Livermore Swing System

Chart Forum » Trading - Systems » Livermore Swing System

«« Previous Next »»

Thread Start New Thread
Last Poster Posts Pages Last Post

Author

Message

smallworld

Member

Post Number: 549
Registered: 01-2004

Rating:
Votes: 1


Friday, March 16, 2007 - 11:06 pm:

Jesse Livermore, legend from another time, still an inspiration to many traders today. His story is an educational one, from amassing great fortunes to his ability to lose the same.
From the limited study that I've done based on the following sources
1. S&C magazine V 1: 4
2. The Encyclopedia of Technical Market Indicators - Colby.

I found that he developed his method through his experience from the the time that he was a "board boy". His method is known nowadays as the Livermore Swing System.

The system uses two filters
1. Swing filter of x%
2. penetration filter of one half the size of the swing filter.
The purpose of the filter is to market noise less than x%, much like the P&F charts do. For example, an upswing is in place when price rises above x% the lowest low since last downswing has started. Conversely, a downswing is when price falls below x% the highest high since the last upswing.
The chart below is constructed using a swing filter of 20% for an upswing and 16% for a downswing.

You will notice that until 2003, ERA was on a downtrend, ie it is getting lower swing highs and lower swing lows. To stop getting in prematurely, Livermore used a penetration filter to weed out any swings which does not rise above the previous swing high by y%. From my research, Livermore defined a swing of $6 for stocks around $30 or higher. Changes in character of price activity were further defined by $3 penetration or more.

One the ERA chart above, the Green uparrow represents a penetration of 7%.

From what I found, it still works pretty well today in our roaring market, I guess most things work, but it also provides a method to enter the market objectively. While the original Swing method is used to catch trend changes ie from down to up trend or vice versa. it works pretty well on trend continuation as well.

Recent candidates are CRG and FXJ

CRG did very well and FXJ was pretty ordinary.

Thats enough for now.
I'll upload some more recent candidates in the next post if there is enough interest

sam111

Member

Post Number: 2
Registered: 03-2007

Rating: N/A
Votes: 0


Saturday, March 17, 2007 - 08:43 am:

Smallworld, I've read a couple of books on Livermore and thought that he must have been a discretionary trader.
I never figured out his method. This is very interesting, it looks like it works best on trending stocks.
I would be interested to see if it can be applied to the XJO maybe as an additional entry/exit signal.
Cheers Sam

smallworld

Member

Post Number: 550
Registered: 01-2004

Rating: N/A
Votes: 0


Sunday, March 18, 2007 - 12:38 am:

Hi Sam
Judging from what I read, I agree with you that he sounded like a discretionary trader. But mind you, they didn't have computers in those days so he didnt really have a lot of choices there. I also think he was a highly disciplined trader, and would really have plenty of systematic approaches behind all those "mad" discretions.

I think you are spot on in saying that his method is for trend trading as opposite to swing trading - the system is designed mainly for capturing most of the trend rather than a single swing. Thats' probably why Livermore said "After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It always was my sitting."

Your second question is a very interesting one. The trading result or equity from this method shows peaks and troughs are very much aligned to those of the index. So easy money can be made when the market is on a upswing, and some of that is given back on a downswing. So if you are like Captain Jack Sparrow, you would probably use a xao/xjo swing filter to get you out of the market during the downswing. It will be like taking bites out of the current trend.

I believe the system is quite easy to understand, and profitable and I have a number of variations of it. The reason I posted it here is that like those before me who posted their methods, I want those who are seeking a profitable method, to use any part of this discussion to build their own trading strategy. Perhaps some people feel that they dont have the means to calculate the swing highs and lows easily so they can monitor their candidates or trades. I think this can be quite readily done in excel.

If there is anybody who is interested in a collaborative effort to put an excel spreadsheet together. I'll be happy to provide the information needed to build such a spreadsheet.

(Message edited by smallworld on March 18, 2007)

smallworld

Member

Post Number: 551
Registered: 01-2004

Rating: N/A
Votes: 0


Sunday, March 18, 2007 - 12:07 pm:

Just received a PM wanting to join in the group work on this spreadsheet. People can either PM me or put their hand up here, thats fine by me.

