Ãû¼Ò̸ϵͳ¿ª·¢Ö®¶þ_____Linda Bradford Raschke

"Back to the Basics”
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, arengs 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!)

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