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Jesse Livermore | Number One Rule for Position Sizing 📈 | Trading Psychology & Risk Management | Whispers of WallStreet | YouTubeToText
YouTube Transcript: Jesse Livermore | Number One Rule for Position Sizing 📈 | Trading Psychology & Risk Management
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Core Theme
The fundamental principle of successful speculation is not being right, but managing risk through proper position sizing, which ensures survival and enables long-term profitability.
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The market is a place where a man's
fortune is not made by how often he is
right, but by how much he has left after
he is wrong. That is why the first and
greatest rule in speculation, the rule
that sits above all others, is the rule
of position sizing. You may search for a
thousand rules about entries, exits,
charts, tips, and timing. But you will
always come back to this one. A man can
be right about the direction of a stock
and still lose everything if he has
sized his position wrong. He can be
wrong about the direction, but if his
size is disciplined, he will live to
fight another day. And the only fight
that matters in this business is
survival. If you cannot survive, you
cannot profit. And if you cannot profit,
then you have no business speculating. I
have seen more men ruined not by being
wrong but by being wrong with too much.
They wanted to get rich on the first
swing. They believed the market owed
them something for their cleverness, for
their information, for their confidence.
But the market owes you nothing. It does
not care if you are smart, bold, or
certain. It does not care about your
debts or your dreams. It only cares
about your capital. and it will strip it
from you the moment you place it in
harm's way without protection. Position
sizing is protection. It is not
glamorous. It does not make the
headlines. Nobody boasts in the bucket
shops about how small they bet or how
cautious they were. But those who last,
those who accumulate, those who become
rich, they all whisper the same thing.
Size is survival and survival is profit.
You may hear a man say, "I knew that
stock would go up, but I was shaken out
by margin calls." What he really means
is, "I was too big for my capital."
Another will say, "I was right, but I
couldn't hold." That is the voice of a
man who put too much on the line. Being
right is useless if your size does not
allow you to sit still. The market
demands patience. But patience is only
possible if your position is sized so
that the daily jiggles, the sudden
drops, the unexpected moves do not force
you out. You cannot be patient if your
heart is in your throat every tick. You
cannot let your profits run if every
down tick feels like ruin. You cannot
cut your losses if the size is so large
that you refuse to admit the mistake.
The whole game comes back to size. Now
many beginners think size is about
greed. They think if I double my size, I
will double my profits.
But what they do not see is that they
also double their danger. They double
the weight on their nerves. They double
the chance that a small mistake will
become a fatal one. Speculation is not
arithmetic. It is psychology. You may
hold 100 shares comfortably, but 1,000
shares may break your back even if the
stock moves the same way.
Your brain will not work the same when
you are too large. You will not see the
market. You will only see your money
bleeding. You will not follow your
rules. You will follow your fear. A man
who is oversized is already beaten
because he will act not as a speculator
but as a gambler. The gambler bets
because he must. The speculator bets
because the odds are right. The only way
to stay a speculator is to size yourself
so that you are never forced, never
desperate, never over your head. I have
always said it is not the market that
beats the man. It is the man that beats
himself. And the weapon he uses most
often is his own greed expressed through
size. How many fortunes have been lost
because a man wanted to make a killing
instead of a living? How many houses
gone? How many wives left? How many men
ended up on the street? Not because they
lacked brains, but because they lacked
the discipline to size their trades. It
is not knowledge that saves you. It is
not courage. It is not tips. It is size.
A small position can be corrected. A
small loss can be endured. A small
mistake can be forgiven. But when the
size is too large, no forgiveness is
possible. The market does not forgive
and it does not forget. The trouble is
most men cannot stand to think small.
They dream of millions but they do not
dream of the slow climb. They want the
fortune in a season, not in a lifetime.
