Linda Raschke is a professional trader with 1981 of the year. She started her career as a trading floor trader and later founded the money management company LBRGroup.. Linda Raschke was featured in Jack Schwager's book The New Market Wizards and is well known for her own book, Wall Street Virtuosos.. She has also published a huge number of educational articles on short-term trading in the markets..
You can remove a trader from the exchange hall, but you can't make him forget the habits of the stock market.. Current example – professional trader Linda Raške, who currently trades from her office, started as a trading floor trader on the Pacific Stock Exchange in 1981. and then on the Philadelphia Stock Exchange.
Although it has already passed 17 years, since she stopped trading in the gym, Linda says, that market principles and methods of analysis, which she was developing at the time., remain an integral part of its trade today. Actually, some of the tools, which she uses today, like oscillator "3-10", are essentially the same, which she took from her first mentor more 20 years ago.
Linda says, that trading "at a higher level" required a slight adjustment, although initially everything went well enough. Relying solely on "Quotron" (easy display of price quotes, which was distributed in the 1980s), she successfully traded during 45 weeks, partly because of that, that technology has contributed to the use of its data reading skills, which she purchased in the stock exchange hall. But when she got her first graphical analysis software in 1987., she lost money within three months.
"It was crazy in a way.", she says. "It was like a tennis player., who always played on clay and switched to grass".
Failures and problems usually do not decorate the stories of professional traders, but Linda Raschke is pretty candid about past mistakes and failed deals, including the fact, that it went bankrupt even earlier when it was trading in the stock market and even today does not always hit the target exactly. Like many traders with experience in trading in the stock exchange hall, it focuses on consistency – smaller trades with high probability.
"I needed 11 years, to make a great way", she says. "It was in the early '90s., on soybean contracts – short-term transaction, which has become large. There was a bullish divergence on the oscillator 3-10. I bought by 4.80 $, waiting to move to 5 $. It was the year of the Mississippi River Flood., and I finished holding the position with two additional points (movement in 10.000 $ on contract)”.
Part of that, what Linda talks about and tries at her trading place – it's realism about individual trades, as well as trade in general – the example above is an exception, than the rule and mistakes happen to everyone.
"I always try to see my mistakes", linda says. "People need to know, that such things happen to everyone..
Linda Raschke takes a practical approach to trading. It indicates, that many potential traders leave their jobs, when for the first time trying to trade professionally, and the strain of trying to make money on trading can be very debilitating..
"It's like going to college., she says. "You still have to pay the bills., when you go to study – you work in the evenings at a bar or somewhere else. Very difficult to trade, when you worry about, how will you pay the bills".
Records and numbers
Linda Raschke says, that does not develop or test a full-fledged trading system, as most people imagine it – specific sets of rules for login, exit and placement of stop orders. Piles of notebooks in her office, filled with statistical models and market trends, more like pointers, which she uses, to make trading decisions at a specific time.
"Things, which I mostly check, include basic "counting" or modeling of a market trend", linda says. "Let's take, for example, Day Bar S&P, which closed above 20% of its range. There is a probability of approximately 75%, that the next bar will trade above the maximum of this bar, but there is only a 50% probability, that it will close above it. In other words, model predicts, that the market should trade above the high of the last day, but it has no predicted value regarding closing. That would be a basic model or trend..
"In terms of real trade, a model like this can affect the situation in several ways.", she continues. "First, it might persuade me to do that., to hold existing long positions the night before due to a 75% expectation of a follow-up the next day. Or, if the market opens the next day near or slightly below the previous close, you could play in the direction of the previous maximum – once again, because you know about the 75% probability of moving above that maximum.".
Many of her notebooks contain records of market activity., which it registers manually, mainly within a few hours of analysis, performed after the closing of each day. Linda believes, that recording better helps her remember important moments.
"You'll always see things more clearly., when markets are closed", she says. "You are more objective at this point.. I'm a big proponent of working logs. – register your trades. Conduct your trade, as you would conduct any other business".
"Holy Grail Bowl"
Although it trades at its own discretion., Linda Raschke is adamant about the need to have statistics and strategies, to understand the markets and focus on your trading. For example, she says, that its "inner feeling" about the direction of the consolidation breakthrough leaves much to be desired..
"I'm wrong about 90% cases", she says, Laughing. "Use me as a counter-trend indicator – I only know, is ADX low (indicator, which measures the strength of the trend), I'm willing to be wrong, if I'm trying to guess".
