Livermore Swing System
Saturday, March 17, 2007 – 12:06 am:
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
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)