The Reality of Relative Strength Based Trading with Linda Raschke

we want to be mindful about how do we make the most amount of money in the least amount of time the relative strength between the winners and the losers increases that means that our

basket shows that the leaders continue to outperform and continue to outperform really try to do is concentrate on the pre-existing conditions that may lead to

a trend Aid relationships that's so essential for good trading what is price doing relative to an indicator what is price doing relative to a certain Market environment and you know you're going to get closer

to a top when they start scraping the bottom of the barrel to look for the dogs that haven't moved never get caught into averaging never never never that's my Golden Rule don't trade too small because you'll be ridiculously sloppy

and and don't trade too big because you'll just make unforced [Music] errors we've got a real treat uh we've

got Linda rashy Market Wizard and experienced Trader uh who's going to be talking about relative strength and the Janus Factor Linda it's a real pleasure to have you as a part of uh the conference so thank you so much for

taking the time and yeah this is this is one I've been really looking forward to so I'm really excited to get going well I know I've got a captive audience because the Market's just

opened so I'm sure everybody's looking at their screens but uh thank you very much for having me on it's an honor to be here and you had such a wonderful lineup of guests and from what I

understand excellent attendance so of course every presenter likes in audience to deliver to and uh let me just say there's only so much that I can cover in

a 45 to 60 Minute presentation but hopefully I'll put some good ideas in your head here as to the current environment that we're in and um

different ways of thinking about relative strength okay because everybody's heard for years about how the relative strength leaders outperform and outperform and outperform until they

don't don't outperform so we're going to look at the types of environments that they don't outperform as well as as you all know relative strength is a function

of your look back period so if I'm just looking back one day I'll get a completely different subgroup than I will looking at a six-month look back um

my my initial knowledge of relative strength was really my weak point because I um was trading more as a short-term uh

Trader off of momentum factors but that's a little bit different than the relative strength you know Market structure and so forth and I was one of those people I I started off on the

floor the Pacific Stock Exchange back in 1981 and I was always the one sucker that would buy the dogs because they hadn't moved yet and guess what they still wouldn't move until if I sat on

them for three years maybe they'd be up a fraction there so obviously I was very um ignorant on some of these principles and then I was a member of or am a

member of APTA the American Association of professional technical analysts if you have been in the markets for seven years you two can qualify for this

prestigious group and I heard a presentation uh by George shade and he was talking about all of his work on relative strength now George shade has

been an experienced Market participant for 50 years so uh I always love to default to the people that have the most experience and he started talking about

how with these look backs obviously he wasn't talking about short-term trading per se but in terms of candidates for the Investment Portfolio and he said

that the absolute worst look back period was one month or four weeks and the optimal look back period was was six months and so I started playing around

with different look back F you know periods and I'm going to show you the pros and cons of of using this in different ways to capture different

types of things and then we're going to wind down and we're going to put it into the context of Gary Anderson's work on

the Janis Factor if you don't know his work he won the Charles da award in 2003 which is quite prestigious award for his

original paper on the Janus factor and then he came out with a book in 2012 it's not a very long book but it'll fill

in so many holes and gaps in your knowledge and approach to the markets if you have not read it so I'll show you the name of the book and few

recommendations at the end of this so moving on here I need to find my trusty little arrow okay just in general this is a

general commentary because most people when they think of relative strength rightly so it refers to momentum trading and investing where a stock outperforms

a benchmark now we can do the same thing with commodities and commodity indices and see what's outperforming the relative strength and we can use any

Benchmark I use the SMP 500 but if you wanted to use the NASDAQ or the NYSC you can play around with different they'll all pretty much come up with a similar

group of the leaders and the laggards okay and the thesis behind relative strength is that in a momentum type of

environment which is going to be um generated by a positive feedback type of system which we'll look at the trend is

going to outperform and in positive feedback and momentum that is what generates a trend okay so in a nice

uptrending bull market making new highs you are going to have good positive feedback and obviously a trend and you can see the type of environment that we

have been in for the last uh year and a half exception of just a few stocks it's been fairly flat sideways market and so we'll look at some of the uh little

traps in that type of environment so it's not only depend on the market on the look back period but the market environment and it's most useful in a

strong Market it exhibits the characteristics of positive feedback so we can have this positive feedback phenomena in a downtrending market as

well okay so um obviously contrarian strategy in the trading range would be where the laggards are bought at the bottom of the range and then outperform

the Le ERS um which is something that most people don't consider these types of environments because we have been in such a steady strong bull market which

has been coming to an end so we need to sort of adjust our thinking for strategies going forward um for really aggressive short duration stock Traders

and this is not my style but I see it amongst some friends and um most of them are very very shortterm duration they could even be just day Traders with the

use of weekly options and daily options you can really capitalize on some of these things but I'm sure you guys are familiar with these strategies looking for what is the largest percent Gap up

on the opening the largest five minute bar off the opening perhaps you could incorporate a volume component in there the largest 15minute gain from the

previous day's higher close in terms of a percent AG wise and so these strategies have become so well known and everybody scour them in the pre-market

that you have to be very Nimble and uh not shy about pulling that trigger pretty quickly and so uh also being quick to exit if you are in a non-f

follow through Market because you'll see that all the trend will Peter out at the end of the Europe um Europe close and you have to be really mindful if you are using using options as one of your

trading vehicles and I'm sure all of you have experienced that that trade uh these little hot potato options so we're all I'm going to spend more time on looking back with a longer duration

we're not going to concentrate on all these shortterm tricks um because I think that so many of you are familiar with them I want to bring something new

to the table just by introducing some of Gary Anderson's work okay um the reviews okay this is a difference

between the main thesis of Gary Anderson is the difference between the positive environment feedback loops and the momentum is calculated by the spread

between the basket of leaders and a basket of laggards and I will show you exactly how to do that so for example we

have been in a downtrending moment momentum environment I know it sounds like a mouthful in an uptrend okay but

what's what's happened is that the um spread between the leaders and the laggards has been converging because of this type of environment so normally we

would be in a contrarian type of mode looking to buy the shares just coming off of bases at the lower end of the trading range and a perfect example of

this is on Friday when we actually saw the laggards Jump by 5.7% I and the leaders Rose 6% so we

really need to figure out where are we going to get the most bang for our buck I mean on a day like Friday and the day before you could practically throw darts

at a dart board and anything's going to go up but we want to be mindful about how do we make the most amount of money in the least amount of time and that's

going to be your selection of markets to trade okay so I'm going to go back to showing you at the lowest end of the range a one-day look back period And I

use trade station and you can see I have a nice grid here of three different relative strength look back back periods and each of them serves a different

purpose so I have a longer term look back period of 120 days and then I have a middle column here intermediate and