And so they take a large position
because they believe that if they are
right, they will win so much that they
will never need to work again. But here
is the trap. When you take a position
that is too large, you are already
wrong. No matter what the stock does,
even if it moves in your favor, you will
not be able to manage it with calm. You
will take profits too soon because you
are afraid of losing. You will not
pyramid correctly because you already
have too much. You will not be able to
act like a general commanding his
troops. You will be like a prisoner
dragged by them. And sooner or later,
that will be the end of you. I learned
this lesson the hard way as all true
lessons in the market are learned. I had
been right on direction, right on
timing, right on the story, and yet I
went broke how? Because I was too big.
When the market turned against me for
just a short spell, I was forced to
liquidate. I did not go broke because I
was wrong. I went broke because my size
did not allow me to be right. That is
the cruel trick the market plays. It is
not enough to be correct. You must be
correct with the proper size. If your
position does not match your capital,
your nerve, your plan, then your
correctness is worthless.
There is a simple way to look at it.
Your position should always be small
enough that you can sleep at night. If
you cannot sleep, your size is too
large. If you are staring at the tape
all day, unable to look away, your size
is too large. If you cannot leave the
market alone for fear of what might
happen, your size is too large. A man
who is properly sized can walk away. He
can let the market do its work. He can
wait. And waiting is the hardest but
most profitable part of this game.
Another mistake men make is pyramiding
too fast. They put on a position, it
works, and they rush to double and
triple it. They think they are building
a fortune, but they are building a trap.
Pyroiding is only wise when the market
pays you to do it. You must let the
profits finance the new position, never
your original capital. If you add with
your winnings, your size grows safely.
If you add with your stake, you are
gambling, not speculating.
It takes iron discipline to add only
when the market gives you permission.
But that is the only way to pyramid
without ruin. Do not think that position
sizing is only for the poor or the
cautious. Even the richest speculators,
even the boldest traders, they all live
and die by their size. The great
operators were not reckless. They were
daring, yes, but their daring was
calculated. Their size always
controlled. They could take the large
lines because they had the large
capital. They did not confuse courage
with recklessness. They could scale in
and scale out because they had mastered
the art of putting on size in proportion
to their account and their conviction.
That is why they lasted. That is why
their names are remembered. The bucket
shop boys who went for broke, their
names are dust. Do not be fooled by the
talk of quick killings. A killing can be
made, yes, but not by the man who tries
to make one on every trade. The man who
makes a killing is the man who has
survived long enough to be present when
the big move comes. And survival again
is only possible through proper sizing.
Every big move that ever made a fortune
was first endured by small moves that
tested patience. And the man who held
through those tests did so because his
size allowed him to hold. If he had been
too large, he would have been shaken
out. The market always shakes. The only
question is whether you are strong
enough to take it. And strength does not
come from muscles or courage. It comes
from being small enough to last. There
is another danger in size and that is
the temptation to average down. A man
who starts small can cut his loss and
move on. But a man who starts too large
is tempted to throw good money after
bad. He cannot admit he is wrong because
admitting it would mean too large a
loss. So he buys more. He says he is
lowering his average, but he is really
raising his risk. And the market, which
punishes pride more than anything else,
will usually finish him off. A small
loss is a bruise. A large one is a
bullet. If you keep adding to a losing
position because you started too large,
you are digging your own grave.
Speculation is not about being bold in
size. It is about being bold in
patience. It is not about betting all,
but about waiting for all. The position
size is the foundation of your house. If
it is weak, the storm will take it. If
it is strong, you can build on it.
Without it, nothing else matters. I do
not care how good your system is, how
sharp your analysis, how perfect your
timing. If your size is wrong, you are
finished. And if your size is right, you
can survive even your mistakes.
That is the irony of this business. The
smaller you bet, the bigger your chances
of getting rich. The larger you bet, the
quicker your chances of going broke. The
beginner thinks the opposite. He thinks
the bigger he bets, the sooner he will
be rich. But speculation is a
profession, not a lottery. A profession
requires you to last. It requires you to
accumulate slowly. It requires you to
respect your capital more than you
respect your opinion. And respecting
your capital begins and ends with the
size of your position. I repeat, because
repetition is the mother of truth, size
is everything.
