How to understand Jesse Livermore's Pivotal Points

Jesse Livermore's trading method (Pivotal Point Trading System or PPT) is very straight forward. It is easy for us as normal people to understand and even apply to achieve success. This system contained only three components, which are respectively known as the reversal pivotal point, the continuation pivotal point and the symptoms of weakness.

1. Reversal Pivotal Points

The very first component of Livermore’s PPT system is the reversal pivotal point, which is defined by himself as “the perfect psychological time to mark the beginning of a new move, representing a major change or reversal in a primary trend.” However, confirming a market reversal in real market is not that easy, e.g. when there is a big rally in a long bear market, how can you tell whether it is just temporary or the bull market has returned? Fortunately, Jesse already gave you some clues, you can use the following steps as your favors to justify:

1. The rally should be a intermediate trend (not minor trend) with volume increase, . 

2. The following correction(intermediate trend) does not get retraced below the rally's starting point. 

3. Few weeks later an even bigger rally follows. 

4. This time the volume of the subsequent rally is significantly higher than previous days. 

5. This subsequent rally breaks the trendline of previous bear market.

This monumental subsequent rally is exactly what Livermore called a reversal pivotal point, because it marks the return of large money back into the market.

2.Continuation Pivotal Points

The second component of Livermore’s PPT system is the continuation pivotal point, which focus on the time to re-enter into the new trend. While a reversal pivotal point marks a trend reversal, a continuation pivotal point confirms that the trend continues.

After the breakout of previous bear market trendline, usually the market will form a consolidation which is known as the accumulate process or the preparation of the new take-off .This breakout from consolidation is the continuation pivotal point, where a trader should get in and follow it. Most importantly, just as for a reversal pivotal point, a true breakout at a continuation pivotal point is usually accompanied with a higher volume than the previous few days.

Buy at breakout off a consolidation is one the greatest secrets in trading stocks. It can help maximize your profits and minimize your risk at the same time.

3.The Symptoms of Weaknesses

The final part of Livermore's PPT system is called the symptoms of weakness, which tells you when to exit the market.

Symption 1: Failed Rallies-----After an overall head is formed, the subsequent rallies often end with a weak momentum, Failed to make a new high and volume decreased.

Symption 2: High End Price Consolidation (Distribution)-----The volume during this period of time is very high. After distribution, the price would breakdown and downtrend formed.

Summary

Over his entire legendary career, Jesse Livermore obtained two important insights in trading: firstly, he often lost when he entered a position before a pivotal point was formed and secondly, the big money could only be made by capturing big trends, Thus he developed the discipline to avoid any personal opinion until a pivotal point appeared, as well as to hold onto his positions until market was shown the symptoms of weakness.

In short, this is how Livermore traded:

1. Trend confirmation: he never trade against the trend as indicated by the reversal pivotal points.
2. Careful entry: He only entered the market when a sound breakout appears. 

3. Let the winners ride: He held onto his positions until the symptoms of weakness appeared.