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Futures Magazine
March 1994
Source: Futures Magazine, March 1994
Photograph by Mike Tribulas
In the swing of things with Linda Bradford Raschke
By David Nusbaum
Linda Bradford Raschke has come a long way form the trust fund she helped run in college.
"It was all fundamentals and longer-term and I still don’t have a clue what we did or why we did it, " Raschke says.
Today she’s more focused on the short-term, and profitably so. With $5.5 million under management, Raschke’s new managed money program—LBR Group Trading Co. in Marlton, N.J. – was up 110% in 1993; her largest monthly loss was 2%. (LB R is not yet a registered commodity trading advisor and isn’t actively soliciting money.)
Raschke, whose real trading career began as an equity option floor trader at Pacific Coast Stock Exchange in 1981, has since moved upstairs and started trading stock indexes and finally futures—she now analyzes the basic 20 domestic markets, sticking with the most volatile markets at any given time.
While she left the floor in 1987, Raschke still concentrates on short-term pattern recognition, capitalizing on price swings that generally last tow to three days, although she usually has one or tow long-term trades per quarter. Her typical trade size is 100 contracts.
"What I try to do is construct a probability matrix—so I don’t feel I’m trying to pick whether the market is going up or down," she says, "I just note form certain momentum indicators and price patterns and back testing there’s a 65% probability the market will open at its low end of the range and close at the high end, and an 80% probability that I should exit on the open the next day as opposed to the close the next day. A little bit of discretion may enter on entry or exit or whether the trade sets up the next day."
She favors watching the previous day’s high and low, and looking for patterns like double tops and bottoms.
"After you’ve had a 1-2-3 count down, I like to buy on a test," she says. "That’s probably my favorite trade—a test of a low or a high—and I’ll do that on any time frame. So, if I’m watching on a daily time frame and we’re testing a high that we made 10 days ago, and we’ve already had a good run up, I’ll look to short that point if it fails, and that’s where I’ll start playing the market form the short side where the probability says to sell."
When trading intermediate-term patterns, which tend to consist of two-week swings, Raschke also uses momentum oscillators to help choose which direction to play a market.
"A lot of technical tools are only an aid to help you see what the chart is telling you anyway," Raschke says, although she admits she’s probably seen the patterns she looks for 5,000 times. A strong believer in specialization, she recommends using one method in all markets, and compiles her matrices by hand before each trading day.
"One thing that’s essential to successful trading is having a game plan before the markets open," she says, "Never leave yourself at the mercy of being in a reactionary mood."
Eager to find more of an edge, Raschke has started a company with Steve Moore in Eugene, Ore., called LBR Moore Trading Inc., which specializes in correlation studies, looking for historical market similarities.
"It might be taking the March wheat contract and saying this market is correlating 86% with the price action in 1982 and 1979, and it projects this pattern," Raschke says. " You get these kinds of seasonal windows…the road map of the next tow months…for example, cocoa is in a down seasonal (into early March), so I might only want to be playing that from the short side."
Even when such market probabilities prove wrong, they provide valuable information, Raschke says.
"It tells you what the tendency is, and then the market’s reaction to that matrix tells you something," she says. "The market should be rallying but it’s going sideways for five days—that’s a really valuable clue that the next move down is going to be very big. It’s kind of like fishing. You drop your pole in and occasionally you catch a big fish."
While she has a trading partner, Raschke "fishes" alone in that she deliberately avoids out side information like the Wall Street Journal, newsletters or the TV that might distract her form her system.
"Far too many people let external influences enter their trading," she says. "If you have a system that says to buy the S&Ps, you shouldn’t be influenced by what Japan did overnight, or what Clinton said in a speech, or where the bonds opened or what IBM’s earnings are."
Raschke is thoroughly committed to remaining upstairs, where she’s no longer at the mercy of the order flow and free to take advantage of volatility and swings in activity cross several markets: You couldn’t pay me to go down to the floor," she says. "The (stock options) floor is not the place to be anymore – it sopped being the place to be as of 1988, and everybody I know on the floor wants to be off the floor, they just don’t know how to make the transition. Or they’re so used to arbitraging options that they don’t feel comfortable trading futures or in a different environment. Seat prices are telling you that."
Copyright (c) 1994, Futures Magazine
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