I'll explain exactly how I use that and then of course this is our uh one day and you can actually see this in the

middle of the day very very clearly um uh and uh I think caterpillar was one that just boom shot up to the top of the list on Friday so I just want to show

you what that looks like because you can see here I have a weekly chart and a daily chart so any look back period with

longer than three four days of duration is not going to capture these things so I like that one day look back period when we're just starting to see a move

and what we see here is a classic example of a lagard of sorts um catching the bid and outperforming you can see

dish Macy's the Russell uh you know Lulu of course was a unique sit situation but caterpillar so these were all the shares

that outperformed the snps on Friday by a significant amount and that's what we really want where are we going to get our you know our

outperformance so this column right here is our one day relative strength and usually I I use all three of them when I look at these at night I'll just kind of scroll through all three of them and

maybe you don't want to buy the opening on Monday but then we can put this on our watch list and that's a good way to go about doing it so this was the slide

I've I just went over on how Friday the laggards jumped significantly and that is indeed signs of a trading range type

of environment or negative feedback loops and that is a counter Trend it puts a damper on some of the upside momentum functions not that we can't

have a bull market we could even go up and and um go and retest the high we can even look above the high on the Dow but it's just saying that as long as that

spread between the laggards and the leaders is starting to converge you are going to get more bang for your buck on

those little dogs there so the middle column that I showed you here I'm going to go back I don't know why this is skipping over this stuff here okay

this middle column here I have set to um I use the last cycle low and so that is a a oscillator low on the snps and that

always gives a good definition of it and so it was 21 days just looking back you can see the the cycle in the NASDAQ and the

snps and so this is just sort of interesting you don't want to necessarily buy this on day 21 but if

you can identify a little cycle low here and start to do this scan on day three and day four and day five um those are

the nice little hot potatoes that can give us much more than we're expecting and you can see as well we're in that environment that's not a momentum based

environment where most of these shares Nidia of course has been hot to trot here but most of these shares s have been underperforming with a longer look

back period maybe uh maybe uh 80% of these have been underperforming so that's one thing that we can do with that middle column set

the look back period to the start of the cycle low on an index another trick I really like is to look at the start of

the quarter and sometimes if I if I do it three days out four days out just a little weak period there at the start of the quarter what you will see it's going

to pick up all the stocks that have the best institutional participation behind them and institutions are slow moving dinosaurs for the most part and they

tend to adjust their strategies quarter by quarter by quarter so if you see things outperforming the first week of a new

quarter it tends to outperform for the quarter so it's just a little caveat

there um and let's see here this here is our traditional six Monon look back period so when you're looking for

investment candidates in general it's not 100% but the shares that have been outperforming for the previous six months tend to

continue to outperform so ge's been on my rate radar because it was actually outperforming in February and March you know if you had bought any time in this

time period and stuck it in your portfolio it still made new highs there on Friday so that's kind of a longer

term duration thing uh great for your IRA or a a separate holding account just to establish a little bit of a presence

it may not generate the most beta but um or Alpha you know but it's steady and so

it has lower draw Downs in general so let's just talk about this Janus here as a market metaphor because Janus was the

Roman God of gates and doors represented by two opposing faces and this represents the duality of things the

one-sided two-sided nature of things you know coin has two sides the metaphor of Jan explains the Dual nature of the markets and how the markets vacillate

between these two different environments although one wouldn't think so the previous 10 years but um one is determined by the trend followers and

the other has been the contrarian bargain hunters the trend followers have not been doing so Swank uh this year and I think some of the bargain hunters have

caught a few gems that's just my opinion so I don't have any way of knowing for sure I never know

for sure who is doing what and I see so many people fall into the Trap of oh they're going for the stops or oh it's

the alos or oh kind of forcing a little bit of um story to the thing and I just find that that does not serve me and

I've not really seen it ever serve anybody else else so always remember there's two sides to a coin but when we

want to um let's see put this into the positive feedback the positive feedbacks the momentum and the acceleration and yes no doubt we did see that Nidia but

Nvidia does not make the whole Market either okay so we are going to look at how we use a basket of the top 10% of

shares in our database and the bottom 10 % of shares in our database and keep our database fairly small two to 300 shares and they we're going to take the spread

between those so nid of course would be a contributing factor but uh we'll see surprisingly how many of the laggards at the bottom range have been coming to

life one by one so when there is positive feedback what tends to happen is the relative strength between the winners and the losers increases that

means that our basket shows that the leaders continue to outperform and continue to outperform and you know you're going to get closer to a top when they start scraping the bottom of the

barrel to look for the dogs that haven't moved which is still a mistake whoops but I'm going to just go back here and by the way all my slides will be

available for you so if you want to go back and review something not a problem um

so the direction of the momentum can be up or down that's the widening of that spread and we see the same thing to the

downside where these laggards get hit so much further than the leaders so that spread widens once again when that spread starts to converge and we've

actually seen that for the last uh you know 16 months that represents a form of rotation which is most likely in a

trading range all right but the increasing momentum is really what drives the trend sorry about that I've got a little Twitchy Mouse here I

thought I had to feed him some cheese okay so yes when the spread is decreasing there's rotation when that's

increasing you've got upside uh Trend or downside Trend um so there is the there's the gist of it and uh again when

there is positive feedback the direction of the momentum which is the periods that are moving the market so for example in

