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more from Linda:  Putting Together a Business Plan   MACD Grail   Professional Traders Still Daytrade  Scalp Trading Methods   The Discerning Trader   Keeps up the pace   Swing Trading- Rules and Philosophy    Tape Reading   Secrets of Top Trading Performance   Putting Together a Business Plan  Pages from - Trading as a game..The need to focus, and why she keeps notebooks    Back to Basics


posted from https://www.tradestation.com/Discussions/Topic.aspx?Topic_ID=4030

Interview with Linda Bradford Raschke

by Janette Perez

 

Linda Bradford Raschke continues to inspire many traders through her unique approach to strategy trading. We'd like to share some of her thoughts with you.

JP: Linda, can you tell how you first got started in the markets and what you learned in those early days?

LR: My first job was right across the street from the Pacific Coast Stock exchange in San Francisco. I used to watch the traders stream out of the exchange in their trading jackets as they would go out for brunch on the slower days. (Back in 1980 - 81, almost every day was a slow day!) Over time, I befriended a trader who eventually became a partner in backing me to go down to the floor to trade.

The main things that I learned in those days came from observing the other traders around me. Each successful trader had their own unique style or type of arbitrage they engaged in. The people who made the most money were not the ones who took big directional bets. The ones who were consistent and did best found creative ways to hedge their exposure, and were very quick to adjust their positions when trades did not work out as expected. I learned the best traders were not the most aggressive ones but the ones who learned to play defense the best.

Unfortunately, it took me a long time to learn how to integrate this into my own style. When I first started trading, I felt like I was always fighting the market, fighting the trend. Of course when you are on the trading floor, everything you do ends up being countertrend in nature since you are essentially selling to those who want to buy as the market is going up. I was typical of most floor traders in that I would make money 19 days out of the month and then on the 20th day, end up giving much of it back if the day turned out to be a strong trend day.

JP: How has your trading style evolved since then?

LR: I think that my trading style continues to become more deliberate. I am much more conscientious about letting the market tips its hand first, and then trying to follow in its footsteps, instead of trying to anticipate what it is going to do next. I am much better about trading only when I perceive a supply/demand imbalance, and then trying to stay on the right side of the money flows.

JP: Let's start with some of the basics. What time frame do you use to determine where the market stands?

LR: I always work from the top down...and so I will always start out with a weekly chart. This will tell me the primary trend. I also want to know if the market is in the process of building a base (or a top) or if it is just coming out of a top or breaking out of a base.

JP: How many markets do you follow?

LR: I follow about 26 futures markets, including the currencies. I follow all the major indexes, of course, in addition to the sector indexes, and I follow about seventy different stocks. I do my nightly homework and analysis on 22 of the futures markets, and then will scan through stock charts for the next day depending upon how much time I have.

JP: Tell me more about predicting price direction and its importance in your trading style.

LR: Well, first you have to recognize that there are certain points where you can't make a good directional forecast.....For example, if a market is too flat, or it is in the middle of a consolidation period, you are better off waiting for the market to tip its hand, and then make a forecast only after a supply or demand imbalance is evident. I would say that the most important thing in my trading style is to find trades where there is a well-defined risk point. A trader can find these spots when working on a smaller time frame, as long as they do not get caught up in the noise. A trader can get the initial direction right on a trade, but ultimately, it will be far more important as to how he manages that trade. For example, what is the point of a good directional call if a trader can't stay with the trade?

Or, a trader might get the initial direction correct, but overstay his welcome only to have the market reverse against him. Trade management issues ultimately will determine a trader's profitability to a much greater degree than his ability to forecast the price direction.

JP: What is the most important part of your strategy during a regular trading day?

LR: The most important part of the strategy comes when the markets are CLOSED! I can't trade during the day if I don't have a good idea of what I am going to look for before the markets open. So, for me, doing my nightly homework is the key to my trading success.

The first thing I look at when I do my strategy at night is what type of volatility environment is to be expected for the next day. IN other words, am I expecting a consolidation type of day, or is the market in runaway momentum type of environment. This will totally dictate the strategies that I select before the market opens.

