Linda's Trading Strategies
Linda Bradford Raschke began her professional trading career in 1981. She has been the principal trader for several hedge funds and started her hedge fund in 2002. Linda’s hedge fund was ranked 17th out of 4500 for best 5-year performance by BarclaysHedge. Linda retired as a CPO and CTA in 2015, however, she continues to trade daily for her account. Linda became a world-known trader through a dedicated chapter in Schwager’s book “The New Market Wizards”.
A Few Words about Linda's Trading Style
According to Linda, successful trading needs a good chart pattern, a sound research process, solid position sizing, and a good market read. Linda is not a 100% mechanical trader, however, she tries to systematize her processes as much as possible. She also mentions that if you do use a system it has to be your system.
Linda’s Trading Tactics
Linda divides her trading action into 4 profit centers (trading strategies). Each of these four profit centers approaches the market in a diversified way.
(1) Equities Day Trading Strategy
- 95% of trading occurs on the S&P500 futures (E-mini)
- 5% of trading occurs on DOW and NASDAQ futures
- She avoids the market noise during FOMC releases or big economic reports
- She focuses on high volume/volatility days when she rides strong trends into the close
(2) Swing Trading Strategy
- Swing trading occurs on major futures contracts
- 1-3 day holding period
- She prefers to cut her losses short and run her profits
- She waits for entry signals based on momentum readings such as a 2-period ROC
(3) Trading Daily & Weekly Patterns
- Her system is designed to recognize and trade classical charting patterns
- Focusing on trading false breakouts in strong ranges rather than trading the breakouts
- Linda expects 14-20 reasonable swings per year to capture one great swing a month
- She prefers to trade only very high Reward/Risk swings
- Her entry signals are discretionary, however, she tries to quantify the whole process using pivot points, swing highs and lows, and ATRs
- She prefers to apply a trailing stop instead of the classical stops (take-profit) and prefers to exit the market at the close
(4) Special-Situation Trade Strategy
- She tries to spot extreme market dislocations and trade them with an option structure
- For example, she trades a fading trading sentiment by taking the opposite direction of extreme fear/greed
- For bullish trades, she uses a long call spread
- For bearish trades, she uses a long put spread
- She also likes to trade seasonal patterns in the commodity markets
A few more words about her strategies
Linda claims that successful traders keep meticulous records of their trading history to identify what’s working and what isn’t. Linda monitors each of the above 4 profit centers every quarter. If one profit center is underperforming, she’ll tweak her approach until it starts producing profits again.
Model-Building & Exit Strategies
In regards to her model building, Linda uses mainly time-based exits. She claims that time-based exits are robust as they are not dependent on the market range or volatility conditions. For example:
- Exiting the market after a specific period
- Exiting on the close or the next day’s close
- Exiting the market when Europe closes
Linda mentions that she believes in predicting price direction, but not magnitude.
- You have to be willing to take what the market gives you
- She doesn’t like to set specific price targets
- She gets out when the market action tells her to get out
Position Sizes -Average Dollar Daily Range
When trading a wide range of financial assets, you need to standardize the risk of each position. For every position, Linda uses the 'Average Dollar Daily Range' to obtain the correct size. This is known as volatility-weighted position sizing.
- Each quarter, she calculates the average daily dollar range per financial asset that she trades
- If gold, for example, had a 20-dollar average daily range over the previous 30 days, this is translated into a $2,000 average daily dollar range
- If the S&P500 e-minis, on another example, had a 14-point average daily range, this is translated into a $700 average daily dollar range
- Lower volatility instruments will need more contracts, while higher volatility instruments need fewer contracts
- By sizing positions, fluctuations in highly volatile markets equal the fluctuations in quieter markets
- This approach ensures that a trader risks similar amounts of money on each trade
Expected Value of the Trade Formula
The following formula is used by traders such as Linda to identify how much to allocate to each trade.
■ EV = (Probability of Winning) x (Amount Won if Correct) – (Probability of Losing) x (Amount Lost If Wrong)
These variables can be estimated by using historical data. For example, if you apply a strategy that wins 50% of the time and loses 50% of the time, with an average win of $2,000 and an average loss of $1,000, the EV is:
■ EV = (0.5 x $2,000) - (0.5 x $1,000) = $500. This means that on average you can make $500 from each trade.
Her Favorite Trading Books
- Charting the Stock Market: The Wyckoff Method, Hutson, Weis, Schroeder
- Stock Market Technique No. 1 & No. 2, Richard D. Wyckoff
- Wall Street Ventures and Adventures, Richard D. Wyckoff
- Technical Analysis of the Financial Markets, John Murphy
- How to Make Profits in Commodities, William D. Gann
- Reminiscences of a Stock Operator, Edwin Lefevre
- Profits in the Stock Market, Harold M. Gartley
- Forecasting Financial Markets, Tony Plummer
- Studies in Tape Reading, Richard D. Wyckoff
- Mind over Markets, James F. Dalton
- Market Wizards, Jack Schwager
- The New Market Wizards, Jack Schwager
- The ABC of Stock Speculation, S. A. Nelson
- Street Smarts, Linda Raschke, Larry Connors
- Tape Reading & Market Tactics, Humphrey B. Neill
- Viewpoints of a Commodity Trader, Roy W. Longstreet
- The Taylor Trading Technique, George Douglas Taylor
- Technical Analysis of Stock Trends, Edwards and Magee
- Trader Vic Methods of a Wall Street Master, Victor Sperandeo
- Trader Vic II Principles of Professional Speculation, Victor Sperandeo
- Technical Analysis and Stock Market Profits, Richard W. Schabacker
- Trading Commodity Futures with Classical Chart Patterns, Peter Brandt
- Trading Risk: Enhanced Profitability through Risk Control, Kenneth L. Grant
Sources:
» More about Linda on Forex-Investors.com
“Trading Sardines” book, released in January 2019 by Daughters Press
» Macro-ops.com/lessons-from-a-trading-great-linda-bradford-raschke
■ Linda Bradford Raschke's Trading Advice
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