2022 um we saw a directional bias to the downside obviously but there were periods of positive feedback during that

period so just be mindful about that so now we're going to look at how Gary calculated his relative strength spread and I think

it's a genius idea and of course everybody can do their own variations on this and that's the whole point if you hear somebody in this conference

suggests an idea you can take that same idea and say well can I express it this way can I quantify it that way I'll show you another way that I quantify it but

it's really you know don't take any of this as gospel play around with it and make it your own so to find out whether the relative strength environment is

working first we're going to identify the strongest and the weakest stocks as a day D and then the changes in each set

the changes in the leaders and the changes in the laggards are averaged and then they're recorded for the following

day or D plus one so forward changes for each set are cumulated and then the specific stocks that rank among the

strongest and weakest may vary daily but you'll find it doesn't matter when you're looking at a basket of 20 to 30 stocks so this method provides a

continuous updating of the forward performance of the relative strength leaders and lagers and you can do this just once a week it's not something that you have to do every single night

because the look back periods that we're going to use are um you can see here the relative strength limited to the top

10% we're going to use a five Monon look back period for the lagard so that does not change as often and a three-w week

look back period for the leaders so uh you want to update the this on a weekly basis because these changes can happen

quickly Gary by the way puts out a newsletter and I'll give you all the the information for that and it only comes out once a month and his client base is

institutional mutual funds you know hedge funds uh that type of group so you don't want to be making decisions when you're running you know half a billion

dollars you know on too short of a time frame so that's sort of his wheelhouse there but let me just give you some food

for thought here okay there we go this is an example of negative feedback environment meaning mean reversion and everybody is familiar with Jesse

livermore's name along with uh some of the others Levy Rich um was a a Pioneer with relative strength so the 1930s

experienced significant mean reversion there was no uptrend to the to the um spread and uh this was a period driven

by negative feedback and risk adverse contrarian Traders I can't imagine why after the 20s but during those years

there were five separate months where a trend following strategy would have lost over 40% so that's pretty harsh each instant

came as the market Rose substantially trapping Jesse Livermore and he was forced to declare bankruptcy

yet again not that he wasn't a very Savvy Traer but he was essentially a one-trick pony which is going to bring

us at the end to why we need to adjust our strategies in certain environments so there's very few single methods or

strategies that we can apply through all these varying conditions so always be aware of that you know right when they find the key it stops working right the

key of the lock so this was the period you can see here in the 1930s and even into the 40s where there was no uptrend there was no downtrend it was a very

flat period it was a mean reverting period sell the rallies buy the dips you know buy the dips sell the rallies right when you think there's going to be a breakout it's a trap etc etc so that

would be an example of a chart and I used monthly data just because I wanted to compress that time period that Jesse liver got caught in now this is a chart

courtesy of Gary Anderson and what we see is a little bit ironic it's kind of a paradox because since the start of

2022 momentum has been declining and I'm sure some of you felt this you know a month or two months ago with the contraction in the daily ranges I always

calculate the dollar value for the daily ranges on the Futures that that I trade and it's just it's just been going down down down if you were to plot a chart of

the average true range probably because some of the money uh liquidity has been uh you know tempered a little bit by the FED but this is sort of interesting

because you can see we had this continual downtrend which is a little bit deceptive because you think there was a downtrend in the market but it was

not a momentum decline even though I'm sure it felt like that if you were getting long prematurely so I thought that was interesting of note we have

seen these Trends in the direction of momentum persist for multiple years at a time so it does not mean that everything

has to come to life and right now we are in that contrarian negative feedback type of loop um so what we want to do is buy at the lower ler end of the training

range and sell at the upper end of the range and I'm not saying step in front of something like L like a Nvidia but I

am saying that as you can see on Friday's action uh some of these little um laggards just grossly outperformed

the leaders and uh so just be aware of that um as a contrarian and I'm a better contrarian Trader than I am a moment Trader frankly because that's just how I

started off on the trading floor and it was very difficult to be on a trading floor and buy breakout so that is not my forte but we'll always be looking for

the soldout issues that are ready to turn and this this does not mean like dog dogs that you know were uh High risers for the pandemic and then just

crashed and burned and they're still up in Flames um but you know contrarian you looking at some of these oversold Dow

shares that we saw they're good shares uh but they were just sold out and um you know uh they uh we we want to buy

them before they pop not like after they pop on Friday but you should see that they should get some continuation in the trend here and uh I think that there's a chance that they can make back

50% of their downtrend which would pull more money in because most of you know with the readings has been way way way too bearish for way way way too long so

we have to figure out how uh the Market's going to pull in some of this money and I think that they feel safer buying these uh contrarian types of

shares oh golly Jeepers okay so I'm just going to give you some quick resources before moving on this is Gary Anderson's book The Janis Factor Trend followers

guide to Market dialectics and it was written in in 2012 and I find everything more relevant

than ever um Equity PM is his newsletter and I think it's fairly reasonably priced at any rate you can go to his

website Gary Equity pm.com I want more people to be aware of his work and his research because it is so unique it's so

unique that it was recognized as getting the Charles da award which is a very prestigious paper and um I have not seen hardly anything else written about this

but I do feel if you read his book it will fill in a missing Gap or hole in your knowledge because we tend to be

very linear based in our approach to the markets these days um and by that I mean not using as much context as we should

so so I think he'll just highlight that awareness and if you are a student of relative strength the number one book you really want to look at is Robert

Levy's book the relative strength concept of common stock price forecasting so this is a classic and

should be in every technician's library and if you're a Trader and I know that most of you trade stocks uh and um so I

think this would be a valuable addition for you to pick up as an aside since I've quoted Gary multiple times he is a

woff efficient AO woff adds a lot of structure to the market as well and he has been in the markets for 45 years he's been a principal of Anderson and

low which he formed in 1990 and his advisoring services are um subscribed to by a very International clientele so he's got a lot of

credentials and credibility there so moving on now I am going to show you some other ways that I have always

viewed this positive feedback and this negative feedback especially since I was originally coming from even though I started on the options floor doing

stocks uh 10 years later I gravitated to doing mostly Futures most of the things I talk about I have to consider true

principles of price Behavior meaning that they will work on stocks equally as well as Futures but you all know they have their own unique little subtle

nuances especially when it comes down to noise and most stocks tend to be much noisier than Futures so this is a little

thing down here that I plotted for you and actually I put this in the in the uh book that trading sardines book that I

did as an example of what I did in you guys are going to laugh it was in the late uh 1980s and the early

