InvestIdeas

Livermore felt that it is wrong and dangerous to establish your full stock position at only one price. Rather, you must first decide how many shares you want to trade. For example, if you want to purchase 1000 shares as the full final position do it this way:
Start with a 200-share purchase on the Pivotal Point—if the price goes up, buy an additional 200 shares, still within the Pivotal Point range. If it keeps rising, buy another 200 shares. Then see how it reacts—if it keeps on rising or corrects and then rises, you can go ahead and purchase the final 400 shares.

It is very important to note that each additional purchase must be made at a higher price. The same rules, of course, would apply to selling short, only each short sale would be at a lower price than the preceding one.

The basic logic is simple and concise: Each trade, as it is established toward the total 1000-share position, must always show the speculator a profit on his prior trades. The fact that each trade showed a profit is living proof, hard evidence, that your basic judgement is correct in the trade. The stock is going in the right direction—and that is all the proof you need. Conversely, if you lose money, then you know immediately that your judgment was wrong.

The tough psychological part for the inexperienced speculator is to pay more for each position. Why? Because everyone wants a bargain. It goes against human nature to pay more for each trade. People want to buy at the bottom and sell at the top.

The speculator may choose a different ratio for purchasing the stockthan Livermore’s ratio of 20 percent on the first purchase, 20 percent on the second purchase, 20 percent on the third purchase, and a final purchase of 40 percent. He could, for instance, purchase 30 percent as the first probe position, 30 percent as the second and 40 percent for the final probe position.

In summary, it is up to each individual speculator to decide the ratio that works best for him. Livermore simply outlined what worked best for him. The main money management rule is comprised of three factors:
1. Do not take your entire position all at once.
2. Wait for confirmation of your judgment—pay more for each lot you
buy—dollar average upward.
3. At the beginning of each trade first establish in your mind the total, exact amount of shares you want to purchase if all goes well, or specify the amount of dollars you are willing to commit; do this before you begin the trade.