future.  Then it is strongly recommended that, take a look at his website… His papers and his simulation results.

http://alphapowertrading.com/

These are some of the back test results with over 100% return a year:->
On Turtle system:

http://alphapowertrading.com/index.php/tests/turletests/turtles-test-v32-improved
On Modified Jesse Livermore System:

http://alphapowertrading.com/index.php/tests/livermorechallenge/livermorechallenge3rdact

(with permission to post as reference)

ONLY when there is a good Benchmark, then one can know what kind of aim he should set…

OF COURSE, the market cannot give profits from air, when more and more people are aware and able to use such strategies and tactics, the profits would drop according to number of participants are able to develop such systems.  

Many “Conventional Wisdoms”, such as ship must be built by wood in order to be able to float, no machine can fly, and later believe that plane cannot break the sound speed barrier, etc…  are now proven to be wrong ideas that limiting people imagination...

 

"One person with a belief is greater than a force

of ninety-nine who have only interests."
-unknown

Stock Market Tools (6) - 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...."

- Jesse Livermore

Livermore Market Key Table. (Click to enlarge)

In his book, "How To Trade In Stock"(<-downloadable), the stock speculation king, Jesse Livermore had spent a great deal of effort to illustrate how he used his own method in determining the trend of stocks... And he named it as the "Livermore Market Key".

Although the method was published in 1940, and many traders who had read some classical trading book must have come across this Tool, this method is not popular at all. I guess, most likely, that it involves with lot of manual work in updating the table as shown above. With current technology, this can be programmed into charting format to make it more user friendly as the following chats...


In the Market Key System, Livermore applies two level of filter to double check whether the stock is in Up-Trend or Down-Trend. So at anytime, a stock is classified into one of the six states:-
1: Up Trend, - (Long - Plotted as Green in the following Diagrams)
2: Natural Rally, - (Close position and stay with Cash)
3: Secondary Rally, - (Close position and stay with Cash)


4: Down Trend, - (Short - Plotted as Red in the following Diagrams)
5: Natural Reaction, - (Close position and stay with Cash)
6: Secondary Reaction. - (Close position and stay with Cash)


In his example, Jesse Livermore use 5 points as the filter threshold for stock that go from 30 plus to 100. To make it able to use of all price range of stock, using "percentage change" would be a good choice for programming the algorithm. And, in fact, this is the ONLY parameter that needs to be taken care of...

Parameters Setting:

All the following charts are using the same setting of 10% as filtering threshold. Of course, one can go through computerized optimization to find out what value work best, over here it is just for illustration purpose.


The next three charts below are S&P500 Monthly, Weekly and Daily Chart. And are all have the Livermore Market Key with 10% threshold setting:-

SPY (S&P500) Monthly Chart: Click to enlarge

SPY (S&P500) Weekly Chart: Click the Chart to enlarge

SPY (S&P500) Daily Chart: Click the Chart to enlarge

It shows that there are more Buy and Short Signals from shorter time-frame chart, that's the daily chart. (But, the back test data show that the Monthly Chart actually gain more profits.)
The following are just some charts around the globe with this indicator:-

China SSE Composite Daily Chart: Click to enlarge:

Singapore Straits Time Index Daily Chart: Click to enlarge

UK ETF Daily Chart: Click to enlarge

Germany ETF Daily Chart: Click the Chart to enlarge

Note: The back tested data has shown a surprising fact: That's this algorithm work better in longer time frame... That is trading with weekly charts are more profitable than daily charts.

The Algorithm that describes in his book, "How to Trade in Stock" is now decoded in the form of programming flow-charts, and it can be download here.:->
Programming the Jesse Livermore Market Key

Jesse Livermore once said: "It was never my thinking that made me money but my sitting tight."
How True! People would normally think too much either win or lose in their account with the emotion of greed or fear. Only those who work with system and stick with it can sit tight.

"...providing tools that can be utilized to evaluate information is more important than providing information; that tools whereby one can use his/her judgment is more important than providing values, and demanding responsibility is more important than providing laws and rules of conduct. The latter should be the default of only those who are unable or unwilling to take responsibility." - Clara Szalai (Philosopher, Writer)

Relevant Articles:
-> More articles on Stock Market Tools...<-
->Personal Finance<-
->Project Freedom<-

->HOME<-

->Comment<-

The program source code in AFL can be download from:

1) http://www.wisestocktrader.com/indicators/484-livermore-secret-market-key-indicator

2) Amibroker's AFL Library.(Need some little work to re-define the plotting state.)

----------------------------    Additinal note added on 10 May 2012  -------------------------------------
Like most other single stock indicator, Livermore Market Key was designed to analysis single stock.  In his book, Livermore put recommend to put two similar stocks(same sector) next to each other as to it would help to confirm the signals. 
As of today, the market is much more complex.  It is recommend to have a overall view on the market with the concept of -> Sector Rotation <- rather than just focus in one stock.



---------------------------- Additinal note added on 19 Apr 2013  -------------------------------------

Just thought of an idea.

Instead of plotting the levels indicator, one can actually plot these level lines ONTO the price chart itself.  The advantage would be knowing in advance the exact stop level instead of waiting for the indicator to switch states.