Not tips, not timing, not inside dope,
not opinions, size. If you remember
nothing else, remember that. Make your
positions so small that you can take
them, cut them, carry them, add to them,
all without strain. Make them so small
that you can follow your rules without
fear. Make them so small that the market
cannot shake you out with its tricks.
Make them so small that you can stay in
the game long enough to see the real
move. The move that makes your fortune.
You can only get rich in the market if
you first refuse to go broke. That is
the law and it is enforced without
mercy. The market is patient. It will
wait until you have forgotten this rule.
Then it will strike. But if you never
forget it, if you always respect your
size, then you can stand before the
market without fear. And the man who
does not fear is the man who profits.
The ability to hold your nerve depends
not on courage but on the comfort of
your size. Men think nerves are a gift
like strength in the arms or steel in
the backbone. But nerves in speculation
are not about nature. They are about
position. You may be the calmst man in
your daily life, unshaken by insult,
steady under fire. But if you put too
much of your capital into a trade, the
market will make a coward of you. It
will turn the calmst gentleman into a
trembling wreck. It is not the ticker
tape that drives men mad. It is their
own oversized wages. When a man is too
big for his account, every small move
looks like disaster. Every little jiggle
looks like catastrophe. Every whisper on
the street sounds like a death sentence.
He begins to watch every tick. He cannot
eat. He cannot sleep. His heart pounds
at each fluctuation. And when a man is
in that state, he can no longer think.
He can no longer plan. He can no longer
follow his rules. He has lost his nerve.
Not because he was born weak, but
because he sized his trade too large for
his comfort. The market does not ask you
to be brave. It asks you to be
consistent. You do not need the courage
of a soldier charging into battle. You
need the discipline of a banker counting
money. Discipline is only possible when
your size allows you to keep your head.
Too many men confuse courage with
recklessness. They think taking the
largest position they can muster is a
sign of strength. They confuse boldness
with wisdom. But what really happens is
that their size destroys their judgment.
And judgment is the only weapon a
speculator has. I have seen men take
enormous lines, boasting of their
courage, only to cut them at the first
dip. They did not cut because they were
disciplined. They cut because they were
terrified. Their size forced them into
panic, and panic is never profitable. On
the other hand, a man who sizes
correctly can watch the same dip without
alarm. He knows what his risk is. He
knows what his capital is. And he knows
the market cannot push him into ruin
with a small setback. He can sit calmly
letting the market do its dance because
his position is comfortable. That is
what comfort means in this business. The
ability to sit and sitting more than
anything else is where the profits come
from. Most fortunes were not made by
quickin and out trading but by sitting
through the big move. The market may go
up and down. It may test your patience.
It may tempt you to act. But the real
money comes to the man who can sit
through all that without flinching. And
you cannot sit if your size is choking
you. Think of the gambler at the
roulette wheel who bets half his stake
on one spin. He is brave, but he is a
fool. If the ball lands against him, he
is finished. He is out of the game. What
courage is there in that? It is suicide
disguised as boldness. The wise gambler
bets a size that lets him stay at the
table spin after spin until the odds
turn. He may lose a few rounds, but he
is still in the game. The speculator
must think the same way. You do not need
to risk everything to show courage. You
need to risk only what you can afford to
lose without losing your reason. The
true nerve lies not in the size of the
stake, but in the size of the reserve. I
have seen speculators in the bucket
shops, young and full of fire, who
believed courage alone would win the
day. They doubled and tripled their size,
size,
shouting to the crowd that they would
clean out the house.
But when the ticker ran against them,
they were white as ghosts, begging the
clerks for time, selling everything at
the worst moment. Their courage had
vanished, because courage cannot stand
against a position too large for the
pocketbook. They went broke not for lack
of brains but for lack of sizing. The
market exposed them as it always does
because the market is the greatest
examiner of human nerves and it always
finds the weak spot. The weak spot is
not fear but size. When your size is
proper, you will discover that you do
not need to be brave at all. You do not
need to grit your teeth or steal your
heart. You will simply watch, waiting
for your plan to work. The little losses
will not disturb you. The small
fluctuations will not shake you. You
will have no temptation to snatch at
small profits because you are not
desperate. Desperation is the child of
oversizing. It makes a man sell too
soon. Buy too late. Change his system.