JP: What do you feel are some of the advantages of following a tested strategy?

LR: Testing strategies builds up confidence. The more testing you do, the higher the sample size, the more markets you can apply your theories to, the higher the confidence level. And having the confidence to see a strategy through in its entirety is a big part of the game.

JP: Share with us your viewpoint on the rubber band effect and market extremes?

LR: The main things I know are...markets always go further than you think they will....trends last longer in duration than people think they will....The "rubber band effect" is really a function of shorter-term noise, in my opinion. A market might temporarily overshoot in one direction, and so there might be a small snap back effect, but ultimate the true trend will continue to prevail. Even after a trend climax, a market will more often than not need to reach an equilibrium point again before the trend can reverse. This often entails a long drawn out consolidation period. Look how long gold had to base out. Look how long the grains had to base out. Many of these stocks that are in downtrends may need to go through a basing period of quite a few years before they are ready for true sustainable rallies. What we DO see in markets, are swings in the sentiment from one extreme to the other. But this too, can be quite a time consuming process.

JP: How do you determine when the market is near such an extreme?

LR: It is dangerous to obsess with trying to time an extreme, because so often, 80% of the movement can come very late in the trend. Prices can get parabolic at extremes. There will naturally be an increase in range and in volume as a market approaches a top or bottom....I would rather be trading in the direction of that movement, with a trailing stop, as opposed to trying to pick the reversal point.

JP: What indicators do you use to help you pinpoint such extremes?

LR: For me to have faith in an indicator, I need to see it work across a broad number of different markets, and I do not think that there is a tried and true indicator that can pinpoint extremes across different types of markets. Who could say exactly where the top would come in natural gas two years ago, or in internet stock 3-4 years ago? Where is the bottom in a stock like Lucent...or in a market like Coffee? This really is not what trading is all about....

JP: How about when the market has trapped one side of the participants? What patterns do you look for?

LR: Now this is a classic scenario.....When the market starts breaking down from a large distribution pattern, a broad trading range, then naturally the longs are the ones who are trapped. Bear flags will be the most common chart pattern. More people want to get out of the market than IN to the market. If no buyers step in, then we can see a free fall if margin calls start to hit. That would be an extreme scenario. When a market starts to accelerate to the upside, this can be an indication that shorts are trapped and there is potential for a short squeeze. This really does not happen so often as one would think. In general, there are market participants trading on many different time frames. The majority of volume transacted each day comes from short-term traders and market makers, as opposed to large funds and commercials. The funds and commercials can provide a stabilizing influence....(in theory..LOL!)

JP: What do you look for when markets make new highs or new lows?

LR: When a market makes new highs, I look to buy the first pullback. When a market makes new lows, I look to sell the first reaction.

JP: What's your definition of a trend and the importance of identifying it?

LR: An uptrend is when a market makes a higher high and a higher low and then turns up from there. Vice versa for a downtrend. The larger moves tend to occur in the direction of the trend more often than not. If you are trading with the trend, the market is more forgiving if your trade location is not so great on your initial entry.

JP: Can you expand on the Principle of Range Contraction/Expansion?

LR: Markets move from a state of consolidation (range contraction) to a period of Price markup or mark down (range expansion). If you can hop on board when the market is in a mark up or mark down period, then this is where you can make the most amount of dollars in the least amount of time with the smallest amount of risk.

JP: What indicators do you like to use in this type of market?

LR: Price, price and price! I look at the sentiment readings...I have a proprietary Tick summation index that functions a bit as an overbought/oversold type of oscillator. But anything I see in these other types of indicators that would suggest a potential trade setup must be confirmed by price. During the day, when I am trading the index futures or stocks, I will watch how the market is moving relative to the Ticks, I will watch the Trin and volume and market breadth.....but all my trades are triggered off price. I would rather look at plain bar charts on multiple times frames than look at canned indicators.

JP: And if you're being very aggressive...

