Trader's Story
Phillip McGregor lives with his wife Susan in North West Sydney. They have five children and grandchildren, who are a very important part of their lives. Most of Phillip’s working life has been spent in senior management in industrial distribution and manufacturing. Susan often worked with Phillip, allowing them to travel and spend a lot of time together. For the past seven years Phillip has worked as a consultant/accountant. They mainly trade Australian equities with a medium-term time frame.
How and when did you first become interested in the markets?
Around 1991 my wife and I realised we needed to start planning for our financial future and we began considering our options. In May 1992 we decided on direct investment – mainly because we could have greater control over the investments and use negative gearing (a lot of negative gearing, since savings, if any, were earmarked for the mortgage).
And then what happened?
Our initial strategy was long-term buy and hold based on companies that we knew and whose products and services we used. Our exit criteria were when we no longer used the products or services – we didn’t ‘like’ the business. Our original investments were made in Commonwealth Bank, Woolworths Limited and Westfield Trust. All performed exceedingly well, which gave us confidence that direct investment was a workable strategy. After several years we realised there was more to stock selection than ‘liking the company’. Several other shares on our shopping list had not performed so well – although they continued to be well regarded by analysts and had very sound fundamentals.
How have you been able to learn and to educate yourself about the markets?
I started with fundamental analysis, a logical choice given my business background. However, we had already determined that too many of the well run, fundamentally sound companies, which were almost always a ‘buy’ recommendation, did not show consistent growth in share price.
In 1998 I tried to apply technical analysis to fundamentally sound shares. I say “tried” because it all seemed obvious only after the pattern had completed. I felt much more comfortable with indicators than with chart patterns and trend lines.
Did you make mistakes when first starting out?
One of the first books I read was by Daryl Guppy. Daryl thoughtfully provided a list of common errors that new traders make. I was forewarned – so could avoid such obvious errors. I soon discovered it was more a checklist of things that I ended up doing! Thankfully Daryl did not update and extend the list in his later books.
Would you define yourself as a discretionary trader, a mechanical trader or a combination of both?
I use a combination of both methods of trading. There is always an element of discretion. When you first enter the markets is discretionary (and many people start closer to a market top when it all seems exciting). Second, you always have to choose between various potential trades. It’s rare that you have only one entry signal when you are looking to fill a position. And third, the elements of your trading system are discretionary. You have to select the elements and parameters you are going to apply. So even if someone claims to be a purely mechanical trader, they are really a combination of the two.
However, the execution of your system needs to be mechanical – especially the exits.
Who have been some of your mentors and role models? What impact have these people made on you personally as well as on your trading style?
The pivotal point in my learning came when I read Alan Hull’s ‘Active Investing’ and attended several different weekend workshops run by Alan. During 2002 and 2003 I quickly saw how Alan looked at fundamentally sound companies and identified those with a high probability of gaining value. I also learned I was managing a portfolio, not just buying and selling shares. The individual trade was less important than the portfolio value over time.
This was quickly followed by a rediscovery of Daryl Guppy through his excellent newsletter, Tutorials in Applied Technical Analysis, which exposed me to a wide range of trading styles and trade-management techniques. It helped me discover what appealed to me and where I ‘fit’ in the spectrum of available trading styles.
This introduced me to Jim Berg’s methods. By the time I had finished reading a short article Jim had included in one of Daryl’s newsletters I knew this was where I wanted to be in trading style. I ordered Jim’s book (pre-release) that afternoon. Jim’s original Metastock Training Course taught me as much about how to get the most out of Metastock as it did about his trading strategy.
In 2005 I read ‘Adaptive Analysis’ by Nick Radge, which has an excellent chapter on having making money from trading as your objective, as opposed to being ‘right’. If you’re interested in charting or Elliott Wave, then you should check his site at www.thechartist.com.au. I have found it a useful learning tool.
The final pieces fell into place when I came across Jim Berg’s and John Atkinson’s newsletter at www.sharetradingeducation.com. Aside from the various articles there is a section showing examples of trades. For me, the newsletter is an ongoing mentoring program. Week after week the same trading processes are applied to various lists of stocks – some trades produce small losses, some produce gains. A worthwhile rate of return is generated on the portfolio.