1990s and at that time in the late 1980s the oex options were the thing to trade they were very hot they were liquid um

you know this was course uh in the good old days and um what I would do is down here at the bottom you can see I've got

assorted rates of change a three a four a five a six a seven period a nine period you can play with this and throw

in whatever you want and you'll see that we have periods right here where all the rates of change pull on up that's your

positive feedback mode and that's what's giving it go go go typically after after the positive feedback mode has ended

you'll see this fragmentation here between all the different rates of change the longer term ones are still going up but the ones that are shorter

have fallen and at this point right here when this spread is the widest that's when I would short straddles on the oex because it needs to

consolidate and then you can see typically what happens we wound down this green here this is a hard to see green but it's an equilibrium point so

this is typically the Market's process everybody tends to think of the best buying opportunities uh coming from oversold or overbought conditions and

that's not always so a lot of times we have to wind down to these equilibrium points and if you are a student of Market profile you will understand

understand exactly what I'm talking about by developing a high volume node or this um balance I think Jim Dalton

calls it a balance period so in that balance period right in here we're starting to get our price bar overlap it tends to take three bars uh before you

can say that a trend has come into balance and then it's susceptible to either continuation or reversal but we can say that the trend has ended and

come into balance down here at which point in this case you can see we had a whole new positive feedback loop starting to the upside and then of

course up here it had to consolidate and do choppy choppy so so easy in hindsight right you know okay but it doesn't always work that way real time

especially when you look at it on your particular Market I just want you to see see this process it's a continuous process positive feedback

consolidation wind down to that equilibrium point and it does tend to work on most markets now this is a minic

cycle of what we were talking about with Gary's work but it's still utilizing the same concepts of different environments where different strategies work here

we're in our counter Trend mode just because this is so fragmented you know you can uh buy dips sell rallies buy dips sell rallies or

short premium this is a great environment that I like for shorting premium and I just make sure I take it back as these start to consolidate

because then you're going to be ready for another rock and roll type of session and so now I'm going to introduce one more thing because this is

my favorite tool that I use in trading Futures and we will see that it does work on stocks here were our little squiggly lines I swear you can never

throw enough squiggly lines up on the charts and it's bound to you can see whatever you want to see in it but down here at the bottom in this green line I

have the two period rate of change which is my main trading tool because it is

slightly better signal to noise raer Rao than a one day rate of change okay so it just cleans out a little bit of the noise even though momentum just so you

know is the noisiest indicator you can use it's really a lot like reading tea leaves so this here is a 310 oscillator the difference between a three period

and a 10 period simple moving average with a 16 period smoothing line so we're smoothing the momentum here you can

easily use a stochastic you could use a seven period stochastic with a percent like D3 or four and a 12 to 16 period um

you know Slow line on the stochastic so uh multiple ways to skin a cat the most important variables in this model tend

to be the trend of this slow line representing the trend of the momentum very analogous to price being above that

20 period EMA and then the positive slope in the two period rate of change so we have all three slopes in the same

direction it's pretty rare that you get more than two maybe three back-to-back days of positive feedback most positive

feedback when I'm trading these futures for my purposes my holding time tends to be 2 and a half days days and then we might have a little reaction back and

you can load the boat again if you feel so inspired so you also notice that when we're in this positive feedback mode for

the most part it's going to lead to a trend day a range expansion day very important because as a

Trader you know it's a burnout job after a while and you don't want to be trading little every wiggle and jiggle and so forth so what I really try to do is

concentrate on the pre-existing conditions that may lead to a trend a and what you'll what you'll see is when the Market's in a consolidation as it is

here I look at these pf3 down you see the negative slopes here in all three of these things the market is giving it everything it's thought to the

downside hello doggy my dogs want to join the party okay it's giving it everything it's got to the downside and it's not leading to

any range expansion the ball is entirely in the Bear's hands and they're fumbling it yet a little bit of a dinky trap look below that previous low and then right

back up so uh that's my interpretation of it and the best thing I could suggest to you if you are interested in pursuing

this is to do your own work and study I print out 20 charts of each Futures Market at the end of the year and just review the different patterns and the

setups that led to the upside breakouts or downside and it's just an exercise

for me now uh with the uh 10year notes Here slightly bit of a different environment but this is back in uh a few

months ago I want you to see that um again this huge range expansion up those are the trend bars up and that's where

you get your positive feedback and it's really rare once again that you get two or three days back to back of positive

feedback so after I saw this one two I'd be looking to buy I buy H the Market's not giving me much okay I'll get out after a day or two you know okay positive feedback to the downside you

can catch something for two or three days you know the whole point in trading is we don't have to be perfect on our

entries or our exits all we need to do is to get the main idea right and we Far Over complicate things I do my best work

just off of daily candle charts and of course I'll look at the shortterm uh intraday time frames after the Market opens you know and that's where I've

always felt that that market profile work understanding the six or seven basic types of days is it going to be a double distribution day is it a little

neutral day is it a you know all of these types of Concepts really serve you if you're a professional Trader you don't have to trade by them but just

being aware of these different day types in context with maybe one or two little other indicators so here I wanted to

show you something really fun this is another tool that I use God bless trade station because now everybody can have

their radar scan functionality for free huh how many times do you get something for free they used to charge 90 bucks a month but now it's free so I have a scan

and you might want to try this out where it says show me the new momentum highs with a 30-day look back period

so it will catch things like this just coming to life okay the momentum precedes the price and then you see our

pf3 is up are giving a steady Trend and our our Bears attempt to flush down is not now I want to point out one thing

this is indicative of a long liquidation flush we don't have lower lows like Beyond any of these lows

it's just a gentle soft correction so don't get caught up in that trap again this is putting momentum in a different

type of context now of what is the market structure are we in an uptrending structure sometimes you can get these one or two day wash outs these flushes

to the downside and they're little traps but if I see it coming out of this nice uh consolidation structure and it makes

a new momentum High I am all uh over that and a lot of times you can just buy call spreads or however you want to trade it and then we made yet another

new momentum highs don't get trapped in looking at the diverences with these things in most cases unless you're in a

trading range now what do we see again look it it's trying to force itself to the downside and where is this little

sucker now I can I've got trade station on one side and I've got cqg on the other side it's really for the

redundancy but um okay so now look at this look at this here is your positive consolidation because the

