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Philip Friston interview Gavin Holmes

Philip was fascinated by the stock market at an early age and began investing in his early teens, encouraged by his father.
He began work as an accountant but became disillusioned by all the regulations and red tape. In 1984 he became more involved with investments following his father’s retirement and started managing portfolios.

Initially his investment management was based upon fundamental analysis using his accountancy skills. However, with the advent of personal computers, he began to study technical analysis and Elliott Wave Theory in particular. He always felt there was something more, and in October 1989 a friend called and suggested he try a new piece of software called Genie Chartist (which developed into Tradeguider).

With the help of Tom Williams and attending seminars he began to understand how the markets really functioned. Philip has gained a thorough understanding of the Wyckoff VSA Principles and regularly features in Educational events offering bar by bar analysis using these principles to uncover the meal messages contained in the charts.

His aim now is to share that knowledge with new users and help them to reach the level of understanding that he has achieved.


GH:  How did you first become involved in the financial markets and what led you to Volume Spread Analysis (VSA)?

PF:  I became interested in the late 1960s.  My father ran an investment company and a friend was also interested in shares.  I was too young to own shares directly so my father would buy shares and I would ‘own’ a portion of these.  I didn't really know anything about the markets at that time - I just thought that it was better than putting money in the bank.  It wasn't until 1973/4, when the market lost around 78% of its value in 18 months. It was then that I lost half of my savings, and came to realize that I had to learn what was going on.  I applied myself to the study of the markets and got involved with technical analysis.  After trying out various bits of software with only limited success, I was persuaded to try a program called Genie Chartist (the forerunner to TradeGuider). 
I liked what I saw: the program seemed straightforward in the sense that there was just a bar chart with volume activity displayed underneath. There were no indicators such as moving averages or stochastics.  It was based upon supply and demand, which I understood from economics. I thought this could be the answer. As a result of attending Tom Williams’ seminars I finally realized what was going on in the markets and decided to concentrate entirely on VSA.

GH:  What do you think is the difference, if there is one, between standard technical analysis, which obviously looks at the price, and VSA?

PF:  VSA tells you what is happening in real time; and if you analyze the background you should gain a picture of the general trend of the market. I know of no other system or method of technical analysis that will do that reliably.

GH:  Until you found Tom Williams did you have any other mentors?

PF:  No. In a business where it is notoriously difficult to find a really reliable system - the Holy Grail, if you will - I would say Tom was the first and only person whom I actually trusted.  You have to accept that as an investor or trader you are going to make losses. Even the professionals do. 

GH:  How do you explain your success with VSA for over 20 years?

PF:  I think it was when I ceased looking at bars in just one dimension.  If I saw a down bar with very, very high volume I thought that it must mean that buying was coming in, especially if the bar closed off its low. But the most important point I was missing was that there would also be lots of selling on the same bar. I was tending to look at the bar in one dimension, not two. In fact, you shouldn’t be buying on a bar like that because often there is too much selling present for prices to go up. The selling could swamp the buying and take prices lower still.

GH:  So, a down bar such as you have described does not give a signal to buy instantly?

PF:  No.  You’ve got to be patient.  And equally, if you reverse it and turn it upside down, you wouldn’t go short on a very high volume up bar.  In both cases you would wait for confirmation.

GH:  Tom says that he doesn’t look too much at fundamentals because the chart reveals what the professionals are thinking.  I know that you look at what the market’s doing and you look at news.  Could you tell us how you use fundamental analysis in conjunction with VSA to confirm that the market is doing what you expect?

PF:  I use fundamentals to weed out stocks that don't meet my criteria (for example, I would not consider a company with a high level of debt).  It is the chart that will tell me whether a stock is good or bad.  By using a top down approach, I try to reduce my risk to an acceptable level.  (To place too much weight on fundamentals could be misleading: a stock might appear bad because the market hasn’t yet caught up with what the chart is telling you.)

GH:  Do you use any form of technical analysis to confirm VSA (or the other way round), and if you do, what do you use?

PF:  Not really.  The only one that I do use, the RSI, which is a momentum indicator, can be quite useful to confirm VSA.  I only use it in limited circumstances, which I won’t go into here, because I think that any such tool, if used all the time, won’t work.

GH:  What would be your favorite VSA signal, for example, to go long?

PF:  My favorite is to see a down move in a particular stock. You see accumulation or buying taking place in the background; then you see the price move back down to that area where you had seen the previous buying; and then you see what we call a Test. This is a down bar, preferably with a narrow spread, with relatively low volume compared to the accumulation area to the left.  What this is telling us is that as the price falls back down into the area of accumulation, any selling or supply that was present has now dried up.