LR: If I am being very aggressive, then that means that I usually got an exceptional sleep the night before! Seriously, the times to be aggressive are when the trend lines up on multiple time frames in the same direction. When the weekly trend is down, and the dailies are turning down out of a consolidation zone, and the hourlies are breaking down out of bear flags...when all three time frames are trending in the same direction, then this is when a trader should be most aggressive.

JP: Sometimes Oscillators can steer you wrong in a strong trend. What do you do about that?

LR: You are implying that oscillators function as an overbought/oversold tool. My rule is, when an oscillator makes a new high, I am looking to buy the first pullback. Momentum precedes prices. A new high on the oscillator is a new momentum high. The only oscillator I use is a moving average oscillator so it does not have a fixed scaling as a stochastic or an RSI would.

JP: How do ShowMe and PaintBar Studies help you in your analysis?

LR: ShowMes and PaintBars are great tools in terms of alerting to a specific condition without having to put up a bunch of extra study windows. For example, it is easy to program a ShowMe if a momentum oscillator makes the highest high of the past 20 bars. This might be useful information. Or perhaps a PaintBar could be created to show a market is making new first hour highs or lows if it is an intraday time frame. I've included some custom ShowMes and Paintbars to share with the community to show some of the interesting things that can be done.

LBRTickTiki -- The LBR_TickTiki plots the TICK and TIKI index values with alerts.

LBRHistVolty -- The LBR_HistVoltyRatio indicator calculates the ratio between two Historical Volatility testing periods.

LBRADX -- The LBR_SmartADX indicator is a standard ADX line that changes color when it is above the trending value.

LBR310OSCLBR -- The LBR_3/10 Oscillator calculates the difference between a fast 3 bar moving average and a slower 10 bar moving average.

LBRPCOLBR -- The LBR_PreviousCloseOpen is a simple indicator that plots the previous days Close and the current days Open on an intra-day chart.

LBRHLCHNL -- The LBR_IntraHLChannel is a simple indicator that plots the highest day high and lowest day low channel for some number of trialing days, on an intra-day chart, or daily chart.

LBRNRIB -- The LBR_NarrowInsideBar paints the bar when there is an inside bar that has the narrowest range for some number of trailing bars.

JP: Share with us your research on Volatilty Breakout Systems.

LR: There are dozens of ways to create breakout systems. The best ones, in my opinion, tend to be based on range functions. For example, add a percentage of the 2 day range, or the 10-day range, or the previous day's range to yesterday's close or today's open. This is a basic departure point for a breakout system. The original Turtle System was a channel breakout...i.e., breakout above or below the 20-day range. All of these systems are very much dependent upon the current market's volatility conditions. When volatility and average daily range are high, they tend to perform best. In general, they all have deteriorated a bit in performance over the years. Yet, they still one of the more durable and robust types of systems around. I believe the small amount of deterioration in the statistics might be attributed to an increase in the "noise" level as markets have matured. But lately, these systems have really picked up again in their performance. Good execution and reasonable commission rates are very important to the real time performance of these systems.

JP: What can trading a Volatility Breakout System teach you?

LR: Trading breakout systems played an integral part in my own education as a trader. It taught me just how powerful the concept of follow-through was....it taught me the importance of trading a basket of markets....it taught me just how much a system is dependant upon capturing a few very big wins, and how it is impossible to predict which trades will turn into the big wins. If you are going to trade a volatility breakout system, you cannot pick and choose! You must take every trade. It taught me that even when my stops were hit and sometimes the initial stops were very wide for these systems (ugh)...that EVENTUALLY the system will make back the losses as long as you keep taking the trades. It is unlikely that an individual will get fabulously rich from trading a volatility breakout system. But I think they are an excellent way for a newer trader to learn how to trade, because they have a well defined rule set, and you will gain lots of experience with trade execution since these systems are quite active.

JP: How about Trade Management? What role does that play in your trading?

LR: Trade Management is what makes or breaks the bottom line!

JP: Can you expand on Stops?

LR: For an initial stop, wider is better. When the trade starts to move off in your favor, then you must tighten the stop. If the trade does not do what you think it should do within a certain amount of time, then close the trade out and cancel the stop. In other words, time can function as a stop parameter as well as price levels.

