How much is Linda Raschke worth

Linda Raschke: experience is my secret of success (part 1)

Linda Raschke has been trading since 1981 and is known as the Market Wizard from Jack Schwager's book series. After initially working as a market maker for options, Linda switched to futures trading and started trading managed accounts and her own hedge funds in 1992. In 2015 she decided to retire. But the markets are not letting go of her: Even today she trades from home with her private account. Marko Gränitz visited Linda Raschke in Wellington, Florida, and spoke to her about trading, but above all about her philosophy and her professional way of thinking and working. The result is one of our longest interviews so far - be curious!

Linda, thank you for taking the time to do this interview. You have a proud 36 years of trading experience - admittedly, it is not exactly easy to find the right introductory question. Let's start with this: How do you think the markets have changed over the years?
Raschke: The markets are constantly changing, and they have changed significantly over the long term. It is crucial that the markets are much more efficient today. This process became particularly evident around 15 years ago when more and more market participants had access to high-speed broadband internet. As a result, the movements became faster and the corrections and consolidations more and more confused - so the noise increased.

Did you adjust your trading processes accordingly?
Raschke: No, not in principle. Basically, I still do everything today in the same way as I did in the early 1990s, with the difference that today I only trade my own account. I prepare on the eve of the coming trading day. I don't want to be influenced by any news the next morning, if possible, I want to go through with my plan. From 7 a.m. onwards, I'll be at the computer I then trade and watch the market until the closing price. Then I go to training or to my horses to relax and clear my head. And in the evening, well, I often trade again, for example currencies or copper. There is always something going on somewhere.

So the markets have changed, but your processes are still the same as they were before. How does that fit together?
Raschke: I am a discretionary trader. My strategies are not set in stone. The basics on the market are just as valid today as they were in the past: You have to understand the trend of the respective trading day, be it an up, down or a consolidation day, and then implement the rough trading idea reasonably well. In addition, of course, there is good risk and money management, the use of appropriate leverage and the important factor not to make it too complicated. If you pay attention to all of this, you will often have small profits and losses and now and then you will receive a "gift" that the market offers surprisingly - namely when there is a tail event and you are on the right side.

You mean fat tails?
Raschke: Yes, exactly. The markets tend to train extreme events more frequently than one would expect. Sometimes the courses in trends go much further than you would ever have guessed. Nobody can predict how far it will go, but you can react to market movements.

How do you do it?
Raschke: If there is an unexpectedly strong movement, I ask myself whether this could be an “outlier”, that is, one of the gifts of the market. If I am already invested, I wonder if I should perhaps expand the position further to get the most out of this opportunity. In any case, you have to try to take the movement with you as best you can and resist the urge to quickly take the profit with you.

So you don't set any course targets?

Correct. I limit my risk but leave the chance for a large move in my direction of trade open.

Who am I to predict how far the market will go? Nobody can make such a prognosis. Instead, it's about being flexible and working with the market - in both positive and negative cases. So you have to be able to admit when you are wrong and draw the appropriate conclusions. Only in this way is it possible not to act yourself in a corner where you suddenly have your back to the wall.

How do you know if the market is "running"?
Raschke: The best opportunities are often at the beginning of the trading day. In the first 15 to 30 minutes in particular, I look carefully to see whether the market - especially the S&P Future - is showing signs of support or resistance. In principle, there are never very clear signals, but my experience often gives me a pretty good nose. For example, sometimes the market is strong right from the opening, other times it pulls back and then becomes strong. Here you have to observe carefully, think flexibly and pay attention to subtle details in the course behavior. Here again the value of the experience becomes noticeable, which cannot be replaced by anything. This enables me to assess the relationship between things and to draw strategically good conclusions from them. For discretionary traders, the most important thing is to be an excellent tape reader, i.e. to be able to interpret price behavior well.

Are you still trading your classic strategies like Spike & Ledge, Holy Grail and Near Range Seven or have you developed them to this day?
Raschke: The basic strategies still work, but I don't see the trading rules as set in stone. You have to have as few fixed variables as possible and be able to interpret the criteria a little more freely - in the sense of a model instead of a fixed trading strategy. After all, the markets never repeat their patterns exactly, but always in a similar manner. The more rigid the rules and the more conditions there are in total, the more often the implementation will fail somewhere. The strategies and patterns are only there for orientation, to bring structure into chaos and to give me reference points that I can use for orientation. They are “abbreviations” with which one can often correctly assess market behavior at the decisive moments - not only in terms of price development, but also on the basis of the point in time during the trading day at which these movements occur.

