Patience

Photo by Jared Rice on Unsplash

As a quick point of clarification, in this post I am talking about discretionary trading (as opposed to systematic trading).

The following quote comes from Jesse Livermore:

"It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. Because the market does not beat them. They beat themselves, because though they have the brains...they cannot sit tight."

At first glance people think this means they need to stick with a winning position and, to a degree, this is what Livermore means. However, as I pointed out in a post referencing one Richard Smitten’s books on Livermore, the quote is also about waiting for a good trade setup:

A famous misunderstood quote of Livermore was: "It was the sittin' and the waitin' that made me the money." He did not mean the sitting and waiting after the stock was purchased-he meant before he pulled the trigger-that's when the trader must have the patience to sit and wait for all factors to come together to merge into the perfect trade, or as perfect as possible.

I slightly disagree with Smitten’s take since other material on and from Livermore indicates Livermore did think it was important to patiently sit with a winning position. For clarity, I think Livermore believed it was necessary to be patient in waiting for his setups (aka, “…to sit and wait for all factors to come together…”) but that it was also necessary to be patient in holding a winning position.

So, what are trade setups?

Trade setups are essentially patterns that motivate a trader to enter a trade. Setups are typically identified looking at chart patterns. For example, Darvas was very successful using his boxes. Alternatively, O’Neil did very well using his cup with handle approach. And Livermore had his pivot points (which typically don’t hold up well to detailed analysis). There are arguably as many potential setups as there are traders.

Is there a best setup?

Through years of research, trial, and error, I have found that, without the benefit of hindsight and a clear definition of what makes something the best, no - there is no best setup in a right-for-everyone sense. However, there are best setups for each and every trader (who embrace the setup method) and these are determined by a combination of trading goals and temperament. Let me digress.

After sinking like a stone, the stock market is shaking like a paint shaker today. Intraday ranges on some single stocks are massive. I personally have no trade setups that thrive on extreme volatility. That isn’t to say that my method of extreme volatility avoidance is correct (there is no “right” in trade setups), but it is to say that I have no business trying to trade right now.

Despite knowing this, it is difficult to follow the “rules”. I log on to X and see all kinds of traders talking about all kinds of setups that sound pretty terrific. And, factual or not, they are making a mint off of the volatility. But, by virtue of lots of personal study and experience, I know that giving in to my emotional desire for market action is the path away from the advice of Livermore and other greats like him.

In fact, the “right” move for me is to sit patiently on the sidelines saving my capital for when my setups return while managing my FOMO the best I can. I find the wisdom of greats like Livermore to be rather helpful in keeping me on the right path which is probably why I read and write so much about trading.

Food for thought in your own trading.