JP: What are your thoughts on Risk and Money Management?

LR: Trading is about managing risk. If you do not see a spot where you can define your risk before you go in, then you can't make a trade. Money management should also include factors such as leverage used, in addition to corellation in your portfolio or markets traded..

JP: Linda, I know you were heavily involved with music at an early age. How did this help you?

LR: I think that learning how to stay in the here and now is important with trading. Stay in the present...what is the market doing NOW...as opposed to what happened in the past. Market, sports...many disciplines are like this. If you are a tennis player and lost the previous game, you can't think about that. You must think only about the shot that you are about to make. With music, you are thinking only about the notes that you are about to play...not the mistakes you just made. There are lots of activities that we do when we are children in which we must learn how to focus and concentrate only on one thing at a time. Much of this is transferable to the markets and trading.

JP: Do you feel there is a parallel between music and the markets?

LR: Sure ...there are many parallels in terms of how we analyze the overall structure of a musical piece or the technical condition of the market. I think emotions are a much different part of the equation in trading than in music though. Perhaps there are better parallels to the performance side of the equation in terms of managing one's emotions in sports.

JP: Even though the number is growing, there are still few full-time women traders. Do you believe there are any obstacles to women trying to get into the field?

LR: Having access to adequate amount of capital is one of the larger obstacles for start up, regardless of gender. But other than that, the availability and ease with which one can use software applications such as charting packages, online execution platforms, and have access to reasonably priced data...really has made it easy for anyone to trade. I can't believe how much technology has changed the playing field in just 15 years. 20-years ago, I feel that you really had to be on the trading floors to have an edge. Nowadays, it is just the opposite.

JP: Any additional advice for a beginning trader?

LR: Yes! I think that the initial learning curve tends to be a bit longer than people estimate. On average, it tends to be around three years. Many people are attracted to this business because they perceive there to be unlimited upside in earnings potential. However, the first few years, many are lucky to just scrape by. The people that I see do best as traders are people who like to play games (such as cards, bridge, backgammon, etc) and understand game theory. You trade because you like to win....the dollars are a way of keeping score. The passion for trying to figure out the game must be there, because during your initial apprenticeship with the market, more likely you will be paying the market to teach you. It is OK to read books, go to seminars, learn from other traders in the beginning...but ultimately if you are to be successful, you must learn how to play your own game. This means that you must believe in your own analysis, and not listen to other people or second guess yourself. And this type of confidence can only come from repeated observations and study over time.

JP: Thank you very much Linda.

Linda Bradford Raschke is President of LBRGroup, Inc., a money management firm and registered CTA. She began her professional trading career in 1981 as a market maker in equity options. After 7 years on the trading floor, she left the exchange to expand her trading program in the futures markets. In addition to running LBRGroup's CTA program, she has been principle trader for several hedge funds and runs commercial hedging programs in the metals markets. In the early 90's she formed a research partnership with Moore Research Center and pioneered work on volatility based trading indicators, which were incorporated into her daily trading programs.

Ms. Raschke was recognized in Jack Schwanger's critically acclaimed book, The New Market Wizards, and is known for her own top selling book, Street Smarts - High Probability Short-Term Trading Strategies. She has been featured in dozens of financial publications, radio and financial television programs, and has served on the Board of Directors for the Market Technician's Association for many years.

Ms. Raschke has presented her research and lectured on trading at annual conferences for the Market Technician's Association, International Federation of Technical Analysis, Canadian Society of Technical Analysts, TAG, Omega World, Managed Futures Association, International Online Trading Expo, AIQ, Futures Magazine, Bloomberg, and Carlin Equities, in addition to lecturing in over 16 different countries for Dow Jones/Telerate.

Ms. Raschke continues to manage money and trade her proprietary accounts, while posting LBRGroup's trading activity real time online into the LBROnline Trading rooms, an educational internet based service. Members in these rooms include professional traders from over 18 different countries.

Ms Raschke received a degree in both economics and music composition from Occidental College in 1980.

 

 

 

 

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