Would get back to work on this soon.

---------------------------- Additinal note added on 06 May 2013 -------------------------------------

As promised on the last update, the following linked shows the Livermore Secret Market Key's Levels plotted on the price chart itself.  Very much helpful in visualizing the market action taking place and how the Market Key works!

Livermore Secret Market Key on Price Chart

Enjoy. :-)



Bless You
KH Tang
 

Stock Market Tools (5) - Tape Reading

"Money is made in

Tape Reading by anticipating what is coming

-- not by waiting till it happens and going with the crowd."

— Richard D Wyckoff

1. Introduction

"Tape Reading" is a classical method that uses to calculate the number of shares Accumulated or Distributed in a particular stock. It been used as one of the key tool to measure the "Internal Factor" by the Gurus, such as Jessie Livermore, Richard Wyckoff, etc... combined with other "Technical Factors" of the stocks/market.

The Proposition of how Tape Reading works is that The direction of the long term trends depends upon the amount of stock owned by and disposition of the insiders and key investors against the public. As Tape Reading can be use to deduce the Accumulation and Distribution activities, and even estimate the total percentage of shares in the insiders and key investors. Therefore it can use to deduce the price direction and level.

Those who are interested in the original detail of how to do so can find out from some old classic book, such as "Reminiscences of a Stock Operator -by Edwin Lefèvre" or "Day Trading Bible - Richard Wyckoff", etc.

2. How does Tape Reading Methodology been Evolved... Volume Based Indicators

While the "Tape Reading" methodology has be evolved over time and use in current charting indicators, it basic Proposition for the idea are the same:

A) The manipulators/ insiders must accumulate enough percentage of the shares in a particular stock before they would mark up the price for distribution.

B) The manipulators/insiders are having more information than the public, and would act before the public has notice the potential of the movement.

The direct translation of the methodology into the current charting indicator is the On Balance Volume(OBV).

The OBV calculation is basically adding the day's volume to a running cumulative total when the security's price closes up, and subtracts the volume when it closes down.

There are many other variations, such as volume weighted moving average etc... All are based on the same idea that volume should move first (or to be more exact, that the accumulation or distribution should start first), before the price would move strongly.

3. How and why does it loss it effectiveness

For those who are seriously want to find out how effective of those volume based indicators, it can check it out by doing a throughout back-test of data since the indicators inception till current date.(Which would not likely possible for individual to do so). Or to check out the results in some books. "The Encyclopedia of Technical Market Indicators, by Robert Colby" is one of a good book for doing so. (Some example backtest result -> Link)

It can be seen that all these volume-based indicators were performing wonderfully well from 60's,70's and all of a sudden, in the 80's, they lost their effectiveness as an indicator for buy and sell.

This is because there are more and more trading software available together with the Personal Computers, and computerized trading system for the big institution.

Let me explain...

For those volume based indicator that the public is using, they are mainly using the daily time-frame. So, the volume based indicator has made an assumption that the trading volumes are equally distributed in the whole day.

For the manipulators who would want to paint a picture of Accumulation, they can simple sell (distribute) the shares heavily, and just before the market is closing, they can suddenly buy back a couple of percent of what they had sold and push the price above yesterday's closing price. By doing so, all the Volume-based indicators will give false information.

One can simple do an experiment to proof this...

By collecting the one minute OBV, 15 minutes OBV, 60 minutes OBV and Daily OBV over a period of some time, say for two months. It would notice that there will be contradiction in the signals by the same indicators itself with different time frame.

In general, the shorter the time frame, the more accurate it would be. But then the problem would be that most softwares are not able to handle years of 1 minutes data (Unless the user has to write special peace of code to compress the 1 minutes OBV and load it back to match with the daily price chart.)

4. How to correct these errors and bring back it accuracy

Even so, that is to reduce the time frame down to a minute or second, there is still a problem with the accuracy in such volume based indicator. As there is one more factor that need to be consider...

As today, the market is full of trading news in all sort of controlled media...

So, when the manipulators wanted to purchase some particular shares, bad news would have came out to the public first, so that they can buy all the way down.

For the classical method, all fall in price during the transaction are considered as a distribution, while all raise in the price are considered as a accumulation. And, in the Figure 4, it shows a snap shot of the Raw data of a typical transaction. Since the Bid and Ask are very dynamic, and for some high volume stocks, it can be transacted a couple or few tens of time within a second.

So, the correct way to calculate the accumulated/distributed volume MUST take consideration of the Bid and Ask on the transacted price.

If the price is taken place on the Ask, it is a accumulation, and if the price is taken place on the Bid, it is a distribution.

When one can collect the data as such for a particular share, then... over a long period of time... he can then decode the INTERNAL CONDITION of the stock. And, it must use together with others Technical Analysis Tool to get a better timing.

For those who can understand this, it need no further explanation. So be it.

Bless You.

KH Tang

...BTW, The last chart show how the money was hidden in the stock... The manipulator are the one with deep enough pocket to go through the crash, and know exactly which one to accumulate...

Relevant Articles:

-> Jesse Livermore's Secret Market Key <-
-> More articles on Stock Market Tools...<-
->Personal Finance<-
->Project Freedom<-

->HOME<-

->Comment<-