Breaking Through: Linda Raschke, Part 2

For Part 1 of this interview between our VP, Customer Success Kara Grygotis and Linda Raschke, seeBreaking Through: Linda Raschke, Part 1.

Kara: Is there any particular advice youd give to a woman whos looking for a career in trading or in futures?

Linda: We need to eliminate the word career for several reasons. It is true, if you want to trade and be successful, you need to do it full time, 100%, and eliminate all other distractions. It has to be the number-one priority in your life in all regards. But with that said, trading futures or stocks, or technical analysis, can also be your hobby. It doesnt mean that you have to make a living doing it; you can certainly enjoy the markets. I see a lot of people study and learn and enjoy getting the essence of the game even though they may not be able to devote all their time to it. Once you take away that pressure of saying it has to be a career, youre either going to love it or youre going to hate it. Youre likely going to enjoy it if you like games and the mathematical appeal of it. Or if you can tolerate understanding that theres losses and get the statistical essence of, Look, I only have to be right 50% of the time. I just need to have winners bigger than the losers. For some people, that kind of thinking wont work-theyll always have a problem with it. Because you cant put the markets in a black box and peg it to an algorithmic, algebraic equation. It doesnt work that way.The thing to keep in mind is its a bottom-line business. Nobody really cares if youre female or male. Theyll care if you can contribute something to the bottom line, either by trading and managing money or being part of the team.

I think that the biggest barrier to entry for anybody is getting initial capital. And for that, I think the most common avenue has been friends and family. Ive also seen a lot of people who sell their businesses when theyre in their 40s and have some trading capital, and they decide to see if they can make a go of it.

Kara: What have you enjoyed most about your career?

Linda: I like the fact that I learn something new every day. I feel like I am getting a life PhD. Every day, theres a new product, a new market, a new twist. I like that constant change.

Kara: Whats up next for you?

Linda: Whats up next for me? I have a hard time pulling myself away from the screens. I actually closed down my hedge funds and thought I was going to retire two or three years ago. I shut down everything. But I still seem to be trading full time. For ten years, Ive wanted to write a book, and Ive not written one page. Maybe I just need to get over that hump and take a little bit of time off. I have about six books Id love to write, but Im not an author, so its really hard for me to write.

Kara: Talk to me a little bit about how you did your initial research and modeling.

Linda: When I first started trading, my background was in math-I worked like a mathematician, and I would log numbers every day. That was part of the ritual and routine-keeping track of the market statistics. We didnt have computers then, and everything was done by hand. When I first started doing my initial modeling, on some ideas I had, it was by hand. Writing down all the prices for two years back, seeing what the standard deviation was and looking for relationships. Deductive logic, if you will.

In 1992 and 93, I had the benefit of a partnership with Steve Moore from Moore Research Center. That was wonderful because he had a programmer who could program all my ideas. It would take a couple days to get the runs, and it would be a lot of paper that would get faxed over to me when we finally had fax machines. That was really beneficial-having somebody there to do my modeling and research for me. I have to say, though, my best ideas ended up coming from doing all the research by hand.

Kara: I was going to ask you about that.

Linda: Nowadays, when somebody wants to model something, you run a bucket of data, and you lose the little nuances in that data while its generating. I mean, you can throw out biggest wins and biggest losers, look at standard deviation and all kinds of statistics. But youre missing the aberrations, which can add a little bit of a skew. Youre also missing the chance to study the times that it doesnt work, which are very insightful. I learned a lot just by doing it by hand instead of, lets say, randomly lumping ten years worth of data together for a trend-following system. Thats just a very generic example. What happens is that the chop and the noise environments are going to be sustainable for a long period of time. Youll see the trends maybe only happen 15% of the time, so what youre really trying to model is, What does it look like when those trends start? That would be a better way to do it. I feel that people who do the modeling nowadays are much more sophisticated. You can use artificial intelligence to put things in a state.

That was another lesson that I learned. I actually started doing neural networks in the early 90s because I had a good friend who had a friend who worked for NASA and had all the resources. We developed some neural networks, and through that, I learned that type of artificial intelligence is really whats known as a pattern classifier, which helps you identify patterns. Its not going to give you an output thats a forecasting type of answer. Its going to be part of a larger equation. At that time, I came to the conclusion that linear modeling was fine. The things that worked best for me were trying to keep it down to just two variables. That would make sure that it would be durable and robust. But on the other hand, its not going to be a mechanical system. I never really traded 100% mechanically, ever.

Kara: Who do you look up to and why? People you know or historical figures.

Linda: Well, I can say some people whose research I respect. Perry Kaufman had a big influence on me. We did some traveling together for Dow Jones Telerate-a series of lectures over in Singapore and Australia. At the time, I think Perrys work was some of the finest that I had seen. He was the one who espoused this tendency towards an increase in noise and of efficiency of trends.

I cant really say that theres one individual trader that influenced me. I tried to keep myself distanced from most traders. I didnt really know what happened much in the managed-money industry because I was pretty isolated. I had built my own office, and I worked out of there. We didnt have the internet like we do now.

Ill tell you a good little story. I had joined the MTA early on just because I wanted some more networking with peers, and Hank Pruden gave a lecture at one of their annual conferences out in California that made a big impression on me. Actually, I think the lecture was stolen from Wycoffs work. The topic was how to be your own best client-basically, to do your own work in a room with no doors and no windows, the gist being to eliminate outside influences.Eliminate distractions, eliminate other peoples opinions. You have to be self-sufficient and have your own ideas and your own systems and your own modeling in order to have longevity in this business. Thats why you see the people that have made it and are successful at the top. Pretty much all of them have some uniqueness to their style or their strategies that they have developed.