When you do it right, trading is boring. Many newer traders, or those that do not trade at all, think it is exciting. If you are not doing it right it can be exciting, because you are trading on emotion. The flip side is depression. I have been through the excited and depressed phase. It is not the way to trade.
Once you reach the ‘mechanical execution’ phase you tend to want to find ways to keep it interesting. This promotes the urge to ‘fiddle’, especially during the extremes – when the market is ‘hot’, or when the number of consecutive losing trades is climbing – and your plan starts to unravel. I have been known to fiddle in my time.
Using www.sharetradingeducation.com helps keep me focused on what really matters – sticking to my plan. Great strategies or plans should be simple: the simpler, the better. It takes someone with a keen intellect to understand that simple strategies have a much greater chance of still remaining valid as the market changes over time. Jim Berg uses sound logic and applies ‘been-around-for-a-long-time’ indicators to capture a visual representation of that logic.
After finally getting around to reading Van Tharp’s ‘Trade Your Way to Financial Freedom’, I understood the importance of John Atkinson to the Berg-Atkinson partnership. John is all about risk. I started using the Atkinson Portfolio Planner to monitor my portfolio’s performance, especially portfolio valuation. I realised that a portfolio valued at today’s close is incorrect. I am not a seller at today’s price unless today’s price is below my stop loss. Valuing my portfolio using my stop loss (actually five per cent below the stop loss) produces a more realistic equity curve without the volatility generated using current closing prices. Those awful equity curve drawdowns are bringing the price closer to the ‘real’ exit value.
My learning is continually supplemented by reading YTE magazine.
Can you give us a brief overview of your trading style?
I aim to be a minimalist. I have been through the “you are not really a trader unless you do lots of analysis” phase. With the help of Jim Berg, John Atkinson and Alan Hull, I now understand that more analysis is not necessarily better analysis. Keep it simple and keep it focused. Execute as per your plan. Then take your wife out for lunch. I have a much better time taking my wife to lunch, or visiting our family and friends, than trying to second-guess what the market might or might not do.
Is there any one trade (win or loss ) that sticks in your mind that had a profound effect on your development as a trader ? If so, what did you learn from this trade?
It was shortly after modifying my trading plan to incorporate management of on-going position risk (individual shares, sector risk and total portfolio risk).
I was holding a position in FMG, which had performed well – around 100 per cent gain. Around May and June it began to become exceedingly volatile, with closing prices exhibiting movements of 20 per cent or more over a few weeks. Several times during these fluctuations the risk profile exceeded my maximum for any one position, requiring a partial sale. After three weeks I had sold off 50 per cent of my position. At a time of high market volatility with a downside risk increasing, I found I had to hold more cash. It now seems the logical thing to do, but before then I would not have recognised the potential for loss and that one of the star performers had now become the single largest potential risk to the portfolio. Until this change I was not one to hold much in cash. I always reasoned you could not make money unless you were close to fully invested. Of course, the market goes down as well as up, so sometimes holding more in cash is better.
FMG may well continue its spectacular growth – or it may have a deeper retracement. However, my portfolio’s risk profile is kept within my parameters and is still showing acceptable growth. And I am far more relaxed, and sleep much better.
Can you tell us about your best and worst trades?
The ‘worst trades’’ list goes on for so long it would double the size of this magazine! What would probably seem unusual is that many of these trades were profitable. Some were very profitable. What puts them in my worst trades’ list is that I did not exit according to my trading plan. Had I stuck to my plan, some may have been more profitable, some less. More importantly though, had I followed my plan, I would have ended up in much the same position – but with much less stress! And considerably fewer trades.
Being able to stand up and admit: “My name is Phillip McGregor – and I do not always follow my trading plan,” was a major turning point. I could seek help. In my case it was Jim Berg and John Atkinson. There are many excellent educators – the list of contributors to YTE is a great start. For example, Tom Scollon’s book ‘Fair Share’ not only offers some sound advice, it’s also a good read. However, the real change has to come from within.
