The Trading System from “Reminiscences of a Stock Operator”, Tested Over 116 Years

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The book Reminiscences of a Stock operator was first published in 1923, and tells the rollicking story of trader “Larry Livingston” – that most believe to be a pseudonym for one of the greatest traders of that time, Jesse Livermore.

As the story unfolds, Mr Livermore never outlines his trading system rules exactly, however people have picked up bits and pieces from the stories he tells.

One trading system that is fully disclosed, however, is the system of old Pat Hearne.  In the book, Pat is an old trader at a Brokerage that Mr Livermore frequents, and he has made a good living trading stocks for most of his life.  Traders tried to copy him because of his success, and they failed – mostly because they were unable to stick to his tried and tested rules.  What were those rules?  Chapter 10 in Reminiscences of a Stock Operator holds the key.

  • He traded a system that bought on a 1% up move, and kept buying on each 1% move up from there.
  • He never wanted to give too much back to the markets, so he sold on the first 1% reaction, or move down.

Now, using the tools that are available to us today – namely the Amibroker trading system platform and 116 years of Dow Jones historical data – I was able to code this system and automate the results.

  • Did Pat Hearne’s method actually work, when the book was written, before 1923?
  • Does Pat Hearne’s method still work today?

Check out the video below!

If you’ve watched the video, you’ll know that I ask a specific question at the end.  I would LOVE to know your thoughts on this.  There are two different and clear lines of thought, and the trading system seemed to be giving some pretty clear signals.

Of course, these differing opinions are truly one of the great parts of being involved in the market.

Happy trending 🙂

– Dave McLachlan

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February 21, 2016  Tags: , , , , , , ,   Posted in: Stock Market Research

6 Responses

  1. tim - February 21, 2016

    dave

    i’d say this system is broken..you gave the reason…too many people trading it…so edge is gone…there may be other reasons related to HFT…really like these videos…thanks

  2. David McLachlan - February 21, 2016

    Hey Tim,

    Thank you! Great comment. I’m inclined to agree with you. Perhaps, even if it isn’t “broken”, as such, it might be almost impossible to trade with a 16 year long draw-down! I certainly couldn’t do it 🙂

    Keen to hear what others think about this too.

    Happy trending – Dave

  3. David H - February 21, 2016

    Hi Dave,

    My belief on trading systems is that the more people catch on, the more likely the system itself will fail. I don’t believe there will be a consistent and extremely profitable system for a long stretch of time.

    Many thanks for the videos.

  4. David McLachlan - February 22, 2016

    Thank you David!

  5. Rick - March 1, 2016

    Hi Dave,

    I think you show the credibility of the system back in the early 1900’s. But a rise in volatility/HFT systems in index trading (which roughly coincides with the time since the system started into drawdown post-2000) have probably caused its death. My question is if you increase the %age threshold to 2%,5%,8% does the system still have validity? Going to higher values will likely decrease the signal noise. And it reminds me a bit of a system talked about by Martin Zweig in his book “Winning on Wall Street”.

  6. David McLachlan - March 4, 2016

    Hey Rick,

    Awesome question, thank you. I really should read “Winning on Wall Street”, if you recommend it.

    Someone asked a similar question on the YouTube page, which got me thinking and testing a bit more.
    https://www.youtube.com/watch?v=7YHbg6EG1Rw

    The end result from memory was that a 14% up/down move on the Dow Jones was the most effective. VERY interesting.

    ** Perhaps a 14% DJI Drop might make a good trading system “off switch”? 🙂 **

    Happy trending,

    Dave

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