Bears are giving it everything they have to the downside here you can see this oscillator is correct in all of the The Fast and Slow line on my 310 oscillator

a stochastic would be correcting and it's not getting anywhere this is such a strong signal so a lot of our processing

as Traders is relationships that's so essential for good trading what is price doing relative to an indicator what is price

doing relative to a certain Market environment so I just look out of the corner of my eye and General Electric is pushing

106 but you wouldn't necessarily see that in advance that's the whole funny thing about the markets you can't look

around the corner and predict but we can say this is not a top this is not distribution this is a consolidation

with higher lows and higher highs and this is just going to explode again to the the upside so as you gain an experience okay you can better look at

these relationships you know one price relative to an indicator One Price relative to the price at the start of the Year all of these types of

relationships I think are way underestimated in their value okay I want to show you something else for fun

since we're on my little wheelhouse here this is um using the slope of the 3 four five6 rate of change and I do believe I

put all these squiggly charts this is this little indicator right here is just a three four five six period rate of change and if you want to be really

clever you can calculate out the pivot at which point it will flip I just see it I I put my um arrows so that they pop up in the middle of the day not

necessarily the close of the the day so I have time to evaluate it so here you can see the little arrows is when they were all flipping down all flipping up

and we can use some useful tools like only do the buy signals in the direction of the trend or only do the sell signals but you can see some of these little

buys generated some interesting uh short-term swing trades and so um that was uh so much fun with that now unfortunately you cannot trade

everything so you have to settle on you know are you going to do the Futures are you going to have a basket of 20 stocks or you going to concentrate on one strategy across 200 stocks and this is

everybody's personal journey in the markets so here I've got Nvidia because it was one of the stronger ones and you

can see the little down arrows maybe led to one or two days follow through not very satisfying at all but if you bought

every little flip up in the momentum in this uptrending market it did not catch it here instead it gapped way up there but that's just part of the game right

guys it never does exactly what we wanted to do but it still worked and then I want to show you the flip side of the coin with the same arrows and the

same little rates of change and now we're back into our trading range where we have the negative feedback and I just

want you to note how many false signals you would have had or how whipsaw you might have had felt if you bought and it didn't have follow through and you sold

and it didn't really have follow through and you bought and it didn't go and you sold and it didn't go and you bought and it didn't go you guys get the picture here so this is and then of course one

stomping bad signal at the end this is why I think was it a Jessie Livermore made a quote about staying out of these

flat narrow range sideways markets okay obviously he preferred the trend momentum type of plays but you can just see the entirely different range than

what I sold before so it's it's a part common sense you know and another thing uh that Jesse Livermore said was even though he went bankrupt three times he

did a lot of fabulous market analysis and quotes and observation and he said um don't try and basically guess the breakout you know let the market come to

life don't go in and pick the direction at this point it's a useless exercise and so sometimes we can say um how can

we save our resources how can we avoid taking marginal signals that's a very big part of the game because we only have limited energy and so we really

need to be careful about narrowing these things down so um I put together a little slide of common pitfalls for

Traders hey see that okay that was Richard's suggestion um it's hard for even me um I'm well seasoned to escape

cognitive biases it just happens and there's so many different types of cognitive biases recency biases you know just getting influenced by somebody else

there's everything under the sun and um that's a really important thing to keep in mind be aware of yourself how

easy are you to flip on a market to trading to the long side when it's in called for or trading from the short

side I know so many people that cannot trade gold from the short side okay so you know we all have our little uh fond you know pets and so forth but you

really need to um get rid of those cognitive biases so when you're trying out something new just such as some of the things that I'm talking about always

observe the results on a walk forward basis because our eyes tend to go selectively to the things that worked and you'll find if you program this

stuff it picks up a lot more noise than you would have thought so your only thing is to try it out on a walk forward basis even if it's just for two to three

weeks and then examine the Cons with a real conscious effort all the times that the strategy failed some of my best observations have come from looking at

failed signals and what were the conditions in those failed signals so that's a probably the most useful tip I can give self discipline cannot be

programmed Med and one of the things that Traders like to do is get ahead of the data try

to see too many swings uh in advance especially in fast-paced markets and and we just end up seeing what we want to

see and projecting what we would like to have happen so again try and stay in the moment try and live one data point to

one data point even if you have a long-term swing trade that you're in you're always monitoring for signs of the loss of momentum or should we

tighten up our stop at some point so don't try to see too far ahead um because that's not going to serve you

and then lastly sorry about that do your own work okay such a such a strong statement because you know we all have

different levels of experience and uh some things may work for me only because I've jotted down the data for so many years other things might work for

other people some people are breakout Traders some people counter Trend Traders um so do your own work because

if I am looking at something and I have it in my trading homework the night before I have a certain expectation as

to how that market should behave if it's going to do what I'm thinking it can do and I'm very focused on trying to

capture a trend day so at this point I'm pretty good at figuring out just two or three hours into the morning that it's not going to be a trend day all the

pre-existing conditions were there but the volume didn't come in the groups are too uh you know segmented half up half down uh the breadth is too flat it's not

going going to be a trend day and we didn't see that urgency of Supply demand in that first half hour because those imbalances are what really create a

trend day but you're not going to get that same feel or knowledge if I'm just sending out a sheet to you and all of these could be Trend days and then you look at them and you put something on oh it didn't work that time you're not

going to know it and you'll you'll just end up uh getting stopped out more often than you would wish so do your own work come up with your own thing I think

that's one of the um learning curves that newer Traders underestimate is that they don't give a

strategy enough time and they don't give it enough time to try different hats on are you going to be a breakout Trader are you going to be a momentum Trader do you like this short-term relative

strength work and it just takes much longer than anybody thinks I had a friend who um you know he had sold his

um engineering firm this is like many decades ago he's long past but he would his his cousin was the largest Trader in the gold pit at the time so he was

