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