Linda Raschke really actively follows numerous trading strategies, including the technique of trade on kickbacks called the "Holy Grail". The strategy is designed to, to catch corrections in the markets, which showed the presence of increased momentum, with the index of the middle direction of movement (ADX) and the 20-day exponential Moving Average (EMA), providing trading installations.
"When the market breaks out of the trading range and makes new momentum highs, there is a sequence of events, which is usually performed", she explains. "The price first retreats to the 20-period EMA on the 15-minute chart, even on a five-minute chart, then the same recovery will occur on the 30-minute chart, then on a 60-minute chart and then on a 120-minute timeline. By this time you should be looking for the top.".
"It's developing into a good sequence. ", Linda continues. "As the market continued to create a new upward momentum., there was another installation for the purchase, occurred on the hourly chart 23 December, and then another, formed on a 120-minute chart 2 January".
"But each recovery must be preceded by an ADX value with 14 Bars, above 30 on this time scale", she explains. "The best installations will be confirmed by other factors., like oscillator 3-10, making new highs".
Linda Raschke also looks at the oscillator 3-10, to see, when the movement begins to lose strength.
"See also, you'll often find 120-minute bearish divergeences (when the price moves up, and oscillator 3-10 move down) at the end of price rises", she says. "This corresponds to the end of the oscillation up or down on the daily time scale".
List of indicators
Here is a list of indicators, which Linda Raschke most often uses in her trading and analysis:
1. Oscillator 3-10. "Oscillator 3-10 I've been using it since 1981.", she says. "This is the difference between the three-day simple Moving Average and the 10-day simple Moving Average.. A plus, there is a second line, which is a 16-period simple moving average from the line 3-10. On the chart, I usually use MACD, changing the parameters of moving averages from exponential to prime and the lengths of moving averages in 3, 10 and 16".
2. 14-periodic ADX. This indicator is used, to measure the strength of the trend.
3. Keltner Canals, which are trading lanes, consisting of lines, placed on 2.5 the average true range on both sides of the 20-period exponential Moving Average.
4. 2-period ROC indicator on daily charts.
5. Closure breadth: 10-periodic SMA from stock market increases minus decreases.
6. Demand-to-supply ratio. Linda Raschke uses a five-time simple Moving Average from the supply-demand ratio. This is usually the TRIN indicator.
How experienced, so novice traders spend a lot of time trying to recognize patterns in the markets – charts and indicators on multiple time frames, seasonal trends at specific times of the month or year, mood and data flow of various funds. I see, that there are many different ways to analyze markets. Analyzing models, the trader is looking for a sufficient reason to enter into a trade or exit an existing one. Markets are monitored to detect subtle changes in the underlying supply and demand, and as soon as the "initial condition" is found, which indicates the position, when there is a possibility of making a profit, trading simply becomes a matter of pulling the trigger to enter the market, determining an initial level of risk and then managing the trade appropriately in response to market action. Professional trader manages the trade, watching for confirmation or non-confirmation of his assumptions.
But why trading never seems so easy in real life? Finally, it's just a numbers game and it really doesn't take that long to learn the basic rules. Maybe it's because of, that trade is usually on 10 percent consists of market research and 90 percent of self-study.
Unfortunately, if the trader does not know himself, then the markets – this is a very expensive place, to find out. If traders took half the time, spent on market research, to explore your own behavioral patterns, the benefit would be much greater, than from accessing any training course, video, system or technical book, ever written about the markets.
Trade balance suffers, when the wrong deals are made, the trading plan is not followed and "voluntary mistakes" are made. Fortunately, traders can learn to recognize those personal behavioral patterns, which lead to loss of focus and concentration, in addition to other bad habits.
Voluntary errors
Let's take a look at some common patterns, leading to voluntary errors. Consider a trader, who diligently monitored the market to obtain a specific situation and, for whatever reason, the conclusion of the transaction is skipped. He then makes a spontaneous deal, upset, what missed the first. The market is making a good move, and his account is increasing. The trader is then proud of the profit, which he did, becoming careless and relaxed, which leads to a prolonged period of decline. It skips the exit point for taking profit on a winning trade and allows a winning position to turn into a losing one. Upset, he is then averaged in the hope, at least, try to make up for the loss.
Bad behavior is often the result of emotional reactions. but, some cases are simply the result of bad habits. The goal is, to make trading so automatic, as far as possible and, thus, the ultimate goal should be, to form the winning habits. As Socrates said, “We are the one, what we do repeatedly. Superiority, in this case,, is a habit ”. Here are some tools, which can help traders identify behavioral patterns, which hinder them and, Further, eliminate them or, at least, take back control. Equally important for traders is the ability to define behavior, which is correct, because this is the first step to building confidence.
