Linda Raschke: Rules, With Numbers
Linda Raschke published short-term trading patterns as complete rule sets, each with an entry, a stop and the conditions under which it applies, rather than as loose descriptions. Her material is unusual for stating openly that edges decay and for counting transaction costs inside every test.
How it works
The published material is a set of specific patterns. Each one describing a condition, an entry, a stop and an exit — short-horizon setups on liquid markets, presented as rules rather than as principles.
Specificity is the distinguishing feature. A pattern stated precisely enough that two people would take the same trade is testable; one stated as a description is not, and most published material is the second kind.
And the patterns are deliberately simple. A few bars, a moving average, a volatility condition — few enough parameters that fitting them to the past is hard, which is itself a design decision.
The honesty about decay is unusual. Published edges get traded away, and material that says so is material that expects to be checked. A setup presented as permanent is a setup nobody has tested recently.
The core observation
Volatility contracts and then expands. Periods of narrow ranges are followed by wide ones far more often than chance would suggest, and several of her published setups are built entirely on that observation.
The horizon is days rather than minutes. Which matters for cost arithmetic — a two-day hold pays the same round trip as a two-minute one against a far larger available move.
The preparation happens before the market opens. Scanning, marking levels and deciding what qualifies — so the session itself is execution rather than searching. That ordering is most of what separates a professional routine from an amateur one.
In practice
Costs are inside the tests rather than mentioned afterwards. For short-horizon patterns that is the difference between a result and a fiction, and most published backtests omit it.
Volume appears as a condition rather than as a trigger. A setup that only qualifies in active conditions is a setup that skips the periods where costs dominate.
The holding period is what makes the arithmetic work. A trader holding for days pays the same round trip as one holding for minutes: at a hypothetical 0.1% of the position, that is a tenth of a 1% multi-day move but half of a 0.2% scalp.
Several setups trade the session following an event rather than the event. A gap is unforecastable and what follows one is a condition you can define — which is a general principle worth more than the specific pattern.
No setup is published without a stop. The exit is part of the pattern rather than a separate decision, which is what makes each one a complete rule instead of an observation.
Cost is treated as a design constraint. Which is why the patterns hold for days and why the filters exclude quiet conditions — both decisions follow from the arithmetic rather than from preference.
How to use published patterns
The right response to any published setup, hers included, is to test it yourself. Code the rules, include realistic costs, run it on the instrument you actually trade, and look at the result on data the author never saw.
Decay is the expected outcome rather than a disappointment. A pattern published decades ago and traded by many people is unlikely to work as well as it did, and knowing by how much is more useful than assuming either extreme. The value of specific rules is that this check is possible at all, which is not true of most trading material.
One habit from her material is worth adopting whatever you trade: keeping a written page of conditions before the session starts. Which markets qualify today, which levels matter, and what would have to happen for each setup to be live. It takes twenty minutes and it converts the session from searching into checking.
The value is that decisions made in advance are different decisions. A level marked before the open is marked by somebody with no position and no pressure. Almost every professional routine has some version of this step, and almost no amateur one does.
What the material is not
It is not a system. It is a set of patterns with rules.
It is not permanent. She said explicitly that edges decay.
It is not day trading. The holds run for days.
And it is not usable without testing it yourself.
How this connects
Her best-known book is Street Smarts, written with Laurence Connors. He later developed Connors RSI, which reflects the same interest in short-horizon oscillators with explicit rules.
Several setups use the ADX as a filter. It measures trend strength rather than direction, so it decides whether a pullback setup applies at all.
One of the most cited patterns fades a false breakout. It waits for price to push past a recent extreme, fail and reverse, which is the mirror image of trend following.
Her volatility work maps onto familiar tools. The contraction the page describes is what the squeeze shows when each Bollinger Band narrows toward the average, and average true range is the usual way to size stops to that volatility.
She has also used a MACD variant with non-standard lengths, which is typical of the approach: the indicator matters less than the rule attached to it.
Much of the work was done on futures, where liquid contracts keep costs predictable enough for short-horizon tests.
Specific rules make overfitting visible. Running them through a strategy tester and checking the expectancy after costs shows whether the pattern still earns anything.
And her rule-based approach brings the habits of systematic trading to discretionary work. A written trading plan and a trading journal are how the same discipline transfers to anyone else.
When it fails
Different patterns suit different conditions and applying the wrong one is the common failure. The mean-reversion setups work in a range and the breakout ones do not, and nothing in the pattern itself tells you which regime you are in.
The second failure is trading published rules untested. A pattern from a book is a hypothesis about a market you have not checked.
A third is shortening the holding period. The cost arithmetic that makes the setups viable depends on holding for days.
A fourth is dropping the volatility filter. It is what excludes the conditions where costs exceed the edge.
And a fifth is expecting the numbers from the original tests. Edges decay, she said so, and the published figures describe a period that has ended.
The original data
Of the 24,971 trading and investing videos in this site’s corpus, 6 have “linda raschke” in the title at a median of 54,592 views across 4 channels, with a maximum of 132,886. “Mark douglas” returns 51 at a median of 13,106 across 25 channels, and “jesse livermore” returns 93 at a median of 5,890. No video is counted twice, however many searches surfaced it.
The question: The setup fired and the volatility filter says no. Skip?
Six videos at a median of 54,592 views is more than four times the Mark Douglas figure from an eighth of the supply, which is the clearest signal in this set about what people actually want. The answer to that final question is yes: the filter is part of the setup, not a suggestion attached to it, and the trades it excludes are the ones the cost arithmetic cannot support.
Related
Swing trading is the horizon the patterns operate on. Backtesting is how any published rule should be checked. And mean reversion is the family several of the setups belong to.
What separates her material from most of what is published is that the setups are falsifiable. Entry, stop, exit, conditions, and a note about when it stops working. You can code one in an afternoon and find out. Most published patterns cannot be coded at all, which is the tell.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.