Trading commodity futures–which is what I do for a living, for both clients and my own account–isn’t easy. The markets are dynamic; the game is challenging and constantly changing.

I’ve yet to discover any quick-and-easy, get-rich schemes. If there was one, more people who trade commodities, futures or stocks would be rich.

Why should it have been more obvious that Bernie Madoff was a scam? It was obvious to a trader like me because in his alleged performance data he didn’t have ups and downs, only ups. Real traders have ups as well as downs.

Like all traders, I’ve had my ups and downs. At times during my 30 years of trading, I’ve been fortunate enough to experience some nicely profitable episodes. These bigger hits–what I call the “mega-trades”–are rare and distinct from the day-to-day trading, but it’s these mega-trades that can secure a trader’s future.

When I retrospectively analyzed the strengths and weaknesses of my periods of unprofitable and profitable trading, I realized that those times I won big I was essentially following the basic lessons passed down from Jesse Livermore.

Most folks outside of the trading community have never heard of Jesse Livermore. If he had died in 1929 instead of 1940 they most likely would know the name.

Let me tell you about Jesse Livermore, or JL, as I’ll refer to him hereafter. JL was an early 20th century stock and commodity trader. He didn’t come from money. He was born on a poor New England farm in 1877, and he never went to high school. His first job–just out of grammar school–was as a quotations boy in a bucket shop where he first learned the game of short-term trading.

During his lifetime, JL made and lost several fortunes, all taken out of the markets. It’s wise to study the lessons he left us, lessons that he used to make his fortunes, lessons that, had he followed them to the end, would have made “Jesse Livermore” a household name at the time of his death. He would have been one of the wealthiest Americans during the early World War II years, but by that time he had lost most of his considerable fortune.

We have to remember back in the 1920s stocks were traded like commodity futures are today, on 5 percent margin. And JL was worth $3 million after the 1907 crash; that’s $60 million in today’s dollars. He proceeded to lose 90 percent of that 1907 fortune on a blown cotton trade. He later admitted he violated many of his key rules on that cotton trade, for example he listened to another person’s advice–he preferred working alone–and ignored one of his main rules. That is, he added to a losing position.

JL continued losing money in the flat markets from 1908 to 1912, at which time he was $1 million in debt and declared bankruptcy. Then, on a small, borrowed stake, he proceeded to regain his fortune. Although he wasn’t legally obligated to do so, JL repaid his creditors in full after the World War I bull market.

While just about everyone lost money in the Wall Street Crash of 1929, JL played his short position to the hilt. After the crash he was worth $100 million based on his short-selling profits; that’s $2 billion in today’s dollars. This was the high point of his career.

He subsequently lost this fortune as well. JL declared bankruptcy again in 1934 and was suspended as a member of the Chicago Board of Trade. It was never disclosed exactly what happened to the great fortune he had made in the crash of 1929. Although untouchable trusts at his death totaled more $5 million, Livermore failed to regain his trading confidence.

On November 28, 1949, JL died at the age of 63. He was found in the cloakroom of the Sherry Netherland Hotel in New York City. The cause of death was suicide, a bullet to the head. He left an eight-page note to his wife, in which he wrote “my life has been a failure” and that he was “tired of fighting” and could “carry on no longer.”

A failure? That’s certainly a point for debate. Starting with nothing, at one point worth more than $2 billion in today’s dollars, losing just about all of it: An amazing life with amazing accomplishments. If there’s failure in his story, it was JL’s inability to follow his own rules. Had he done so, he never would have lost most of his fortune.

Jesse Livermore’s legacy is the working trading philosophy he left us. His philosophy was detailed in the book Reminiscences of a Stock Operator, originally serialized in The Saturday Evening Post and published in 1923 under the byline of Edwin Lefevre. The hero of Reminiscences was one Larry Livingston; it was later revealed that Livermore actually penned the book (it was his autobiography to the time) and that LeFevre merely acted as the ghost writer.

You may wonder what JL wrote in 1923 that’s still relevant in today’s markets. After all, we now have electronic markets, and they’ve changed dramatically in the 80-plus years that have now passed.

Let me share a quote from the book that should answer that question:

History repeats itself all the time in Wall Street. Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was.

The principles of successful speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past. The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.

When we talk about human nature, I think the timelessness of the following passage from the book shines through; remember, this quote is from 1923:

At first, when I listened to the accounts of old-time deals I used to think that people were more gullible in the l860s and ’70s than in the 1900s. But I was sure to read in the newspapers that very day, or the next something about the latest Ponzi and about the millions of sucker money gone to join the silent majority of vanished savings.

In these days of Madoffs and the like, could this observation be any timelier? Fear and hope remain the same, and human nature remains the same. Humans make markets; although new technologies may be introduced, markets, in a basic sense, remain the same.

I’ve gleaned five major lessons from the book that make for successful trading, which I strive to use in my trading every day. Last week I taped a free webinar for Futures Magazine in which I discuss these lessons in depth. For more information or to sign up to view the webinar go to http://www.futuresmag.com/micro/i-trade/2009/12/default.aspx.

For additional trade recommendations, consider George Kleinman’s subscription-based service, Futures Market Forecaster. And be sure to check out George’s new book, The New Commodity Trading Guide, available now at Amazon.com.

Risk Disclaimer. Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the “Holy Grail.” Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past results are not necessarily indicative of future results.

Hypothetical Performance. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.