Some of the best methods of technical analysis were formulated many years ago–well ahead of the computer age, according to Linda Bradford Raschke, the well-known market trader and lecturer. “There is little ‘new’ technical analysis; it’s all been touched on in some way or another” over the years, she said. Raschke was speaking at the Technical Analysis Group (TAG XVIII) workshop held in New Orleans and sponsored by Dow Jones Telerate. Successful futures traders need to “get back to basics,” said Raschke.
She said traders that rely solely on computer-aided “trading systems” are overlooking a key element of the markets: “tape-reading,” or the study of the price action. “System” or “mechanical” trading methods use computer-generated signals that usually have a trader “in” the market much of the time. “Do your homework the night before, and study price action,” Raschke urged all types of traders. Raschke relies on Keltner channels in her trading.
Chester Keltner was a famous grain market trader with over 30 years of commodity trading experience. He was one of the first to pioneer systems work using trend-following rules.
One of the systems Keltner presented was the 10-day moving average rule.A 10-day moving average of the daily trading range was added and subtracted to a simple 10-period moving average–essentially forming bands. These bands served as buy and sell stops by which to enter or exit a position. Keltner’s original system was traded on a stop-and-reverse basis, which was mildly profitable, said Raschke. By varying the bands on the most recent average daily price range, the channels will naturally be a greater distance from the market when the price swings are wide than when they are narrow.However, they will stay at a much more constant width that Bollinger bands, she said.
“You can see how you would have participated in the majority of a trend if you used Keltner’s rules. Unfortunately, you would have experienced many whipsaws, too. This is because the system’s intentions are to keep you in the market all the time,” Raschke said. “I put Keltner channels set at 2.5 times the 20-day moving average daily range, centered around the 20-period moving average.This is wide enough so that it contains 95% of the price action.In flat-trading markets, as indicated by flat moving averages, it serves as a realistic objective to exit positions. However, I find its greatest value is in functioning as a filter to signal runaway market conditions, much as a rising ADX would do.”(The ADX, or directional movement index, helps determine market trend.) “Keltner channels will identify runaway markets caused by a large standard deviation move or momentum thrust.Thus, they can alert one much earlier to unusual volatility conditions than the ADX, which has a longer lag. On the other hand, (Keltner channels) will not capture the slow, creeping-trend market that an ADX will indicate.” Raschke’s rule for defining trending markets: “If the bar (on the bar chart) has a close outside the Keltner channels, or trades 50% of its range outside the band, with a close in the upper half of its trading range, the market should not be traded in a counter-trend manner. Stay with the trend and trail a two-bar trailing stop.” Another trading technique Raschke relies upon is the Richard Wyckoff method of analyzing accumulation and distribution patterns. On Wyckoff’s trading methods, Raschke recommended traders read his book, “The Art of Day Trading,” which is available at many publishing firms focused on business and investing. One key component of Wyckoff’s trading techniques involves a “critical” day.This usually involves a triangle formation on any bar chart—whereby price ranges and volatility are decreasing, to the point where a breakout in either direction is likely. Once the breakout occurs and a trend is under way, traders can get into the market and follow the trend. In her presentation to around 150 futures and equities traders from around the world, Raschke also gave the following recommendations for all traders: Always put current price action into perspective with historical price action. Raschke likes pivot points, as they determine whether prices are moving closer to, or farther away from, the pivot points. When volatility expands, “impulse moves will be followed by more impulse moves. You don’t have to hit the first move” to be successful in a trade. The first hour of market trading usually is the most critical, when determining significant highs or lows in a market. In “runaway” markets, one side (longs or shorts) is usually trapped. “Don’t try to pick tops or bottoms.” Oscillators don’t work well in strong-trending or runaway markets. They work best in choppy markets. When a market looks at its very best, or very worst, a major change in trend is likely. Raschke recommends that smaller-scale traders trade shorter timeframes than larger-scale traders. On where and when to take profits and place stops in a market, she says, “How much do you want to win or lose?There is never a magic place to take profits or place stops.” However, look at “swing moves” and key support and resistance levels closely. “Find your own comfort level.” The most successful traders “like to play the game” of trading markets. If you like the game, then you’ll play a safe game and enjoy trading. On trading psychology, Raschke says follow 3 rules: 1) Believe in “your” trading methodology. 2) Have a good attitude toward trading. 3) Concentrate. “Be 100% in the game.” There is no such thing as “mental stops.” Always have your desired stops in place. Raschke began her trading career in 1981 as a floor trader at the Pacific Coast Stock Exchange.In 1984, she became a member of the Philadelphia Stock Exchange, where she expanded to trading futures markets. She has been featured in “The New Market Wizards,” by Jack Schwager, and also co-authored, with Larry Conners, the book, “Street Smarts.”