Abandon his rules. Chase tips. A
comfortable size keeps desperation out
of your blood. It makes you steady. And
steadiness is worth more than any tip or
any chart. Many men never understand
this truth. They think the secret to
nerves is in the man, not in the money.
They read stories of great operators who
held their lines through panics. And
they think those men were born with iron
wills. But the secret was never
willpower. The secret was always size.
Those operators had sized their lines
according to their capital. They could
hold because they were not drowning.
They looked calm because their positions
were comfortable, not because they were
superhuman. A speculator who sizes
correctly can look just as calm, no
matter his nature. You can give a
nervous man the right size and he will
act like a veteran. You can give a
veteran the wrong size and he will act
like a child. Ask yourself this, what is
the point of courage if it cannot keep
you in the market? What is the use of
boldness if it drives you out too soon?
The only real courage in speculation is
the courage to wait. And waiting is only
possible when you have not overburdened
yourself. The man who is carrying too
much cannot wait. He must act and
usually at the wrong moment. He must
snatch at safety and the market punishes
him for it. The market always punishes
the man who cannot wait and the
inability to wait always comes back to
size. I have said before that the market
is never wrong. Opinions are when your
size is too large. Your opinion becomes
your prison. You cannot change it
because changing it would cost too much.
So you sit not out of patience but out
of paralysis. You tell yourself you are
holding with nerve but you are holding
with fear. The market sees it and will
break you. True holding comes from
comfort. It comes from knowing that if
the market proves you wrong, you can
take the loss and move on.
That knowledge makes you calm. That calm
is what men mistake for courage. It is
easy to say, "I will be disciplined."
When your size is small, it is
impossible to be disciplined when your
size is too large. The size controls the
man, not the other way around. If you
wish to control yourself, control your
size. That is the number one rule, the
first law of speculation. When your
position fits your capital, your nerves
will be steady. Your judgment will be
clear. Your patience will be natural.
You will not need to force yourself into
discipline. Discipline will flow from
your comfort. And only then can you
truly speculate because only then can
you see the market without the fog of
fear. Size is not about greed. It is
about control. Control of losses,
control of nerves, control of decisions.
Too many men step into the market with
the wrong idea that the bigger they
play, the bigger their chances of
striking it rich. They imagine size is
the lever that multiplies their
fortunes. But the real purpose of size
is not to make you rich in a hurry. It
is to keep you steady so that you can
build wealth over time. If you look at
the men who last in speculation, the men
who grow their stake year after year,
you will see that they are not
controlled by their trades. They control
their trades. And that control begins
with size. The speculator who sizes
properly is like a general who never
commits his whole army to the first
skirmish. He holds reserves. He measures
his strength against the enemy. He
advances when the odds are in his favor,
and he retreats when the tide turns.
He does not throw all his men into
battle at once because he knows that a
lost battle is not the end of the war as
long as he still has troops in reserve.
A trader who puts too much money into a
single position has no reserves and
therefore no control. The market turns
against him and he is beaten before he
has a chance to regroup. He may think he
is bold, but in truth he has handed
control over to the market. Control of
losses is the first duty of proper
sizing. Every man who speculates must
understand that losses are part of the
game. You cannot avoid them. You cannot
wish them away. You cannot prevent them
by cleverness or by courage. The only
thing you can do is make sure they are
small enough not to you. And
that is entirely a matter of size. A
small position that goes wrong is a
scratch, a lesson, an inconvenience. A
large position that goes wrong is a
disaster. It wipes you out or leaves you
so wounded that you cannot fight again.
