REVIEW OF LINDA RASCHKE AND MARKET WIZARDS

REPORT #9

Review of Linda Raschke trader and the book NEW MARKET WIZARDS (March 10th, 2010)

A friend brought me a used book called NEW MARKET WIZARDS. I had read the first one and thought this was a copy. It had been a dozen years since I read the last one. So I thought to read it again. Turned out it was a NEW, or different follow up copy and totally new to me.
These kind of books are good. They pump you up. The trading conditions have changed a lot in the last dozen to twenty years. ( I'm pushing 73 yrs. ) Still strategies that work, stay much the same. At least the classical ones. I'm finding some of my old trading books I use as reference are still good. Especially one section I keep re-using on market profile, which explains at the end of day, the meaning for the future next day, of what the H,L,C and Open forecast. I'm having to practice and relearn a lot. There is a lot more on the internet.

That getting aside, reading NEW MARKET WIZARDS is a good read and the only trader in there I liked was LINDA RASCHKE. I must explain my own philosophy after making money in real estate, in Florida is to AVOID LOSSES. Consequently I don't like any trading system that calculates in LOSSES as part of the strategy. I made some money in stocks, but it was too slow a game. I got out of it and switched to real estate a long time ago. You will get losses in trading, but I would not willingly enter a trade with taking losses in mind. My own system I am devising to work with the new computer setups that are available today, to suit my style, is TREND FOLLOWING. Unfortunately, I trade the OEX options and you only get between 6 to 8 TRENDS a year. Mind you, if you stick to what is a sure thing, you are going to do between 80% and 250% a year. The trouble with trading is that it is addictive and the long waits, require too much patience in between a trading system that only has 6 to 8 trades a year. I have a young friend that makes a trade ONCE a year and has a profit return gross of 80%. A seasonal 4 month about trade in options. Lots of leverage and limited risk.
So I got to playing around with the idea of doing some short term trading to satisfy the urge to trade, the adrenaline rush. I'm trading for FUN in my old age. It's got to be fun, or I won't necessarily do it. Money is the measure of success in meeting the challenge, but in my circumstances, is not the reason for trading. Short term trading is definitely going to get losses. I definitely do not want to be a day trader. Too little life for anything else. In the NEW MARKET WIZARDS, I see Linda Raschke does short term trading. I also see she only averages 40% annual returns. Which explains the reason for her low return percentage. ( + 40% ) That said, I'm willing to open two accounts and trade the money making SLOW one, and the less lucrative short term trading account for FUN between times of waiting for trends. As any professional trader will tell you, you have to trade in character to suit your psychology. That said, I find in getting back into the trading game, much apparently I have forgotten and have to re-learn ( thank heavens I wrote myself a bunch of books some 20 years ago as references of what I learned as I went along. ) It seems I crave ACTION like Linda Raschke and I formed the opinion of her trading style that she is trading too much. Obviously she is addicted for the adrenaline rush? ( grin! ) So am I, so why point fingers hey?
It is searching for short term trading strategies that I decided to do some research. Boy! Isn't this internet wonderful? I've managed to locate two so far that I am testing. To test a system I believe you must test into the future REAL TIME. Otherwise the results are no good.
Let an old guy trader tell you my cantankerous opinion about testing. I've played with trade station, data downloads, hand held mobile stuff, in my previous trading life. Long time ago! I don't believe anything based on historical data. It can give you ideas and the idea that BACK TESTING is going to find the HOLY GRAIL is horse manure in my opinion. Most people don't realize their potential because they over trade.
Let me explain something. I have known ( my generation are dying out ) some home traders that managed between 80% and 250 % a year on small accounts. Usually they were just looking to live, have fun and supplement whatever income they had achieved through life. Each year they would start with $50,000 or $75,000. An extra $75,000 to a $150,000 a year was enough for them. So when I read in MARKET WIZARDS of 40% returns like LINDA, I just know something is wrong someplace. The TOAD comes to mind as an OEX option VOLATILITY trader. Don't see him around anymore, he must have died? His old accounts and websites are still on the internet though for reference though. Now he showed you his trades and percentages of wins and losses as they happened. When he sold training, you knew what you were getting.
That said, I can say I'm going to do something similar in one account ( short term trading ) for the FUN and full well knowing LOSSES are part of that fun and challenge. I wouldn't do it for making money though. I'll be satisfied to break even. The thing is; I have to fill in the long spaces between the TRENDS where you make money with no losses. In the OEX, day trading is not workable consistantly. Due to the in between periods of low volatility. The OEX doesn't move enough a large part of the time, to cover your spread. One advantage of getting into the GAME again now, is the drop in commissions. I was paying $300 round turn a long time ago with a DISCOUNT BROKER. So things have improved and a lot of trading strategies that were not practical back then, are workable now, at $20 round turn.