Identifying the problem
Always identify a specific problem or challenge. Here is a list of questions, which will help identify areas, which should be paid closer attention.
Is there a time of day, when the most losing trades are made? Some traders get better results in the morning, and some during the day.
What types of deals lead to the most consistent results? Many traders show their best results, trading on a shorter time frame and not letting the big picture raise doubts about the benefits of trading in a longer time frame. For others, attempts to perform short-term scalping can lead to overtrading and frequent rapid reversals. Is there a game plan or trading program, which is determined before the start of the trading day, and how closely this plan is being implemented? Are there extraneous factors from the outside, such as personal relationships, financial turmoil or illness, affecting or distracting the trader's reasoning? Are days with heavy losses due to emotionality or decreased alertness?, and whether the trader was more emotional or reactive these days? Is general burnout, leading to bad habits, lack of concentration or inertial excess of the trading regime? These are some of the reasons, which normal, intelligent people can be caught in destructive behaviors. so, is it possible to break models, which lead to more emotional market downturns? AND, how a trader can take it to the next level, knowing, when things are going right and, thus, increasing the size of the best deals?
Language of the body
It is very easy for most people to learn to recognize, how their body reacts in different states. Athlete, who is "at ease" can sharply feel, being completely relaxed. On the other hand, athlete, which is "unsettled", will be tense, restless and fussy. Learning to pay attention to physical reactions can help a trader to confirm, when he is in a good behavioral pattern, either breaks its own rules. He can also learn to recognize, what his body feels, when the trade succeeds and how it feels about a losing trade.
Here's a personal example. When i know, that the deal is working according to my plan and the market is doing as expected, even if the deal has not been completed yet, i find, that I feel a high level of confidence, that I don't feel compelled to look at the screen. I do not feel anxious about anything and I am relaxed with a sense of “confidence”, that my position is good. but, if i am in the market, and “don't feel” right, even if the market does not move against me, I stare at the screen, my breath is a little shallower, and I look without blinking. It may take five minutes, and I will still sit in exactly the same position in my chair.
I am also aware of some graphical patterns, in which I participate, when i start to tire or burn out. I know from experience, what am I, probably, lower my level of vigilance during these moments and, that's why, i try to stop trading, when i feel this way.
The longer a trader has been trading in the markets, the more he understands, that higher highs may be followed by lower lows – that's the only thing, to always be on the alert. Many winning sports teams have won championships, building incredible defenses. but, in trading, the ultimate goal is, to do more than just survive, and really make money on random gifts, what the market has to offer. That's why, similarly, how important it is to recognize how you feel, being able, which can lead to errors in reasoning, it is equally important to determine the state, when you can confidently move forward. This state, when it's time to enter the market and stay there with a strong trending move. Winning trade confirmation comes from more than just indicators, but also from our own physical condition, which gives the feeling, to be in sync with the market. In the end, traders, who achieve this in trade, will be the most successful. As time goes by, experience will be the most important asset of a trader. Every day the trader gains more experience regarding, how he feels about making the best deals and which of his own behaviors lead to trouble. Once he learns the models, which lead to mistakes, it will be much easier for him to make these mistakes with a lower frequency. The fewer voluntary mistakes, the, in the end, its asset curve will be more stable.
Good time to trade
Sometimes there can be dull periods in the market, when it's easy to wonder, will ever come back again "good times". Keep in mind, that market movements are unstable. Any market can have long periods of sluggishness without any significant movement, or periods of erratic choppy movements in both directions. The market rarely moves with consistent moderate swings. Traders, who don't even have a strong temperament, will have great emotional fluctuations. Experienced traders know, that there are always one or two dull periods of the year, and these periods require a lot of endurance and patience. If the trader is not yet experienced enough in this business, he must be on the alert, so as not to force events and not exceed the trading mode. How it is possible to break models, which lead to a more emotional decline? Is it possible to develop self-control?
These are the areas, which every trader will have to fight continuously. Even many professional traders make mistakes after many years of highly successful careers.. It only takes one incident, when something starts to leave them, and they are distracted by external events like divorce, illness of loved ones or problems in business relationships. External distractions can easily disrupt attention and concentration..