Just a few charts here
As Sam said, one key is to select Trending stock Vs ranging stock. BSL is a ranging stock (within the timeframe we are talking about, and BBG on the other hand is a trending stock. Both satisfies the Livermore criteria but BBG looks a better candidate. Another candidate is a breakout stock after a fairly long consolidation as in LNN

sam111

Member

Post Number: 7
Registered: 03-2007

Rating: N/A
Votes: 0


Sunday, March 18, 2007 - 02:52 pm:

I'm always up for a learning experience, so count me in please Smallworld. I'm not very proficient at Excel and as a matter of fact deleted it from my computer a month or so ago! But I have Open Office installed and hopefully that will do.
I am mainly interested in exits rather than entries.
Cheers Sam

thebank69

Member

Post Number: 19
Registered: 10-2005

Rating: N/A
Votes: 0


Friday, March 23, 2007 - 09:48 am:

small world,
Have you read ' How to Trade Stocks' which contains Livermore's own words on trading? Are you suggesting the Livermore Market key he used to analyse the strongest stocks and leading stocks of a group is as you describe with your swing charts method? Discretionary trading, as far as I know, is not a mechanical trading technique.Didn't he use pivot point analysis after looking at stocks from a top down approach? Didn't he 'sit and wait' for the ideal entry point, rather than sitting through the uptrend? DIdn't his method rely on pyramiding into a large position when the stock was trending up and acting right? and money management, cutting losses quickly? DIdn't he study the psychology behind traders decisions?I think there is a lot more to his methods actually.

"Greed is good. Greed works."

smallworld

Member

Post Number: 709
Registered: 01-2004

Rating: N/A
Votes: 0


Friday, December 21, 2007 - 11:10 pm:

Thought I'll bring a conclusion to this thread I started in April by publishing the forwarding testing result since April
The return is 87% on capital compared to 5.67% in XAO based on comsec margin lending list and using the margin loan facility.

Rugby is just a game, it isnt a matter of life or death, it is more important than that

smallworld

Member

Post Number: 710
Registered: 01-2004

Rating:
Votes: 1


Friday, December 21, 2007 - 11:16 pm:

You think you are the bank, 69:

My handle is smallworld not small world, If you address me properly, you will always be addressed with respect as well.

I think you're somehow thinking that I dont do Livermore's legendary trading justice by putting forward a method on the basis that there is a lot more in his trading. I never claimed that it is a complete representation of his method, in fact, my terms of reference is in my first post and I have clearly said it is a limited study.

You are free to start your own contribution about all the things you were talking about that I dont cover in this thread. But I stand by my belief that this system is a complete tradable system on its own right.

by the way, I've read "How to trade in stocks", but not "How to trade stocks". if you care to look at the table at the back of his book, you can answer a few of your questions yourself.

(Message edited by smallworld on December 22, 2007)

Rugby is just a game, it isnt a matter of life or death, it is more important than that

chart_rider

Member

Post Number: 225
Registered: 01-2005

Rating: N/A
Votes: 0


Tuesday, January 08, 2008 - 06:38 pm:

smallworld

A few questions if you don't mind:

Max system drawdown - is this the max peak to valley drawdown?. What do you define as max trade drawdown?

What was the leverage ratio used in your tests?

By $3 penetration on a $30 stock, does this mean that in addition to a 20% upswing, the swing up must be 10% above the previous high to trigger an entry?

CR

smallworld

Member

Post Number: 726
Registered: 01-2004

Rating: N/A
Votes: 0


Tuesday, January 08, 2008 - 11:56 pm:

CR,
Max Sys Drawdown is the largest peak to valley decline experienced in the portfolio equity curve.
Max trade drawdown is The largest peak to valley decline experienced in the worst single trade.
The leverage is as per Comsec Margin Lending requirement and is specified on a per company basis and from memory varying between 75% (e.g BHP) to 40%
In your example, 20% swing filter defines the swing. ie, a low is not formed until price has risen at least 20% above that low. The $3 penetration filter defines an entry when price has risen above the last swing high by $3.

Rugby is just a game, it isnt a matter of life or death, it is more important than that

chart_rider

Member

Post Number: 226
Registered: 01-2005

Rating: N/A
Votes: 0


Wednesday, January 09, 2008 - 04:22 pm:

thanks smallworld, hopefully I will get the chance to do some testing of your rules and post again later.

CR

efficiency

Member

Post Number: 46
Registered: 12-2002

Rating:
Votes: 1


Sunday, February 10, 2008 - 10:59 am:

Folklore isn't just Paul Bunyon, Daniel Boone and Davey Crockett (US characters). There's a distinction between trading skill/money management versus 10% margin, no upticks, outside capital, acts of God, press releases, and insider information.

For clarification, here's a sketchy chronology:

By 1900, aged 23, he had amassed roughly $50,000, from the bucket shops.

Fall of 1905 Thomas Lawson of Boston provided ALL partnership capital for Livermore to raid Union Pacifc stock, actively traded by the Harriman pool.
Losing his ass up until April 18, 1906 San Francisco earthquake. UNP stock took two days to respond lower. Lawson got the proceeds and Livermore pocketed a $300,000 fee. Took off for Saratoga.

On an unknown date soon after Livermore made the mistake of going short the SAME stock. Harriman pool this time was prepared. Livermore watched a quarter of a million vanish on upticks.