Another beef I have, is that a lot of people are being quoted ( including Linda )and a lot of system sellers, on their percentage of winning trades to losing trades ratio. That again is a load of horse manure. The only figure percentage worth anything on a system being sold, is a quote of your account profit/loss balance for the year, quarter, or month. Print what you have made, or lost in cold hard cash numbers. What was your capital amount you used and what percentage did you profit, or loss. Anything else is a scam, pure semantics and hype in my opinion.
The hypothetical stuff can be thrown in the garbage. The number of trades that are winning versus losing is garbage. It has to be REAL MONEY, a REAL ACCOUNT and the only criterion is PROFIT OR LOSS number. This can be a percentage. The reason for this includes things: like slippage, spreads, commissions, drawdowns, etc. Lots of times you are slow to pull the trigger, or the market slides away from you, especially going downwards.
I don't like reading garbage. I was reading Linda supposedly recommending Curtis Arnolds PPS method. Can't remember when I tried that? Maybe 20 or 30 years ago. It didn't work. It was one of those hypothetical systems back then.
The best things I know are CLASSIC CHART PATTERNS, some CLASSIC bar readings and those kind of things. Maybe that is because I'm old and stuck in a rut? But I have written and tried a lot of computer indicators myself back in the early days of TRADE STATION. Think I had one of the first programs they sold at the time. Long ago now.
There are two classic chart patterns I like, that work every time you read them on an ordinary bar chart. All you really need is one pattern and you can make money every year. The problem is human frailty. We need to be experimenting and trading as humans, and trying to stick to trading to one rare pattern, that occurs only rarely unfortunately is very HARD to do. My friend Charlie up in Washington, D.C. does better than Linda at 80% return a year, on a four month seasonal SINGLE ANNUAL trade We are our own worst enemy in that respect. OVER TRADING IS THE BANE OF WHY PEOPLE LIKE LINDA DON'T TRIPLE THEIR INCOME in my opinion. It is not as much fun trading less often, but more profitable, so we trade more and reduce the earnings because we are addicted and often undercapitalized.
You can tell when somebody is not doing that good in trading. They start selling methods. When you are young or middle aged, you try to get capital. I had a private mutual fund in stocks from among friends one time. It worked well, but they withdrew their money during bear markets in stocks and that finished that. The 1987 and 92 crashes killed that. Redemptions ( panic cash withdrawals ) killed it. Generally speaking if you can make money trading, you should just use your own money. Why would you need any more?
It is under capitalized people who go into short term trading. If you have only $50,000 and you short time trade, then at Linda's returns of 40% gross before income tax, you are going to have less than $20,000 to live off, if you wanted to do this full time? The USA is a lot more expensive than that to live in. Better move to Belize and trade in the foothills of the Belize Alps, or on a boat in the Bahamas ( grin! )
The article in NEW Market Wizards on the Sorus investment strategy, backs up my own conclusions; that BET SIZE is the all important factor in trading and getting rich quick. You should never trade with money you can't afford to lose. In OEX OPTIONS I find I can scale in on a trend and that means while I may start with a 28% bet of capital on the first entry, of a $5000 account, if the entry is confirmed by the trend later, you can double the bet. That pretty much limits what you can bet. As you increase capital though you can keep doing it at the same percentage scale. By exiting when you are wrong, you normally only lose a portion, a half or less of your bet. Which means you lose about 18% of your account size in rough figures on a bad bet. The nice thing about options is that your risk is limited. Being a limited risk allows you more leeway in initial percentage of capital bet size to use.
The next thing that is important is only betting when you have a sure thing. Or the next best thing to it. Presuming you trade less and less during a year, as you get experienced and build up the intuition and brain recognition of market action and patterns, then it behooves the profit orientated trader to restrict trades to best winning type trades, the ones you are knowledgeable about and experienced enough to know will make some money. You never know quite how much, but you do know you are going to go over break even. This is not true of short time trading. Here you take a portion of bets and are going on quantity and smallness of risk, based on volume of numbers of trades. Under capitalized traders must do this. It is not really a good thing to get rich faster this way, I don't think? You need BET SIZE to be as large as practical, depending on the constraints of the type of market you are trading. I agree with Sorus on this.