Jesse Livermore: be the trader of your life — the answers

“You should always sell the losing position and keep the winning one.”
— Jesse Livermore

80% of people accept uncertainty when they have to pay, and demand certainty when they collect. Profitable traders do exactly the opposite: they take the risk on the gain side and demand certainty on the loss side. In practice, that means a fixed stop-loss, and a profit target that is not fixed.

It’s obvious. And yet it is one of the hardest things to put into practice for many traders, beginners or not.

This article is the follow-up to the exercise Jesse Livermore — Be the trader of your life. If you haven’t done it yet, start there before reading on.

The exercise recap

You have two boxes in front of you:

Box A — contains 3 balls worth €1,000 and 1 ball worth €0
Box B — contains 1 ball worth €700

Exercise 1: you draw from the box of your choice, and you have to pay me the amount written on the ball. Which box do you draw from?

Exercise 2: you draw from the box of your choice, and I have to pay you the amount written on the ball. Which box do you draw from?

The answers: are you human, or a trader?

Most people (80%) answer: Exercise 1 → Box A / Exercise 2 → Box B.

Human logic:

If they have to pay, they take the risk of paying more for a chance of owing nothing at all
If they are collecting, they prefer the certainty of being paid, even a little less

Profitable traders do the opposite.

They are willing to take a risk in order to win big
But if they have to lose, they want to control exactly how much — and prefer certainty on the loss

What this means concretely in trading

Set a fixed stop-loss to control your loss in advance — you know exactly what you are risking before entering
Set yourself a target larger than your loss — but not a fixed one. If the market wants to give you more, let it. Don’t cut gains that are running

That is the fundamental rule: let the winners run, cut the losers.

And in life outside the markets?

This logic applies elsewhere too. A little more trader in your everyday life can’t hurt:

Harmful relationships: you cut them, without hesitating
New encounters: you take the risk. It works, you continue. It doesn’t, you cut
A repair to be made: you do it immediately. You don’t take the risk of it getting worse, costing more, becoming more dangerous

Most trading mistakes — like many mistakes in life — come from refusing to accept a small certain loss, at the price of a large possible one.

Human or trader: two opposing logics

Situation	Human reaction (80%)	Profitable trader’s reaction
Facing a loss	Risk a heavier loss hoping to lose nothing	Accept a certain loss, known in advance
Facing a gain	Lock in a certain gain, even a smaller one	Take the risk of letting it run to win big
In practice	Mental stop pushed back, gain cut early	Fixed stop-loss, uncapped target

Frequently asked questions

Why should you cut your losses and let your profits run?

Because profitability comes from asymmetry: a few large gains have to cover many small losses. If losses are left free and gains are capped, the relationship reverses and the account drains, even with a majority of winning trades.

Should you have both a fixed stop-loss and a fixed profit target?

No, only the stop. The stop-loss must be fixed so you control the loss exactly before entering. The profit target serves as a minimum benchmark: if the market offers more, you shouldn’t cap the position by closing it at a number decided in advance.

What profit target should you aim for relative to your loss?

A target larger than the loss you accept, so the gain/risk ratio is favourable. That is what lets you stay profitable even with a win rate below 50%, the size of the gains compensating for their frequency.

Does trading logic apply outside the stock market?

Yes, to any decision carrying asymmetric risk: cutting a harmful relationship quickly, trying a new encounter while accepting it may fail, repairing something immediately rather than letting a problem worsen. In each case, it means accepting a small certain loss to avoid a large possible one.