Slightly later, another 50/50 deal with Lawson to short Great Northern. Made a second killing.

Jesse made his FIRST million shorting Anaconda in the summer of 1907. Market panic as much as his skill. Banks called existing loans. October 24, 1907 J.P. Morgan forced his fellow capitalists to start supporting stocks. Livermore knew better than to buck the Morgan crowd. Bought his first yacht, the Anita Venetian.

Had an epiphany that commodities posed less "problems" because prices depended upon supply and demand (rather than synthetic measures). Long 120,000 bales of cotton. First used the power of the press release. in the New York Hearld "July Cotton Cornered by Jesse Livermore". Shorts covered, suckers (his term) rushed in, Livermore unloaded. New nickname, Cotton King.

Spring of 1908, Desperately trying to stem a dropping price by buying in both New Orleans and Liverpool, found himself long 500,000 bales. Simply put, the Anita Venetian went under the hammer.

For Livermore 1911-1913 appear to be lean years.

In 1914 he was living Bretton Hall Hotel at 86th & Broadway.

Filed bankruptcy in 1915 with $102,474 in professed liabilities.

The Bethlehem Steel trade in cited LeFevere's book was in here somewhere.

December 20, 1916, somehow became alerted to a telegram to Finlay Barrel & Co. in Palm Beach from a Washington reporter named W.W. Price leaking of Wilson warning the warring parties. Figuring there'd be a market collapse, Livermore approached Lawson again. With capital, shorted the "four horsemen" US Steel, American Can, Baldwin, and Anaconda. E.F Hutton made a flash wire to its offices hours before Wilson's note was publicized. Bids melted away. Livermore bought a half million annuity to throw off $30,000 per annum Also rushed out and bought a speed boat called the 'sub-catcher" and a $120,000 platinum and emerald ring.

Unloaded his first wife via Reno in October 1917 and the 40 year old, on December 2, 1918, married the 18 year old daughter of a wealthy Brooklyn merchant named Wendt. Rented a furnished townhouse at 8 West 76th Street. January 1920, bought a seat on the Curb (today the AMEX). 1919, first son.

1921 had a pool agreement with the Lewisohn Brothers to ramp Seneca Copper. After running from $12 to $25, the brothers canceled the (then legal) agreement.

Summer of 1922, Livermore was reported to have lost $8.5 million on the short side of Mexican Pete. June 1922, Clarence Saunders, owner of the Piggly Wiggly chain hired Livermore to "kill the bears". By November, Livermore had amassed 105,000 of 200,000 shares outstanding at an average of $35. March 1923, stock was over $70. Livermore had 198,872 of the float. March 19th, Saunders asked Livermore to spring the trap demanding delivery from short sellers. Livermore RENEGED. Saunder's somehow succeeded anyway. From an open of 75 ½ sky rocketed to $124, and closed the day at $82. Same year, ran the Mammoth Oil pool involving Harry Sinclair.

In 1924, Arthur Cutten forced wheat to over $2 per bushel for the first time. Livermore was short and lost a considerable amount.

In 1927, Livermore ran a pool to ramp Freeport Texas stock from $19 to $74 ½. Also a director of Minter & Assoc, selling $9 million worth of Florida lots and filing BK two years after inception. Robbed at gunpoint in his home in May 1927.

April 1929, sued for $1,450,000 over the 1926 Boca Raton RE crash.

July 1929 refused to make a court appearance in a $525,000 suit against Livermore by the Carbonite Corp for an alleged breach of agreement.

October 1929, details sketchy but even though Livermore "won" millions on the short side, he lost $6 million in his long positions in the crash.. Arthur Cutten purportedly lost $50 million.

August 16, 1932. Divorced his second wife. March 28, 1933, married his third wife at age 56. May 30, 1933. Security Legislation enacted. Pool operations outlawed.

March 4, 1934, Livermore filed BK again. . $2,259,212 liabilities/$184,000 assets.

Thanksgiving Eve 1935 his divorced second wife shot his first son. Non-fatal.

Summer 1937 chartered a yacht (Nina) rather than owning it outright.

Apparently from 1934 to 1940 he was an investment advisor/broker. Apparently to acquire capital for a comeback, decided to write a book (in two versions) The office that's frequently mentioned in awe appears to have been merely a facade to promote the book. The "legendary" market key, is patterned after Dow Theory confirmation, but using two companies in each of 5 leading industries. Hardly original, and basically the opposite of pairs trading.

November 28, 1940, shot himself in the head in the hat check room of the Sherry-Netherland hotel after writing an 8 page note to his wife with the recurrent theme "My life has been a failure"

Do YOU really want to emulate him?

Mexican Pete

(Message edited by efficiency on February 10, 2008)

(Message edited by efficiency on February 10, 2008)