The Normal Reaction

jamesmith

The Normal Reaction
Once a stock had broken out of a trading range - such as the stock on the left, which has broken downwards - Livermore would begin trading. In this case the breakout is downwards and so Livermore would sell the stock short.

He would look for signs that the new trend was behaving normally and that it would be safe to stick with the trade.

Jesse Livermore would look for the following signs:

At the beginning of the move there should be an unusually large volume of shares traded.
Prices should move generally in one direction (upwards or downwards) for a few days.
A normal reaction should be observed - volume will decrease compared with the volumes observed during the initial trend, and the price may move against the trend somewhat.
Within a day or two of the normal reaction, volume should increase again and the price trend should be resumed.
Provided this pattern is repeated, it is safe to stick with a trade. If there should be a deviation from the pattern, it is a warning sign. If the pattern fails and the price moves against the trend by more than a little, it is a sign to exit your trade and preserve your profit.