How to deal with personal calls
Traders, who experience emotional challenges or upsets from time to time in their trading career are by no means alone. These challenges are part of the business. Listen to your body and its signals – it always shows signs of bad habits. But some steps can be taken, which will help every trader to defend against his own "Achilles heel". Exactly investigate the specific problem or challenge. For example, trader, maybe, tends to give away three weeks' profit in two days. Sometimes it is very helpful to identify conditions, which precede periods, when a trader becomes "vulnerable". Did he feel jubilant, reaching new highs on your account? Or, was he distracted by events, which happened outside of trade? The trader must learn to recognize the different sides of his personality, which affect his trade, because these traits will never go away. Finally, we are not robots – we are real people. But when can we recognize patterns of feelings or emotions, that we are experiencing, before, than they start to bring trouble, we are less likely to make a deal, which is not part of our game plan. Have a trading plan every day. It is insurance against spontaneous transactions.. It will also protect the trader from using the wrong strategy for the day., reminding him, that the market changes from periods of trend development to periods of volatility. The trader can identify the type of period in advance, in which it is located, and be prepared to apply the appropriate strategy during that day.
Tradition and ritual are tools for, to stay prepared in the present and can help maintain trader behavior, compatible with his trading plan. Everyone needs tools, to create structure and order in an otherwise very abstract game. Record keeping, such as the logical rationale behind the transactions, statistics or market indicators, is an excellent discipline, which helps you stay consistent. A set of small goals every day is also effective.. Such a goal might be, to have three winning days in a row, or clearly follow the trading plan during this day. It can also be – do not conclude more than three transactions per day and refrain from exceeding the trading mode. Or, take a position on every five-minute bullish or bearish flag, which will form. A trader's small goals should reflect his own trading style., needs and weaknesses.
A professional trader must learn to distinguish between mistakes, market-driven and voluntary errors, which he does himself. He should avoid making efforts on himself., if the current market environment is unfavorable or his normal trading style is not appropriate for the current environment. A good way to correct behavior is, to always think about the desired result. Write it next to the trade screen. Read this every morning..
Everytime, when the trader is about to take any action, he has to ask himself, does it really support its desired goal. He must present a victorious feeling after achieving short-term goals and replay this feeling many times in his mind as motivation..
It is important to be very clear about, that the goal is related to the market every day, not just in the long run. Traders should consider having a trader buddy, with whom they can share their daily results. Most traders will do better, if they are responsible to someone for doing their trade. They are less likely to let one big loss spiral out of control.. If their reasoning is harmful, then, at least, is there someone else, who can draw their attention to the fact, that the trader deviates from his plan or may need a break. Trade buddy – this is not the same, who offers advice regarding the market or specific transactions. If a trader feels the need to ask someone for advice or opinion on the market, then this is a sure sign that, that he should not be in the market at the moment. A buddy must serve as a coach., which can cheer up or enhance, if nessesary, Motivation, or serve that outside, to indicate, when a trader is in destructive trading behavior, which ends in a long decline. Markets can change quickly. A less prejudiced trader can more easily adjust to the environment. If he begins to develop prejudice, which is not accompanied by technical factors, but caused by emotion or weakness of reasoning, then the signals of his body, probably, they won't tell him anything.
Most professional traders know, when they are in a bad deal and know when they make a mistake. The more trades a trader makes and the more experience he gets, the sooner he will learn to recognize his own personal characteristics, which indicate, that he really is in a bad deal, no matter, whether its stop level has been reached or not yet. As long as the trader is able to benefit from this knowledge, this is another excellent reason, to always have a stop placed in the market!
Not less important, so that he remembers, how does his body feel, when he is in control and has a winning position. The best traders go one step further and add to a winning position. Green light is on! Foot on the gas! This concept is just as important, how to learn to recognize, when the deal doesn't work.
What lesson to learn
Trader, who goes through a losing streak should ask himself, “What lesson should I learn?" "What I should do, to change the situation?"He should never do himself a disservice., looking back at the graphic patterns with regret and saying “I should have seen this”. The problem is not, what he sees or does not see. The problem is always, how a trader manages a trade after he has entered the market. Trade management – it is the process of determining an initial risk level and then moving stops away from that initial level as the market moves or placing orders to exit a position, whether at a profit or at a loss.
The trader must rely on his best judgment at the time, when the deal is made and manage it. With experience, he can learn to recognize behavioral patterns, which he is experiencing, when his judgment cannot be on 100 percent correct – Times, when he tends to lower his vigilance and the market may punish him. And then, after a while, the trader's asset curve will start to improve steadily, as he will make fewer and fewer voluntary mistakes!
