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Thursday, May 19, 2005

Interview: Linda Raschke, An Active Trader

Linda RaschkeI found an interview with Linda Raschke, a short term trader, the president of LBRGroup. The journalist spent a whole trading day in Raschke's trading office. There is also a shorter follow-up in the next issue of the magazine, the two parts cover 12 pages, but it really is worth reading. You can read about her strategies and methods of stock picking, entry, and exit points. She talks a lot about mechanical trading systems. The interviews were made more than a year ago, but the hints are still relevant. (Photo from LBRGroup web site.)

Linda Raschke began her professional trading career in 1981 as a market maker in equity options. After 7 years on the trading floor, she left the exchange to expand her trading program in the futures markets. She was recognized in Jack Schwager's critically acclaimed book, The New Market Wizards.

Linda Raschke keeps up the pace
Active Trader Magazine

By Mark Etzkorn

“Everything I do is based on actual chart points,” she says. “I’m always looking at the swing highs or the swing lows. I never calculate Fibonacci numbers, Gann retracements, artificial pivot points or other things like that because I’ve never found any edge or any statistical significance from testing them. You have to put indicators in context. They’re background information — never the primary reason for a trade.

What I’ve found with the majority of mechanical systems is they only test out well if you use a very wide stop. Let’s say this system has a win-loss ratio of 60 percent. You think, “Hmm, not bad.” But that’s horrible, because the odds of getting five consecutive losers at some point out of a sample size of 200 or so is around 90 percent. So I know if I trade this system religiously I run an incredibly high risk of having five losers in a row — with a large per-trade risk.

On the other hand, consider a little scalping pattern that has a 92-percent win ratio and shoots for a 75-cent profit in the S&Ps. The odds of getting five losers in a row are much more remote. I can trade 10 times more leverage on that system than I could the first one.

Experience counts for a lot in this business. It’s a survival game. If you can persevere and endure for that first two or three years, then you’re there. If you do it for a year and get frustrated and quit because you’re not profitable — well, that happens to a lot of people. If you don’t know the rules of the game, you don’t know what to look for.

Raschke offers suggestions as to what traders can do to get and keep themselves on a profitable track. “You have to add things, explore everything and find what works for you,” she says. “Start out by doing one thing and one thing only — trading a bull flag, for example — and do it well.

“Forget about making money, just get proficient at execution,” she says. “Because when you start, you can be nervous and you can freeze up. And with practice, the emotions that accompany trading subside.”
Trader Toolbox
Active Trader Magazine

By Mark Etzkorn

In a follow-up to our February interview with trader Linda Raschke, we discuss more of the indicators and strategies she uses each day.

Raschke says she racked up 45 successive profitable weeks, in part because the technology was so conducive to the tape reading skills she had honed on the exchange floor. But when she got her first analysis software in 1987, she lost money for three months.

Linda Raschke’s office setup:
Computers: The office includes 23 networked CPUs (plus one laptop PC).
Monitors: 15 ViewSonic flat-panel monitors.
Internet connection: T1 line, plus satellite Internet.
Backup power: An independent generator that can keep the office up and running for five days in the event of a power outage.
“It is also essential that we have three different data feeds coming into our office for backup purposes, since we are managing money.”
Read further:
Active Trader Magazine: Linda Raschke keeps up the pace (PDF, pages 42-49)
LBRGroup (Active Trader Magazine): Linda Raschke Active Trader Interview, pt 2 (PDF)

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