GH:  BP would be a good example of that.  Perhaps we can discuss that stock in a little more detail.  Prices plummeted for several weeks to an eight-year low - we even heard rumors that BP was going bust - and yet it was a great stock to buy.   Most people would not believe that statement, but if we look at the chart, it doesn’t lie. Describe what’s going on here.

PF:  According to the fundamentals, the company was quite solid, bullish, even.  But the news put out was so bearish that it created an atmosphere of panic.  The 'Herd' (the uninformed investors) were terrified of losing their money and were prepared to sell at any price.  That is when the 'Smart Money' (the professionals) stepped in and said, ‘Thank you very much.  This looks like a good long-term stock. We’ve got the opportunity to buy it now at a very cheap price.’

GH:  Can you tell us more about the relationship between the 'Herd' and the 'Smart Money'?

PF:  To give you an example: during a bull market, as prices go up, more and more people will be sucked in.  What is happening is that the 'Smart Money' is selling to the 'Herd' at ever rising prices in order to keep the bull market going.  The 'Herd' keep buying because they believe the good news that is being spread around, and do not wish to miss out on a good thing.  Eventually, there comes a point when prices get pushed up so high that they are completely overbought.  At that point the professionals start selling.  Then, later, when the market falls back to oversold levels, they begin to buy in again. 

GH:  And that’s exactly what VSA determines?  It sees when the professionals are buying or selling, and when the ‘Herd’ are involved?   And is that what causes the very high volume?  The interaction of the ‘Herd’ and the 'Smart Money'?

PF:  It is.  At the bottom of the market, it’s the fear of losing money, causing the 'Herd' to sell every stock they’ve got to get their money back, that creates the high volume.  At the top of the market, it’s the opposite; it’s greed, and the fear of missing out on further gains.  We know that these gains won't materialize; however new people coming into the market don’t know that.
GH:  If you see a VSA signal like the one you have just described, namely, a down bar with a wide spread, maybe with bad news, and a Test, would you enter a trade every time, or are there times when you would wait?

PF:  This is where experience tells. You learn to recognize certain situations where waiting is called for. However, in general, I would probably go in and buy (but not if I were trading, say, a future).  After all, with the bank paying no interest on your deposit, it is worth buying a stock with a decent, and reasonably secure, return.  Like that you get paid for owning the stock, and you might even earn some money on the investment as well.  I would put my stop loss below the area of accumulation. If the stock then starts going up and we see signs of weakness coming in, I would probably sell half of the holding.
Then if it comes back down to the bottom again and tests, I would buy that half back again.  And then eventually, if the market goes up, I’m fully in.

The advantage of doing that is, if it goes up and down a couple of times like that, and then drops below the stop loss because perhaps the accumulation hasn’t worked, and that can happen sometimes, hopefully the amount I have made on the gains would cover any losses I’ve made. So overall I wouldn’t lose anything.

GH:  Many traders and investors don’t really understand what risk means. How do you understand the work ‘risk’ and what risk parameters do you use when you take a position?

PF:  Risk is one of the most important factors in the market. You can pick good stocks and still lose money if you don’t get the risk right. It’s a question of looking at risk and reward in every purchase you make.  You’ve got to get that right.  I work on a certain level of risk that I’m prepared to accept. If I see a stock on which the risk is too high, I don’t buy it.

GH:  Let us say that your capital account was $100,000. How much would you be prepared to risk in any one position?

PF:  From an investment point of view, I would probably want to invest in perhaps 40 stocks, which is 2.5% of your capital base per position. I feel this is a nice manageable position. Once you go too far above that, say if you are managing 80-100 stocks, it becomes a little bit too cumbersome.

GH:  Tom mentioned 3%.  I prefer 2.5%, like you. So you don’t want to be exposing yourself to saying, as many traders do, that ‘this is a golden opportunity, I got three tips that this is going up, my account is one hundred thousand. I’ll tell you what, it’s such a good tip, I’ll put $50,000 in here’… That’s not good advice.

PF:  That’s too much risk going into one stock, because if you are wrong, then you are going to lose too much capital and it will affect your confidence.

GH:  What is the worst loss that you can remember? Even if you can’t remember exactly what the figure was, do you remember how you felt after that loss, and how do you deal with emotion when you invest?

PF:  I do remember the loss, but not the amount or even the stock.  It was in 1987 when the market dropped dramatically over two or three days.  With hindsight, I can see why I shouldn't have been in certain stocks.

GH:  The second half of my question:-

 As a fund manager, how do you control your own emotions when you manage not only your own, but other people’s money?  Losses can make us depressed, angry and resentful, to name but a few emotions.  You always seem to be very calm, collected and disciplined.

PF:  It's no longer a problem. With investing, because I have been doing it for so long, a loss doesn’t worry me, its just par for the course. I’m not afraid to admit that I do have losses, quite frequently in fact. But that’s all part of it. And I’ve learned now, because I’ve been doing this for so long, that if I make a loss, I will make a profit later on. Perhaps I should emphasize that I am speaking from my experience (and confidence) as an investor; with trading it might be another matter!

