|
Trader
Linda Bradford Raschke Gets 'Back to Basics'
By
Jim Wyckoff
(Note:
I wrote this story a few years back, when I was a journalist with
FWN.)
Some
of the best methods of technical analysis were formulated many years
ago-well ahead of the computer age, according to Linda Bradford
Raschke, the well-known market trader and lecturer.
"There
is little 'new' technical analysis; it's all been touched on in some
way or another" over the years, she said. Raschke was speaking
at the Technical Analysis Group (TAG XVIII) workshop held in New
Orleans and sponsored by Dow Jones Telerate.
Successful
futures traders need to "get back to basics," said Raschke.
She said traders that rely solely on computer-aided "trading
systems" are overlooking a key element of the markets:
"tape-reading," or the study of the price action.
"System"
or "mechanical" trading methods use computer-generated
signals that usually have a trader "in" the market much of
the time.
"Do
your homework the night before, and study price action,"
Raschke urged all types of traders.
Raschke
relies on "Keltner channels" in her trading. Chester
Keltner was a famous grain market trader with over 30 years of
commodity trading experience. He was one of the first to pioneer
systems work using trend-following rules.
One
of the systems Keltner presented was the "10-day moving average
rule." A 10-day moving average of the daily trading range was
added and subtracted to a simple 10-period moving
average-essentially forming bands.
These
bands served as buy and sell stops by which to enter or exit a
position. Keltner's original system was traded on a stop-and-reverse
basis, which was mildly profitable, said Raschke.
By
varying the bands on the most recent average daily price range, the
channels will naturally be a greater distance from the market when
the price swings are wide than when they are narrow. However, they
will stay at a much more constant width that Bollinger bands,"
she said.
"You
can see how you would have participated in the majority of a trend
if you used Keltner's rules. Unfortunately, you would have
experienced many whipsaws, too. This is because the system's
intentions are to keep you in the market all the time," Raschke
said.
"I
put Keltner channels set at 2.5 times the 20-day moving average
daily range, centered around the 20-period moving average. This is
wide enough so that it contains 95% of the price action. In
flat-trading markets, as indicated by flat moving averages, it
serves as a realistic objective to exit positions. However, I find
its greatest value is in functioning as a filter to signal runaway
market conditions, much as a rising ADX would do." (The ADX, or
directional movement index, helps determine market trend.)
"Keltner
channels will identify runaway markets caused by a large standard
deviation move or momentum thrust. Thus, they can alert one much
earlier to unusual volatility conditions than the ADX, which has a
longer lag. On the other hand, (Keltner channels) will not capture
the slow, creeping-trend market that an ADX will indicate."
Raschke's
rule for defining trending markets: "If the bar (on the bar
chart) has a close outside the Keltner channels, or trades 50% of
its range outside the band, with a close in the upper half of its
trading range, the market should not be traded in a counter-trend
manner. Stay with the trend and trail a two-bar trailing stop."
Another
trading technique Raschke relies upon is the Richard Wyckoff method
of analyzing accumulation and distribution patterns.
On
Wyckoff's trading methods, Raschke recommended traders read his
book, "The Art of Day Trading," which is available at many
publishing firms focused on business and investing.
One
key component of Wyckoff's trading techniques involves a
"critical" day. This usually involves a triangle formation
on any bar chart-whereby price ranges and volatility are decreasing,
to the point where a breakout in either direction is likely. Once
the breakout occurs and a trend is under way, traders can get into
the market and follow the trend.
In
her presentation to around 150 futures and equities traders from
around the world, Raschke also gave the following recommendations
for all traders:
-
Always
put current price action into perspective with historical price
action. Raschke likes pivot points, as they determine whether
prices are moving closer to, or farther away from, the pivot
points.
-
When
volatility expands, "impulse moves will be followed by more
impulse moves. You don't have to hit the first move" to be
successful in a trade.
-
The
first hour of market trading usually is the most critical, when
determining significant highs or lows in a market.
-
In
"runaway" markets, one side (longs or shorts) is
usually trapped. "Don't try to pick tops or bottoms."
-
Oscillators
don't work well in strong-trending or runaway markets. They work
best in choppy markets.
-
When
a market looks at its very best, or very worst, a major change
in trend is likely.
-
Raschke
recommends that smaller-scale traders trade shorter timeframes
than larger-scale traders.
-
On
where and when to take profits and place stops in a market, she
says, "How much do you want to win or lose? There is never
a magic place to take profits or place stops." However,
look at "swing moves" and key support and resistance
levels closely. "Find your own comfort level."
-
The
most successful traders "like to play the game" of
trading markets. If you like the game, then you'll play a safe
game and enjoy trading.
-
On
trading psychology, Raschke says follow 3 rules: 1) Believe in
"your" trading methodology. 2) Have a good attitude
toward trading. 3) Concentrate. "Be 100% in the game."
-
There
is no such thing as "mental stops." Always have your
desired stops in place.
Raschke
began her trading career in 1981 as a floor trader at the Pacific
Coast Stock Exchange. In 1984, she became a member of the
Philadelphia Stock Exchange, where she expanded to trading futures
markets. She has been featured in "The New Market
Wizards," by Jack Schwager, and also co-authored, with Larry
Conners, the book, "Street Smarts."
|
