Market Wizard Linda Raschke’s Technical Trading Rules Buy the first pullback after a new high. Sell the first rally after a new low. Afternoon strength or weakness should have follow through the next day. The best trading reversals occur in the morning, not the afternoon. The larger the market gaps, the greater the odds of continuation and a trend. The way the market trades around the previous day’s high or low is a good indicator of the market’s technical strength or weakness. The previous day’s high and low are two very important “pivot” points, for this was the definitive point where buyers or sellers came in the day before. Look for the market to either test and reverse off these points, or push through and show signs of continuation. The last hour often tells the truth about how strong a trend truly is. “Smart” money shows their hand in the last hour, continuing to mark positions in their favor. As long as a market is having consecutive strong closes, look for up-trend to continue. The up trend is most likely to end when there is a morning rally first, followed by a weak close. High volume on the close implies continuation the next morning in the direction of the last half-hour. In a strongly trending market, look for resumption of the trend in the last hour. The first hour’s range establishes the framework for the rest of the trading day. A greater percentage of the day’s range occurs in the first hour then was the case in the past, and thus it has become increasingly important to trade aggressively if there are early signs of a strong trend for the day. There are four basic principles of price behavior which have held up over time. Confidence that a type of price action is a true principle is what allows a trader to develop a systematic approach. The following four principles can be modeled and quantified and hold true for all time frames, all markets. The majority of patterns or systems that have a demonstrable edge are based on one of these four enduring principles of price behavior. Charles Dow was one of the first to touch on them in his writings.Principle One: A Trend Has a Higher Probability of Continuation than Reversal Principle Two: Momentum Precedes Price Principle Three: Trends End in a Climax Principle Four: The Market Alternates between Range Expansion and Range Contraction! In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
I said it on Twitter as well but #1 isn't reliable. "They" regularly synthesize it. It's got to be a significant new high without strong rejection and preferably defended after profit taking.
Great rules. Question: Principle Two: Momentum Precedes Price What exactly does that mean? Momentum picks up before price makes a new trend high or low?
That is some ancient shit right there. But a lot of it still valid. One other rule...Swing trading is ideal for retail traders. Too hard to compete with market makers, can't turnover money fast enough as a long term trader.
This is perhaps best understood using the example of momentum "divergence." Linda Raschke has long used a 3-10 price oscillator as a momentum indicator. When price makes a new high but the oscillator does not, that indicates waning momentum, and that price may soon change the pace of its rally/decline, go into a period of consolidation, or outright reverse. She doesn't take these "signals" as commands to trade, but uses them to put her on the lookout for a corresponding price action signal. The notion that momentum precedes price was, I believe, first spoken by George Lane, developer of the stochastics indicator. Principle 1 actually follows logically from principle 2, though not by way of divergence. When a momentum oscillator makes a new high along with price, then price will most likely go on to test that high or make a higher high following the first pullback.
I know Raschke is one of the more respected trading educators, but does she have any documented track record? Has she managed money? Have any of these rules been systematically tested and built into automated systems? Are the first and last hour rules just as true in this age of HFT? I've tried a bit to systematize and test Rule #1, which sounds good in theory, but never came up with anything very profitable. Honestly, I think these kind of rules a mostly a crutch. They're accepted as conventional wisdom, "timeless trading advice," and whatnot, but there's little hard data to prove them. Having said that, she probably did something early in her career to get in Market Wizards. Then again, everyone has hot streaks. Prechter had a great run in the mid-80s before he became a permabear. Whether it was skill or "fooled by randomness," I'm not sure.
Great thread! I'm interested in Principle #4. Has anyone succeeded in trading it? " Principle Four: The Market Alternates between Range Expansion and Range Contraction"
Please define what you mean by "swing trading". I've seen so many different interpretations, I don't know which one to believe. Thanks.