GH: So you define trading and investing as two different things. In Tom’s day, there was mainly the stock market and commodities; it was end-of-day with the ticker tape and no computers. He was telling a story of Teledyne where he was short and the ticker tape was going up but it turned out to be an up-thrust. There is a difference now because people can trade a one-minute chart, be in and out of the market, and make 500, 1000, 5000, 10000, 20000 dollars in minutes. Then, of course, you have the investment that can make the same amount of money but it takes six months.  That means there's a big difference between investing and trading. Do you think VSA applies equally to both types of trading?

PF:  Certainly. VSA can work equally well on a monthly, a 5-minute, and, if you have enough liquidity, even a one-minute chart. We’ve seen it on the E-mini S&P futures.  The principles are exactly the same for charts of all timeframes.

GH:  What do you think the general public’s misconceptions are of the market? We have touched on market manipulation. I was very skeptical of that whole concept when Tom told me about it, but I know better now.  How can you give the general public some advice to wake up, as Richard Ney put it, to what’s going on?

PF:  I think the biggest problem with the general public is that they tend to get into things too late. They are reading the financial press, they read all the general news, and thereby don’t get into the market at the right time. It’s very difficult; it goes against human instinct to buy a stock when the news is bad. Equally, it goes against human instinct to sell a stock when the news is very good. It’s the total opposite to the way in which we are programmed, or conditioned, as human beings and you almost have to re-program yourself in order to follow VSA!

GH:  That’s almost exactly what Tom once said to me, ‘If you do everything against your gut instinct when you’re trading, you’re going to make money!' 

So, we’ve talked about VSA, and how it has helped you and your investing. Can you now give me three simple rules that you’d give a trader or investor just coming into the market - three simple trading rules that will keep people out of trouble and, hopefully, make them some money?

PF:  Yes I can-           

Number 1, Risk management:  This is extremely important, because, if you haven’t            any risk management you’re very likely, if not certain, to lose money however good you are or may be, at picking stocks.

Number 2, Discipline:  You have to be disciplined to do your analysis thoroughly, to follow it, and not be influenced by other things around you, particularly the news.

 Number 3, Follow Volume Spread Analysis.

GH:  And read the chart!

PF:  Yes, read the chart (that makes four!)

GH:  Do you think chart reading is a language, like French or English or Spanish?

PF:  I think it is.  You can learn so much on your own, but to be really fluent, you need to go and live in the country concerned, in other words, to immerse yourself in VSA.  There are many things you can do, including joining the VSA Club.  You can get hold of lots of charts. Go back several hundred bars, say 500 (you can do this in TradeGuider).

Then pick a point way back and analyze the chart up to the right edge. Then move along a day at a time to see if you are correct. Re-analyze as you go. Don’t look ahead first though. Every time you get it wrong, ask yourself why. 

Practice.  If you have question - and there is no such thing as a dumb question when it comes to VSA, you can post it in the VSA Club forum (most questions are answered within 24 hours).

GH:  If everybody in the world who was a trader or investor had VSA and the TradeGuider software, would the market change or stay the same?

PF:  It would change if they all understood it, but I think in reality that is never going to happen.

GH:  I once asked Tom the same question and he said, ‘There’s so many different markets, so many different timeframes, so many different people, that even if it did happen, it would be applied at different times, and of course it wouldn’t have an effect on the market because the market is moved by supply and demand.

Finally, just to wrap up, with your lifetime trading experience,  what advice would you give to someone who has just started out, or has been losing money, using technical tools, using fundamentals, and just can’t figure it out, and who wants to lift the fog off the market. What’s that path moving forward?

PF:  First of all they should join the VSA Club and learn from it. There’s a lot of material in there, a lot of webinars they can look at.  (Yes there is a monthly subscription, but you can't learn about the markets for free!)  After all, it’s a lot cheaper to join the VSA Club than it is to go into the markets blind and try to trade by yourself. You’ll lose lots of money - thousands, or, in a few cases, millions.

If you wanted to set up a shop somewhere, you wouldn’t just go and purchase the first shop you saw in the estate agent’s window. You would want to do your homework. You would want to find out about the area and the particular business you’re going into. You’d want to ask yourself,  ‘Are there any competitors, or there likely to be in the near future? If so, can I find a way of bettering those competitors and gain their custom?'

But on the other hand, with trading we tend to think we can open an account, start trading without any knowledge, and expect to make money. It cannot happen. You need to treat it as a business, do your homework and study it carefully, to make money.

GH:  What you really need is a business plan as a trader.  In fact 'Fail to plan, plan to fail.