always uh very enthralled with the markets and he would subscribe to a strategy like for example Steve Moore's

seasonals or a volatility breakout system or this style and he would give it three months you know to really

evaluate It ultimately he settled on day trading the snps and he was the one in that street smarts book that came up with the three little Indians uh pattern

which is just three pushes at the end of a swing but it took him a long time to arrive at that once he feels comfortable with that that's all he did and that's

where you really start to make the money is being consistent so a consistent process for your nightly preparation it will keep you from getting too impulsive

the next day and you are the least biased if you do your homework after the markets are closed all right so be conscious about these types of things so

just to summarize because we do want to have some time for questions here and I told Gary I would keep this or told Richard I would keep this under an hour so there's many ways to use relative

strength but for short-term trades as well as string trades and portfolio positions you can greatly improve your results by finding a process that helps

quantify that market environment or just pure observations studying examples in the past Gary Anderson showed us the way that he prefers to do it in his book with the relative strength leaders and

laggards and the spread but there's multiple ways that you can quantify the level of noise in the market environment um gartly is another another classic

technician that you should all study if you like the technicals because he contributed a lot with volume but he was one of the first to Pioneer relative

strength work but he abandoned all his work in the 1930s and 40s because it stopped working remember that flat period there where Jesse Livermore went broke that was almost two decades where

it just fell on its face but on the other hand Robert Levy the other fellow that you should definitely get his book said the historically strongest stocks

produced the best future results and the weakest stocks preferred the worst and he was looking at the

1960s so take all that to heart and I've got plenty of time for questions thank you yeah great Linda thank you so much for for putting that together uh some

extremely important points and I'm sure everybody watching got some great takeaways um we'll go ahead and start with a Q&A I've got some questions to kick things off but if anybody watching has some questions for Linda this is the perfect

time to drop them in the chat I already see a few coming in here so we'll get to those in just a second uh but first see the chat uh if you go to the URL you can

um if you'd like to no that's okay I'll rely on you all right all right cool um to kick things off um to your point of doing your work and also I I liked your

uh your bit about you know each year you print out a chart of of all all the markets and really study it could you could you talk about um or or give any

advice to traders who want to do that type of work study a process um do you have any advice for uh I guess having better deliberate practice in that sense and getting the most out of that and

applying it to their training so interestingly when I was a member of the MTA I went to their annual conference which was in Santa Barbara at the time very nice place to be and heard

a very powerful speech by by uh Frank hudin Frank excuse me Hank Pruden see this is what happens when I talk too long Hank Pruden was probably the

world's top yof afficianado and his topic was doing your own work you know you are your best own

best client you'll do your own work with closed doors and closed windows in other words isolated from all other opinions and distractions and then later I found

out that this was put out first by wof okay that you need to do your own work free of all other input and distractions and um that's the first

part of it the second part of it is I have logged numbers for ages uh I I had to stop about 10 years ago because I was

getting a a problem with my joint in my thumb but since you can see my slide up I'll show you what I was was doing by

hand probably for a good solid 30 years and uh see I can just this is pretty cool being on Zoom I can just slide this

over assuming it comes up here Excel not responding okay yeah right now right now I still see oh there it is there it is it just came up yeah popped up so this

is an Excel spreadsheet and I use a dll link to extract the data from cqg so you can do this with trade station several different software products you know

suck the data out and then put it into someplace else so I would essentially write down let get the snps up here

write down the closing price this is the two period rate of change the most important variable for me uh this was the pinball cell column we don't need

that 5 SMA thing there and we don't need that oscillator thing this is just the closes above or below the five smas so you can see right now the snps have had

five closes above the 5 SMA we can see this momentum reading of plus 100 is greater than all these other previous

readings till we get down here um you can also see that uh you know there's several little subtle patterns here these two pf3 is up that I was talking

about where I gave it everything you could to the upside we closed at 4215 and then we had to consolidate for

two days actually three four five six seven before we caught a bit again so I used to do this for probably 25 markets

every day and now you can see I just have it all in an Excel spreadsheet but what I did then was to consolidate this

all onto one sheet here so so I can just print out this is just because we haven't started trading it um in these two markets the boons and the Dax they open up a little bit later same with the

grains so I could put them all on one window but just to let you know I would write down every single one of these by

hand and so I had to uh get creative here and uh find another way to do that the best way I look this is after I've logged all my numbers which could take a

25 minutes and it's grunt I hate doing it I really do it's like my least favorite part of my job but there is something where you write down with

pencil that goes to the brain and you remember it as opposed to just looking at some spreadsheet like this so what I also do is I print out charts that are

just daily charts daily Candlestick charts and then I'll just make a little notation on the chart and then that takes the replacement of this so that

was just one creative way of writing down this data now you certainly do not have to do so many markets you could certainly just write down the S&P index

and that is what I did for the very first uh year that I started logging these numbers and where I got the idea was

from Taylor trading technique my all-time favorite book and you can go in there and I do not understand his little squiggles and gyration and how the hell

he was calculating these things they make no sense to me but it was his way of seeing things at a time where they didn't have charts they didn't have

computers and he was just trying to keep some Rhythm there so I never went to his method of his little weird you know the difference between the high and the

previous days low but I did start writing down these things and in the back of that George Douglas

Taylor trading technique was a brief article by um oh shoot can't remember his name right now I always believe in giving

everybody credit my my book right here somewhere I usually have five dozen copies around the office but uh that's

okay oh George Andel George Andel that was it and so he started talking about the two period rate of change and he had his little metrics for uh I don't know

monitoring if it was a you know big high to low day or so forth and so forth so that's where I just fell into the habit of doing this and um yeah I I think it

really works you know writing stuff down by hand so you can pick anything I just pick the snps and I used to write down the Open high low

close probably Overkill open high low close two period rate of change and and I'd also put like a little circle if it was what I call a three bar triangle or

three price bars of overlap because then the trend has come into balance and I found that I can't predict the outcome at those points you can't predict if

it's going to go down or you can't predict if it's going to go up but you do know if it starts Trading above that first hour's range or below that first hour's range you just want to be on

board and you can just enter at the market and half the time um it really needs to keep going you can pretty much pull your stop down to even a break even after three hours if it's working and if