If you can cut a loss quickly and
without hesitation, it is because the
loss is bearable. If you cannot bring
yourself to cut it, it is usually
because the position is too large. Size
determines whether you can obey your
rules or betray them. Then there is
control of nerves. A man who has control
of his nerves can see clearly. He does
not chase the tape. He does not listen
to rumors. He does not jump in and out
in panic. He watches. He waits. He acts
when the time is right. But nerves are
not a gift of birth. They are a function
of comfort. And comfort comes from
proper sizing. If your position is well
within your means, every tick does not
feel like a threat. A two point move
against you does not shake your
confidence because it is not large
enough to do serious damage. But if you
are oversized, a two point move looks
like the end of the world. Your nerves
fray, your vision blurs, and you start
acting not on reason but on fear. Fear
is the enemy of every trader. And it
comes into play when the size is too
large for the stomach to bear. Control
of decisions follows naturally from
control of nerves. If you are calm, you
can think, you can follow your plan, cut
your losses, pyramid your profits, wait
for the right moment. If you are in a
panic, you cannot think. You break your
rules. You snatch at profits. You hold
losers. You average down. The decisions
that ruin traders are almost always born
of fear. And fear is born of poor
sizing. A trader who puts on a line that
is comfortable for his account can act
with detachment. He is not tied up in
the outcome of every tick. He can make
decisions based on the market, not based
on the size of his losses. In other
words, he is in control. Greed blinds
men to this truth. Greed whispers that
more size means more profits, forgetting
that more size also means more danger.
Greed convinces a man that if he is
right, he should bet everything on it.
But greed never considers what happens
if he is wrong. And in speculation,
wrong comes more often than right. The
difference between winners and losers is
not that winners are never wrong, but
that winners keep their wrongs small.
Losers let their wrongs become ruinous,
and they do so because their greed made
them too big. Greed wants the quick
fortune. But speculation punishes greed
more than anything else. The man who
sizes for greed is already half beaten
because he has given up his control.
Think of a man sitting at a card table.
He may have the best hand in the room,
but if he bets his entire role on that
hand, he has no control left. One
unlucky card, one twist of fate, and he
is out of the game. The smart card
player never pushes everything forward
unless he is prepared to leave the table
for good. He sizes his bets so that he
can withstand a run of bad luck. He
knows that one hand does not make a
career. The speculator must think the
same way. No one trade makes your
fortune, but any trade can end it if
your size is wrong. Control is more
important than victory in a single
trade. Because control is what lets you
live to fight again tomorrow. Now
consider paramiding. The only safe way
to build a position is by using the
market's profits to pay for your
increase. That is control. If you add to
your position with money the market has
already given you, you are never overexposed.
overexposed.
You are playing with winnings, not with
your stake. But if you pyramid with your
original capital, you are letting greed,
not control, dictate your size. You are
building a tower on a weak foundation.
And when the market shakes, and it
always shakes, the tower will collapse
on you. Paramiding is a tool of control
when done correctly, and a tool of
destruction when done by greed. Another
form of control that comes from proper
sizing is patience. A small position
allows you to wait. You can let the
market confirm your view. You can let
the move develop. You can hold through
the minor reactions.
Patience is not a virtue. It is a
byproduct of comfort. A man who is too
large cannot be patient. He feels every
moment as a crisis. He must act and
usually at the wrong moment. Impatience
ruins more traders than ignorance ever
did. And impatience is nothing more than
the voice of discomfort caused by poor
sizing. Control also shows itself in
independence. When your size is too
large, you will find yourself hanging on
the words of others. A tip, a rumor, a
headline, anything that gives you hope
or fear will sway you. You are no longer
thinking for yourself. You are letting
the crowd think for you. But if your
position is comfortable, you can ignore
the noise. You can trust your own
judgment because you know that a bad
outcome will not destroy you.
Independence of mind is a mark of every
successful speculator. And independence
begins with size that allows you to stay
in control. The man who thinks size is
about greed is like a horseman who
thinks speed is about whipping the
animal harder. He may get a burst of
motion, but he will not get far before
the beast collapses. The horseman who
understands control will ride smoothly,
steadily for miles, while the other is
left in the dust. In speculation, the
man who sizes for control outlasts the
man who sizes for greed. Outlasting is
everything because the market always
gives opportunities, but only to those
who are still in the game. Size is not a
weapon to win battles. It is the shield
that lets you fight them.
