To come full circle, what goes up, must come down. And what goes up in dramatic fashion may come to a violent end.
The histories of both uranium and silver are those of fomo-filled hysteria - runaway bulls where investors scramble for a piece of the pie. But, like Icarus who flew too close to the sun, only to melt the wax holding his wings together, these markets are historically victims of their own success.
While both silver and uranium are destined for epic bull runs, there are sure to be blinding corrections, whipsaws, and eventually, crashes. But, if you’ve taken some of the principles above to heart, you’re not only prepared for what goes up, but also what comes down.
Just because a commodity or a stock screams higher, doesn’t mean it’ll necessarily drop. But it often does. And in such cases we can learn a few lessons from the king of short selling, Jesse Livermore.
Jesse Livermore, the enigmatic trader of the roaring twenties, possessed an uncanny ability to read the market's pulse and time his moves to perfection. But it was his audacious play during the 1929 stock market crash that etched his name in the annals of financial history.
With an unwavering conviction in his analysis, Livermore positioned himself against the exuberant tide, seeing the impending doom that eluded most. As chaos unfolded and fortunes crumbled, he flawlessly executed short sales, effortlessly profiting from the market's downward spiral. Livermore's daring trade during the crash transformed him into a legend—a maverick who, with razor-sharp precision and nerves of steel, unraveled the secrets of the market and left an indelible mark on Wall Street folklore.
Livermore placed great emphasis on patience and timing - waiting for confirmation before making significant trades or positions in the market. This is not easy, because markets can stall or range for quite some time before signaling either continuation or collapse. Which is why a signal to take profits isn’t the same as a signal to take a short position and / or buy puts.
Here are some key aspects to consider regarding his approach and what we can learn from it:
- Confirming Market Trends: Livermore understood the importance of confirming market trends before committing to significant trades. Instead of acting on initial signals or speculative assumptions, he patiently waited for clear indications that the market was indeed moving in the anticipated direction. This confirmation could come in the form of breakouts, breakdowns of support levels, or other technical indicators aligning with his analysis. In other words, when selling short, he’d be looking for clear breach of a Darvas box (or other inflection based breakout) to the downside.
- Avoiding Premature Entries: Livermore recognized the risks of entering trades prematurely based on incomplete information or short-term fluctuations. He emphasized the need to wait for a higher level of certainty and a clear confirmation of the desired market trend. This helped him avoid false breakouts or premature short selling, which could lead to losses or missed opportunities.
- Avoiding Overtrading: Livermore's patient approach helped him avoid overtrading, a common pitfall for many traders. By waiting for optimal trade setups and confirmed market trends, he focused on quality over quantity. This allowed him to conserve his capital and selectively capitalize on high-probability opportunities.
- Disciplined Risk Management: Livermore's emphasis on patience and timing was closely linked to his risk management practices. By waiting for confirmation, he could better assess risk and adjust position sizes accordingly. This disciplined approach helped him manage risk effectively and protect his capital in case the market moved against his anticipated direction.
- Developing Market Intuition: Through patient observation and experience, Livermore developed a keen intuition for market dynamics. This intuition allowed him to sense shifts in market sentiment, identify subtle patterns, and anticipate potential turning points. Traders can learn from this by actively engaging with the market, studying price action, and developing a deep understanding of the underlying factors that influence market movements.
- Emotional Control: Livermore's patient approach required emotional control and discipline. Waiting for confirmation meant resisting the urge to chase trades or react impulsively to short-term market fluctuations. We can learn from Livermore's ability to maintain a calm and rational mindset, sticking to our trading plan and avoiding emotional decision-making.
At the end of the roaring 20’s, where everyone and their grandma through everything at the stock market, Livermore waited patiently for a sign of post-peak hysteria, and he shorted. By waiting for confirmation of market correction / breakdown, we can not only spend the next few years capitalizing on mispriced risk within raging bulls, but can profit just as much on the way back down.
We need to become very comfortable with the tools above - right market selection, key inflection points, mispriced (cheap) derivatives, risk management and disciplined position sizing, and finally, taking profits out of the market. We’re going to make mistakes and we’re going to have a pile of losing trades. These must be accounted for ahead of time through a betting strategy that assumes losses.
And when the time is right, we can reverse course, and short these markets into the gutter.
As per the strategy I gave you, the critical caveat here is the level of risk you take on entry, and the price premiums that increase due to higher levels of volatility. This is why buying on the cheap can be far more advantageous than shorting on the expensive. As such, I’ve tried to get you in before the storm. Once the storm picks up, so too does risk. So while you can play these markets on the downside, do so with restraint, and remind yourself of Livermore’s cardinal rules - patience and timing.
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