it's not working you know you just scratch it or take a small Nick and it actually works fairly well in stocks if you go back and study that yeah

fantastic and to calculate the two-day rate of change is it the um is it as simple as the close divided by the close two days ago and then the

the percent change divided by it's taking today's close minus the close two days ago gotcha and you'll see on most

software programs it's labeled either rate of change or momentum they're essentially the same thing yeah perfect that's helpful um are there any other uh

parts of that indicator that you find people get confused about when it comes to calculating it the the oscillator that you fabricated that I'm sure a lot of people might want to investigate that

and and see if it works for them um so any any advice oscillator yeah yeah so interestingly I did not create that um

that came from a company called security market research and uh oh my goodness so many Traders used to

subscribe to that back in the uh good old days um you know Williams uh who's

the uh very vocal guy that um pitbull wrote Pitbull Marty Schwarz yeah Marty Schwarz yeah so that's what

we used back in those days and they would overnight us the new set of charts um each weekend and then during the day we could update them and you could get the plot you call on the telephone just

like you would for a hotline and you had a little worksheet and it would read off the numeric values for each of those but what they did is they normalized it in

slightly different ways that you wouldn't ever have a zero thing and so the the values were never the same as on the charts and then I just figured it out like this is just the difference of

a three and 10 period simple moving average but it took me like 10 years to figure that out they had had a good one on me um you really oscillators are just

based on the price so I can create a stochastic that looks near identical to the 310 oscillator the 310 has a little bit more definition because it's not a

banded oscillator like the stochastic everybody finds their own little tool you know and you only need one yeah perfect and uh there's a good question from Ro Roberto Wilco and I actually

have the same question here uh Linda how has your trading change over the years uh and are you using these same techniques and strategies or have you adapted different

markets um well two things you know when I had my hedge fund I had uh the opportunity to do a lot more strategies I had two assistants I had somebody

doing my execution so I could trade a lot more markets if I try to do that by myself I will I will so get into trouble um I'm not a very good stock

Trader short term I mean it just is a distraction for me so I really concentrate on the Futures that that's my bread and butter and where I get the most bang for the buck I would say that

um in terms of what's changed very little with my original strategies I was so influenced by that you know in one day out the next day style that uh

volatility breakout players like you know Larry Williams or Toby krael or these types of uh people they were so popular in the

1980s and um I think we were way head of the curve with the equity Traders now the equity Traders have caught on to quantifying things a lot more I would say the biggest thing that's trading now

is that I tend to put positions on at Asia opening you know so I might have a signal that says wow this next day is going to be a strong buying day but I

might come in the next morning it might have already been well marked up in Asia and Europe so then it's still a buy day but sometimes you can short it for first

and catch a little down and then try buying the pullback so um the 24hour phenomena did you know make

things more complicated I just don't trade them if they've left me in the dust or I don't want to bother so if you have enough setups you know each day by

maybe that I mean maybe 10 you know or 10 or 12 on your list and you capture two or three of them I I mean for me I'll get into Trouble Over trading and

I'll get into trouble having too many positions on so I've throttled things way back you know I'm supposed to be retired but here I am in front of my screens every day and I I closed my

hedge fund down like I don't know eight years ago so it's nice yeah there you go perfect no regulatory

stuff and my favorite question to to ask Traders um is about their routines and kind of their prep work uh so would you be willing to kind of walk through your day and kind of how you go about you

know preparing for the trading day and all the way up to you know executing a trade what's kind of your process there and what are what's kind of the checklist that you run through each time well at night I print off my sheets

so I have my trading sheets where uh it's very very simple I'll just put you know buy day or breakout mode or exit you know if I have a position on I mean

I really keep it down to two or three words I find that my head if I just write down too much and try to analyze too much it's all goes out the window so

just the simplest cue that I can take off and then when the Mark I I I try to sit down at uh 8 AM eastern time I'm

always at my desk then because um I used to trade the bonds real regularly and um they'd have a time of day function because your uh Europeans would be going

to lunch you know and there'd always be an infl in lection point uh around that period plus or minus 20 minutes same thing with gold it would have an inflection point and over time these

inflection points have changed a little bit now gold and silver can actually flush down in the first hour a lot more than they used to uh but I I have a

chart that's like all the little five minute charts and I have a line that's plotted there as to the 8 A.M opening so

I have not only the 8 A.M Eastern time opening but I also have a chart that shows all of these markets pit session

data only so you can see pretty quickly um at 8 AM if I have a market that gaps up even if it's the snps or the nas in

Europe's not even open yet and they do three bars up off of that opening price that's very likelihood it's going to be a strong Trend up this it's so funny I

don't know what it is about those three five minute consecutive bars bars and then likewise um if there's a gap you know does it retrace partly into the Gap

and it is all just everybody's so familiar with trading these gaps now does it hold or is it you know going to partially fill and then off to the races so we learn a lot just from that and

I'll try to identify the the few markets that look like they're going to be the strongest off the opening price or or the weakest and again this is 8 A.M it

doesn't matter that the NYS see isn't open it really doesn't matter because I'll ceue off the Dax and I find that the the patterns in the Dax you know

just stay true to the snps you know the five and 30 and one 120 minute if there's divergences or you know that

kind of stuff and then um you know it's uh I I I I would try to sit and just you

know watch and uh usually if I saw a little little Flur in activity or something that was in the direction of my bias I just buy it at the market so I'm not trying to move the sides that I

did when I have the had the fund you know so I'm like get the trade on and um lately the past year I have been playing tennis in the middle of the

day there you go so you know I don't get quite as leveraged as and and uh trading as I I used to so I've stepped back a bit I'm supposed to be

chilling you know but it's fun you know here's the problem it is it is a really fun game and especially when you have your style and your strategy down you

know and and you know you know you've got the tiger by the tail but it does it's um even though I've been doing it all those years it still takes an hour

every evening for me to do my prep and if I'm not going to do that hour prep in the evening I'm uh probably not going to trade much the next

day I Know Myself by now I'll start to get reactive yeah yeah perfect um and looking back on your trading career especially as you're kind of developing