Would you classify yourself as a short-term or a long-term trader? What advice would you offer to people getting started as traders on the relative merits or otherwise of each?
I trade several portfolios. In my superannuation fund I take a medium- to long-term view, using a combination of Alan Hull’s and Jim Berg’s trading strategies.
The shorter-term portfolios use strategies modelled on Jim Berg’s short-term methods plus one using a strategy modelled on Nick Radge’s methods.
These are all long strategies – although with different time horizons and entry/exit criteria. I plan on adding additional strategies that offer a much lower correlation in outcomes, such as short selling.
Medium- and long-term investing suits me because it takes very little time. Usually a few hours a week, and that’s a busy week. Short-term trading at least gives me something to do – even though most days this seems to be mainly downloading data and seeing everything is going to plan. The important task is selecting the watch list. That takes the real time – at least one hour a month. Actually, it’s more like one every three or four months.
What markets do you trade and which do you prefer? Do you have a favourite, and why?
I trade ASX equities, both direct shares and CFDs. I have considered other markets, for example US and UK markets, but this adds complexity – currency movement – into the trading result. The ASX may only be two per cent of the world market, but it’s still relatively enormous against my portfolio valuation.
What makes your trading style different from others? What sets you apart from other traders?
It is how my experiences and training cause me to react. We all see the same key pieces of data – price (open, high, low, close) and volume. We add indicators and time frames; we put in trend and resistance lines. Then we draw our conclusions, and take action based on our expectations of what those conclusions mean. The difference between all traders is how we interpret the data and how disciplined we are in our execution.
Do you have a favourite trading rule?
Stick to your trading plan. There is no other trading rule.
Ed Seykota says, “Everybody gets what they want from the markets.” What does Phillip McGregor ‘get’ from the markets?
I have learned a lot about myself. How I react when things go well, and when things do not go so well. To be successful you have to learn ways to focus and to manage what you can control – your reaction, and your exposure to risk. If you treat the process as one of self-development, you can become a better person in the process. Learning to trade is not just about learning indicators, chart patterns and fundamental criteria. The answer lies within us. We are the key to our own trading success, and our life success.
How has trading affected your lifestyle?
It has greatly improved our financial security, and we have certainly been able to achieve a better lifestyle, including travel, spending more time with our children and grandchildren, and so on, than we could have expected otherwise.
What books, seminars and courses have you read or attended and which would you recommend?
• Alan Hull: ‘Active Investing’ and ‘Active Retirement’. If ‘active investment’ appeals to you, then definitely attend the workshop.
• Nick Radge: ‘Adaptive Analysis’. The Chartist (www.thechartist.com.au) newsletter is also a great learning tool if you are interested in understanding chart patterns and Elliott Wave.
• Stan Weinstein: ‘Secrets for Profiting in Bull and Bear Markets’. Written in 1988, but only the dates on the examples show its age. Still a great book.
• Jim Berg: ‘The Stock Trading Handbook – Fundamental & Technical Analysis Combined’ (available only as an E-Book from www.sharetradingeducation.com). Jim also runs a weekend seminar/workshop (Boot Camp Seminar) that is very worthwhile. ShareTradingEducation.com newsletter provides ongoing support.
• Van Tharp: ‘Trade Your Way to Financial Freedom’. If you do not understand that the real key to trading success does not lie with your entry and exit criteria after reading Van Tharp, then you should probably stop trading and seek help.
• Daryl Guppy: Take your pick, they’re all good. ‘Trend Trading’ is one I re-read periodically. The Tutorials in Technical Analysis newsletter (www.guppytraders.com) provides a good cross section of trading styles and management techniques. I have also attended Daryl’s ‘Trend Trading’ seminar.
What does the future hold for Phillip McGregor?
Probably more of the same – travel, spending time with my family and friends, taking my wife to lunch (very high on the agenda). And ensuring I do not slip into old bad trading habits. Just like any other ‘abuse’ issue, it takes only one panic attack deviation from your trading plan to send you back to ‘no plan’ trading.
Kel Butcher is a full-time futures, equities and derivatives trader. He also acts as a mentor and coach to other traders. He can be contacted by email at kel@tradingwisdom.com.au
This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.
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