On which timeframes do you act?
Raschke: Day trading, swing trading and a few longer-term positions. I've traded the S&P Future since the first day on April 21, 1982. And active in day trading. Today I do about two to three trades a day. I focus on this market in day trading because you cannot always trade several markets intraday at the same time. When trading around positions, I add contracts (or stocks, as the case may be) to or reduce the position depending on market developments. It is important to have a clear plan so that you don't always start chasing the market or missing out on the big moves.

Do you also act in news?
Raschke: Oh yes, very much! News is great because nobody knows what's going to happen. This creates volatility and therefore excellent trading opportunities.

Which markets are you trading today?
Raschke: Almost only futures, very rarely stocks.

It's just great how you can get in and out of the market quickly with futures.

I mainly trade the S&P 500, US bonds, currencies and commodities, but no longer soft commodities, they are too erratic for me.

Why hardly any shares?
Raschke: You can't get in or out in one fell swoop. It is very tedious to slowly buy up a block of shares in blocks of 50 or 100, for example 20,000 pieces. And if something suddenly happens, I don't get out of it quickly, it's more like a big lump.

You used to work with options as a market maker, so you surely always had a lot more open bulk positions, right?
Raschke: Yes, absolutely. However, as a market maker you also had a nice advantage in the market back then because the prices were still inefficient. I don't have that advantage today with a large equity position. So I wonder why in today's fast-paced electronic marketplace, when I can get in and out of futures quickly and easily, I should still grapple with a cumbersome, risky execution quality stock position.

Do you have different accounts in order to be able to better separate your models and strategies mentally?
Raschke: No, there is no reason for that. I trade everything from one account, that's the easiest. I think that you shouldn't get bogged down just to feel somehow better subjectively.

What indicators are you looking at?
Raschke: I think most trading indicators are superfluous and nothing but a distraction. Actually, it is enough to have a simple bar chart and draw a few trend lines and channels. Some of my charts contain individual indicators, such as the Moving Average Convergence / Divergence (MACD) *, the Rate of Change (RoC) *, Moving Averages (GD) * or Keltner Channels *. Truly successful traders who trade large positions don't just look at a simple technical indicator that tells them when to get in or out. Seriously: Who really thinks that it works that easy?

Those who are really good usually don't reveal much. Therefore, the beginners cannot know how the professionals really trade.
Raschke: That's right. And in the institutional area it is even more pronounced. The best trading firms operate completely beneath the public's radar - and for good reason. After all, nobody wants to reveal what is being traded when and how. This is especially true in the quant area, where theoretically everything can be copied quickly. Some companies like Renaissance Technologies are known to have been extremely successful for years and still are, but nobody knows what exactly they are doing. Otherwise it wouldn't work after all.

You've also dealt with trading systems, haven't you?
Raschke: I am a discretionary trader. Systems are basically a good thing and they certainly work well if they are professionally created. You can use systems as your own indicators, but I don't do that. I use signals from systems in a different way - namely in such a way that I can develop an advantage. As mentioned, I have a lot of simple models with just one or two variables and a filter like trading volume. These models are very robust because they are quite general. I then think into a system in each situation where I can roughly estimate where the entry and the stop would be if the market behaved as expected, and then I try to make a better trade.

Do you have an example of this?
Raschke: In principle, it's very simple. Let's take a look at the daily chart of USD / JPY (Image 1). There were two clear downward days within the short-term uptrend. Most of the time, the market doesn't give much more countermovement, so I expected a buying day here the following day, as long as the market doesn't refute this. That's a nice, simple, general model. The market opened the next day with a bullish gap up (upward price gap). The likely scenario now was a higher closing price. In systems thinking, this would mean buying at the closing price, as this confirms the bullish trend. So I think to myself: what if I bought at the closing price on a buying day like this? And then I put it to the test and ask myself: How much better would it be to come in now or during the day for a much cheaper price? So I think: Wow, I'm a genius, I can buy cheaper than the system at the closing price. That might sound a little euphoric, but it makes the point that I'm concerned about. And if it actually comes to a strong closing price, there will certainly be another follow-up movement on the following day, which in this case worked perfectly. Overall, it was a strong long scenario with limited risk.

Figure 1. Long trade USD / JPY. After two downward days within the upward trend, Linda Raschke classified the following day as a potential buying day in her evening analysis. The market opened higher and confirmed the idea. The market showed strength until the close, so it held the trade overnight and only closed it out the following day.

Part 2 of the interview

The second part of the very interesting interview with the dealer Linda Raschke. Linda Raschke began her career as a market maker in 1981. It has been registered as a CTA since 1992. In 2002 she founded and managed her own hedge fund, which was so successful that Jack Schwager interviewed her for his book “Magician of the Markets”

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The interview was conducted by Marko Gränitz.

Marko Gränitz writes articles on capital market topics and conducts interviews with traders. For several years he has also started as a triathlete in competitions. Source: Traders' Mag.