your strategy and your method um were there any kind of key turning points where your performance really you turned a corner um you know maybe it was a trade that kind of shifted things for

you uh where you made a realization and any any like stories or anything like that come to mind sure well two key things you know I started off in the options pit so I was

first on on the Pacific coast Stock Exchange and then I was on the Philadelphia Stock Exchange and back in those days you know the market makers's

function you're standing in the pit and you're you're forced to fill the paper you know the broker comes in you have to make a two-sided Market you don't know if he's a buyer or seller although

generally you do and and um you know so you have to make an offer and it's usually sometimes it's when the Market's really going up you know so you have to figure out how to position yourself

ahead of time long gamma to take advantage of that or be very good at hedging quickly with stock because it's not like there's two-sided uh paper like you would have

in the Futures you know the Futures it's constantly bides bides bides but we would have periods where the Brokers would walk into the pit and all they want to do is sell the premiums because

they're bu writers you know bu right bu right so everybody ends up choking on these same positions and

um so therefore my initial conditioning was very counter Trend and I like everybody else would get run over twice a month by a strong Trend date you know

although it still made money well because it was a lucrative uh inefficient Market at the time but then when I started managing money you cannot

be that Nimble when you're trading you know some size and I I thought you know I have to switch my thinking I really have to do a reversal and figure how to

be on the right side of a trend day and never get caught into averaging never never never that's my Golden Rule um and so one of the ways that helped me was

just trading a canned volatility breakout system from a friend Bob uran and you start to get a better sense of the statistics oh I only need like 20%

huge wins and everything else kind of washes out a little bit you just have these gifts you know like four trading days a year could make your entire year

it was crazy so I thought ah you know I need to be mindful of this range expansion concept so that was one uh

really good turning point and um H I would say that was probably the most important thing figuring out how to capture a trend day instead of you know

being the market maker upstairs thing which just does not work for me yeah perfect and with regards to learning more about risk management and kind of

mastering that side of things were there any kind of big losses that impacted you uh in a large way or um how how did you go about learning risk management and

learning its importance in your trading oh I have to tell you there were periods where I was absolutely the worst risk management you know horror stories you know and I think I put some of them

in that trading sardines book you know where I was short all this way out of the money uh premium in I don't know if it was the 10 year or the 30-year notes at the time and this was at the you know

time when the Fed was playing Hanky Panky with everything and you know I got caught in one of those little positive feedback Cycles because everybody was short derivatives and the bonds are

notorious for that and I was over in Hong Kong and staying up all night and it's just the I don't know somehow I managed to trade my way out of that and

just scratch the whole thing I have no idea how my first always thing if I'm caught on something like that just a a Black Swan or something that you can't

see and keep in mind I I could not put stops in because I might have 600 contracts in a particular position and you can't use stops like that you just have to have your levels where you're

going to stop you know where you're going to start getting smaller but I found that if I could take off part of the position right away you know um then

I could reinitiate it at a much better price so that was one saving grace and the other Saving Grace was that I really traded on fairly low leverage I think people would be shocked at what low

leverage I use you know one contract per 100,000 you know dollars that that type of stuff so that's always I always had a unit size and um I would say that most

of my career as a fund manager I never really had more than a a 2% draw down you know in one day except for this time

that I got caught where the snps gapped higher and I had just put on a big short position that Friday you know and they came out and you know made some random

freak announcement and the markets opened up 40 s smps higher against me and I think I was short couple hundred snps and a couple Russell and I'm like

ah you know yeah but I I ended up only really you know at at its extreme it was about a 4% loss but it was a big dollar

amount very big dollar amount it's like four million dollars and like opening up on Sunday night but you know what do you do get smaller to the point where you

can trade again and I think over time every Trader just starts to get desensitized to these things and you just don't want to use big leverage if

you are newer you know just stay small because I'll tell you one last story this is a really good one um when I was at the Philadelphia Stock Exchange Jeff

Yas was there trading at the same time Jeff went off to form sesana he's basically a billionaire because I think they sold out to Swiss I don't know one

of the other big biggies there and Jeff is super Savvy he's probably the smartest guy I have ever seen in terms

of processing data I I've never seen anybody come close to Jeff yoss and um he was a very astute poker player I mean

he could play in the Championships in Las Vegas and he um would always have his groups of Traders play poker after the market Clos and he would kind of

supervise them you know to see how they're doing because he felt that was the best way to learn about risk

management and so um he uh he said that if you bet too small you're not going to play a good game so if you're trading in

the markets and you have an account size of $200,000 and you're trading one em okay it's not going to mean anything it's not going to hurt you're not going to be as

attentive to it okay so on the other hand if you trade too big now all of a sudden you've introduced this variable of fear so you need to really think

about what is proportional to your trading account in terms of your unit size and you can do the same thing with stocks you know what's what's your average line that you use and the price

of the stock and so forth and uh I I I think I think that's really important for people to recognize don't trade too small because you'll be ridiculously sloppy and and don't trade too big

because you'll just make uh unforced errors yeah for sure uh Linda this has been really great I think I just have kind of one last question for you uh you mentioned never averaging down is kind

of a golden rule of yours uh are there any other kind of uh golden rules that you abide by that you think are really important for for Traders out there to hear oh man I I just like something

doesn't feel comfortable it's starting to go against me I love my flatten button I am I'm in Dent to that flatten button boom flatten it's like off my you

know off my p&l off I don't see the trade anymore and then like I said if I really feel like I did that in a little bit of a selling into the hole you know

I can always Reby it back so I I love the flatten button yeah perfect uh well Linda thanks again for taking the time for putting this together and for joining us today today and for answering all these questions uh I really

appreciate it I think everybody watching had a great time as well and took something away as I can see from the chat um where can people learn more uh from you your style uh what what other resources would you point everybody

watching towards oh my gosh I have so many YouTube videos I've made out there like long ones 45 minutes an hour of webinars

taped for free you know it's all free you don't even have to subscribe to anything to get access to them it's just go on the internet and Google uh you know Linda rashki YouTube

or something you'll see dozens of little things you'll see a common theme through most of them too yeah great well Linda thanks again uh for the time for everybody watching make sure leave a

like down below subscribe to the

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