Livermore: The Pivotal Point

In chapter five of his book, How To Trade In Stocks, famous speculator Jesse Livermore presents his theory on pivot points.

Why Look For Pivot Points

“Whenever I have had the patience to wait for the market to arrive at what I call a ‘Pivotal Point’ before I started to trade; I have always made money in my operations.” – Livermore

Livermore spends the beginning of this chapter explaining that a pivot point can mark the beginning of a long trend. Long trends are where serious speculators are known to make most of their money. Therefore, it is advantageous to any speculator to be able to identify the potential beginning and ending of a significant trend. 

Livermore also points out that he never made money on a trade if he didn’t get in near the very beginning of a major move. He points out that when he is sitting on a significant profit after the beginning of a mood, he is able to hold through the short term corrections that inevitably come in the middle and end of these moves. He also notes that just as there are pivot points that give signs that a big move could be starting, those moves will also give signs that they are coming to an end. The intelligent speculator just needs to know what to look for.

The Terms Bullish & Bearish

Livermore makes it a point to inform us that he never uses the words “bullish” or “bearish” when discussing the market. He feels that those words have powerful and long term connotations attached to them that lead to clouded judgement. He prefers to us the terms “upward trend” and “downward trend” because he feels that it is easier to reverse a position when these less serious terms are attached to it.

Identifying Pivot Points

“When a speculator can determine the Pivotal Point of a stock and interpret the action at that point, he may make a commitment with the positive assurance of being right from the start.” – Livermore

The first style of pivot point Livermore identifies happens when a stock crosses a significant, round number such as 100 or 200. The theory is that once a stock passes through one of these significant points, it is more likely that it keeps going even higher. The idea is that it takes such power to get through the significant number that the stocks own momentum will continue to carry it higher.

The second style of pivot point that Livermore discusses is when a stock makes a new high. Any time a stock makes a new high, it is displaying a level of strength that it has never shown before. This strength usually propels the stock even higher after breaking into new high ground.

Livermore points out that a key factor to watch is how a stock behaves as it approaches, crosses, and then continues on from a pivot point. Any sign of weakness or struggle should be interpreted as a danger signal. Successful speculators are very defensive in this respect.

Do Your Own Homework

“Few people ever make money by trading on the occasional tips or recommendations of others. Many beg for information and then don’t know how to use it.” – Livermore

We have all heard this one since we were little kids, and the root behind it has always been the same. If you don’t do your own homework, you won’t really learn from your experience. Livermore illustrates that everything that happens in the markets has happened before. The more studying you do into past and current price action and patterns, the better equipped you will be to identify, understand and profit from a given situation.

“I do know a basis is there for anticipating future movements and if anyone will study these records, keeping them themselves, they cannot fail to profit by it in their operations.” – Livermore