The men who get rich are not those who
bet the most, but those who bet in a way
that kept them steady. Steadiness is the
hidden edge in speculation, and it comes
from control. Every man has greed inside
him, but not every man learns how to
master it. The way to master it is not
by wishing it away, but by sizing your
positions so that greed cannot tempt you
into ruin. Control your size and you
control yourself. Control yourself and
you can control your trading. A man who
sizes right can sit still. A man who
sizes wrong must always run. That is the
difference between the winners and the
losers in this game. The market pays the
man who can sit and it destroys the man
who cannot. But sitting still is not
about patience alone. It is about the
comfort of your position. If your size
is proper, you can wait. If your size is
too large, you will be forced to run
from every shadow. Men often talk of
courage and nerve. But the truth is that
most of what they call nerve is simply
the ability to sit without strain. And
strain comes from size that is out of
proportion to capital and temperament.
The great moves, the kind that make
fortunes, take time. They do not unfold
in a day or a week. They build slowly,
testing the nerves of everyone who rides
them. There are reactions, setbacks,
fence, false breaks, shakeouts. The man
who tries to capture these moves with a
position too large for his means cannot
hold on. He may be right about the
direction, but the market will scare him
out before the big swing comes. He will
run because his account or his mind
cannot take the strain. And when he
runs, the market wins, not because it
was against him, but because he was
against himself. The ability to sit
still, to wait for the market to
complete its work, belongs only to the
man whose position size is right. You
can see this truth in the tape rooms, in
the bucket shops, in the exchanges. The
men who are over committed pace the
floor like trapped animals. They whisper
for news. They curse the fluctuations.
They are always waiting for the clerk to
call their margin. They are never at
ease, and so they never sit still.
They dart in and out, covering here,
buying there, always acting, never
waiting. Their very size forces them to
run. On the other side of the room, you
might see a man who is calm, who watches
without excitement, who can leave his
desk for lunch without fear. That man
has sized correctly. He can afford to
let the market breathe. He is not
frightened by a small reaction because
his position is comfortable. He can sit
still and in the sitting comes the
profit. The small fluctuations are the
ruin of those whose size too large. A
twopoint drop means little to the man
who has a modest line. But it means
disaster to the man who has his whole
fortune tied up in it. The small move
that is only noise for one is terror for
the other. And terror always forces
action. The man who is terrified cannot
sit still. He must run. He must sell too
soon or hold too long. But in either
case, he loses. The market is designed
to frighten men out of their positions
before the real move begins. And the
only way to resist the design is to sit.
The only way to sit is to size
correctly. The importance of sitting
still is not a new lesson. It is as old
as speculation itself. But generation
after generation forgets it. Men think
they will outsmart the market with
cleverness, with quick trades, with
constant motion. They imagine they can
dart in and out catching every little fluctuation.
fluctuation.
But the profits are not in the
fluctuations. They are in the big swing.
And the big swing can only be caught by
sitting. If you are too large, you
cannot sit. You will always be forced to
take action when none is required. The
market loves to make fools of such men
and it never fails. You must understand
that the market is a machine designed to
shake you out. It does not rise in a
straight line. It climbs by shaking. It
throws men off with false breaks, with
violent reactions, with sudden drops. It
tests every holder. Only those who can
sit through these tests take the prize
at the end. The rest run, not because
they wanted to, but because their size
gave them no choice. If you are carrying
too much, you cannot sit through a
shakeout. Your nerves will betray you,
or your margin will. But if you are
sized properly, you can ignore the
tricks. You can sit and by sitting you
can ride the full move. It is not enough
to be right about the market. You must
be right in a way that allows you to
profit. Many men predict the market
correctly and still lose. They lose
because they could not sit still. They
could not sit still because their
positions were too large. They were
forced to act by their fear or by the
broker's call or by the drain on their
capital. A man who sizes properly can be
wrong for a time and still win in the
end because he can afford to sit until
the market proves him right. A man whose
size is too large can be right in the
long run and still lose in the short run
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