Interview with Stuart Mcphee

Where do you usually get your trading ideas from?

I believe traders must have a process that they follow to guide them through the execution of their trading plan. It is this process which allows me to conduct my analysis and identify trading opportunities.

With my currency trading, whilst I acknowledge that foreign exchange market can be quite news driven, I do not really follow any daily news that impact the market. I rely almost exclusively on conducting technical analysis of numerous charts of currency pairs. This allows me to apply my trading rules.

With my stock trading, this is a lot more mathematical and data driven. I have software that conducts enormous data calculations to present me with a list of all stocks that met my strict criterion.

The power of these systems is tremendous and can make your analysis more efficient. For example, my software search systems can filter through the entire stocks database and present me with a list of all stocks that fits my criteria in less than one minute, whereas it would take you weeks to perform the same filtering process manually.

The list of stocks presented to me allows me to browse through each chart one by one and make decisions based on what I see. As any technical analyst will tell you, the price (chart) will tell you everything you need to know.

Please tell me more about your investment strategy. Do you have a set of rules that you teach your students?

For my currency trading, I have around 10 different products (pairs, gold and two indices) that I routinely look at, using daily charts. I have two ever so slightly different trading systems for trading currencies, both of which look to identify and trade short term trends within medium term trends.

My entire trading endeavour relies on rules and one thing I rely on heavily with my currency trading is restraint. As I only trade on daily charts, there are many days when I do not do anything, yet feel like I am forcing the action and making a trade when I know I should not.

For my stocks trading, as I shared, is very data driven.

The key behind my stocks trading systems is based on happenings in the last 3 months, which is why I developed a simple indicator called ‘3-month bracket’. This calculates the highest and lowest price from the last 3 months and places the most recent closing price in that bracket - providing us a number between 0 - 100.

It is not always a case of the higher the number the better, as you may have a very strongly moving stock in a solid medium term up trend which has just eased over the last few days - therefore it will be a lower number than a stock that has reached a 3 month high today.

I also use a 150-day simple moving average in a simple manner - it needs to be on its way up (doesn’t matter for how long) and the price needs to be above the MA.

I have several other tools to weed out the least desirable trading opportunities, e.g. a volatility percentage tool, ATR exits, a volume strength indicator, sector analysis and market breadth tools.

The volatility percentage is more of a gauge of how volatile a stock is. My system scans for stocks that are between 1.2% - 5%. Therefore, stocks that are not too volatile but also volatile enough to make it worth our while.

I want to accompany an increase in price over the last 3 months with an increase in trading volume supporting it. I don’t want the average volume to only be 50% of what it was several months ago, as that may be a concern. This is what the volume strength looks for - the number presented is a percentage comparing the last 3 months average volume to the 3 months prior.

My market breadth indicators typically don’t dictate every trade selection, rather they provide an overview of how things are going generally. For example, the market sentiment indicator may provide you guidance on how committed you should be to stocks and therefore how much money you would consider committing from your entire portfolio to stocks alone. Or it could provide some indication of your bias between long and short positions in your portfolio. This only needs to be checked every 1 or 2 weeks as it doesn’t change too much from day to day.

Selecting a trade still comes down to me deciding on what I see. Whilst the scanning does a lot of the work, I make the final call.

Every investor/trader looks towards a mentor or guru when they first start out. Who is your mentor and what have you learnt from him/her?

I am not sure if I actively sought out a mentor for this reason, although I know that many do. I was very fortunate to have travelled extensively throughout SE Asia for many years and have spoken at countless trading expos and events where many more accomplished and experienced traders were also speaking.

I took great advantage of this by spending lots of time with each of these more experienced traders, listening to their presentations, sharing meals with them and then keeping in touch and sending questions whenever I needed help.

For this reason, I am not able to really narrow down any particular person who took me under their wing however I must acknowledge there were many people who helped me along the way.

If I was to narrow down one thing that I learned from all of those people it would be how hard they worked, how hard they studied and how much they applied themselves to the trading craft through very focussed effort and an appetite to always learn more and improve.

Lastly, any advice or words of encouragement for fellow readers who want to follow upon your footsteps?

I would tell a new trader that trading is not as easy as you as you probably think it is. Many people think that trading is easy money, as I did early on - it is probably the hardest easy money there is.

If a new trader can appreciate right from the start that trading is not as easy as they think it is, they will most likely approach it with a more committed effort and be prepared for the challenges that trading presents.

With the benefit of experience, there are so many things I wish I knew when I first started that I now just accept and take as ‘the way it is’. So, here is my little list of guiding points for you:

Be humble - you are not going to get every trade right. In fact, you will be proven wrong very often.

Be committed - trading is not easy and any half-hearted attempts will get you nowhere.

Educate yourself - there is so much to learn and while you can learn from actually trading, you can save yourself a lot of money and stress by learning from someone else who has come before you.

Take it slowly/be patient - trading success is not going to happen overnight. For most people, this is a life-long endeavour, so it does not really matter if it takes you a few years to start trading profitably.

Keep it simple - people tend to overcomplicate matters and develop intricate and complex solutions to problems. When we accept that trading is not easy, we think only a complex solution (trading plan) will work. In trading, simple does work. It also makes it much easier for us to follow the plan when it is simple.

Be realistic - having high expectations of yourself is a good thing; however, having unrealistic expectations is not. Many traders when presented with the wonderful opportunities that the market offers can be very easily led to setting unrealistic goals for their trading. This can be devastating. It is vital to set yourself goals with your trading but it is equally vital to ensure that those goals are measurable, and realistic.

Focus on the right things - do not focus too much on your entry signal, as most people do. Keep it simple and then move on to the more important areas such as position sizing, setting exits and preparing your mind for successful, disciplined trading.

Whatever you do, protect your capital - it goes without saying that if you have no money left, you cannot make money. This is an important issue because any new trader is not focused on protecting their money: they are focused solely on making money!

Finally, it is critical for you to convince yourself of the importance of having a trading plan. If you are without a plan, you have already severely reduced your chances of trading success. All consistently successful traders have a plan - how anyone could possibly think otherwise is beyond me.

 

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