Welcome to this issue of STP Algo Trader: “The Method”

Each Saturday, we break down one of the core inputs in our proprietary algorithmic trading system. Our goal is to give you insight into how our system works and, more importantly, how these factors can be used to make money.

Our process has been developed over three decades and has been used to manage billions of dollars. More importantly, it has delivered gains during every market downturn over that period.

Positive Long-Term Price Trend

This is a simple yet powerful concept: we focus on stocks that are going up. In our scoring system, a strong long-term trend earns up to 3 points because it signals alignment with the market’s momentum—a key requirement for high-probability trades.

You’ve probably heard the Wall Street disclaimer, “Past performance is not indicative of future results.” While this is legally required, the reality is that past performance is one of the best indicators of future trends. Both markets and company fundamentals move in trends, meaning they typically continue in the same direction for extended periods.

Why Do Stocks Trend?

Companies don’t go from thriving to failing overnight. A well-positioned company with a great product, strong leadership, and solid financials is likely to continue performing well. Since stock prices generally reflect fundamentals, they too tend to follow sustained trends.

Think of it like a sports team: Who’s more likely to win their next game, the undefeated team or the one that has struggled all season? Winning isn’t random; it’s a result of strong execution, just like in business.

But just like on Any Given Sunday, short-term fluctuations are unpredictable—a stock can rise or fall sharply in a day, week, or month. However, over multiple months, quarters, and years, fundamentals drive stock price trends.

A good analogy for price volatility is the weather. Depending on where you live, the weather can shift from sunny to rainy in just a few days—or even hours. But when you zoom out to a larger time frame and consider the seasons, it’s rare for the weather to deviate significantly from seasonal averages.

For example, New York City can go from sun to rain in days, but it is never going to be 90°F in the middle of winter!

This is the same way to think about trends. If we see a well-established trend, it will be difficult for that trend to change. This doesn’t mean that trends can’t change—just that the more powerful the trend, the more force it takes to reverse it.

How Does This Play Out in Our Trading System?

Let’s look at the chart of stock market leader NVIDIA Corporation (NASDAQ: NVDA) between January of 2023 thru December of 2024.

You can see in the charts that the stock has gone up—a lot.

This is the definition of a Positive Long-Term Uptrend.

Driving the stock price has been the operational success of NVDA over this time period. We will talk about stock fundamentals in future issues of The Method, but it is important to acknowledge that price reflects fundamentals.

But one of our most important rules is: Price = Truth.

That’s why long-term price alignment plays a central role in our point scoring algorithm. A stock in a sustained uptrend automatically qualifies for up to 3 technical points, even before we assess other indicators like earnings momentum or fundamentals.

If we think the fundamentals are good and the price doesn’t respond, our opinion doesn’t really matter—we will still lose money. We always want to be aligned with the long term trend. We look for companies that the market is willing to reward with higher stock prices. If a stock is being rewarded by the market and then it stumbles, we know it still fits the criteria of our trading process.

As legendary investor Martin Zweig famously said:

“The trend is your friend!”

How Do We Define a Long-Term Trend?

Moving Averages

If you’ve ever watched the stock market, you might have heard analysts mention terms like the “50-day moving average” or the “200-day moving average”. These moving averages (MAs) are crucial tools for traders and investors because they help identify trends and key levels of support and resistance.

Why Do These Specific Numbers Matter?

A moving average is simply the average price of a stock (or any financial asset) over a set period. Instead of looking at day-to-day price swings, which can be noisy and erratic, moving averages smooth out the data to show the broader trend.

• Short-term moving averages (e.g., 10-day, 20-day) react quickly to price changes.

• Medium-term moving averages (e.g., 50-day, 100-day) provide a balanced view of the trend.

• Long-term moving averages (e.g., 200-day) help investors identify the overall market direction.

The 200-Day Moving Average: The Long-Term Trend Indicator

Since we are looking for stocks in an established positive long-term trend, we first focus on the 200-day moving average (200-MA).

A stock trading above its 200-day moving average is considered in a long-term uptrend. If it falls below, it’s in a long-term downtrend.

The 200-MA is where many “buy-the-dip” investors look for opportunities. When a stock that has been in an uptrend touches the 200-MA, it often sees increased buying interest. On the flip side, if a stock falls below the 200-MA and stays there, it could signal further declines.

When does the long-term uptrend fail?

Trends change when company fundamentals shift or when a stock becomes overextended, exhausting willing buyers at higher prices.

Stock prices often become more volatile toward the end of a trend, eventually crossing below the 200-day moving average. A short lived cross of price below the 200-day moving average can be constructive, but if it remains below the 200-day moving average for a significant period, it will become a barrier where institutional investors will look to lock in their gains and exit their positions.

The weather analogy applies again—when seasons shift, we start seeing more unpredictable and volatile swings before the new season fully takes over.

The Death Cross

We consider an uptrend exhausted when the 50-day moving average crosses below the 200-day moving average. This is known as the Death Cross and is a potential signal of a longer-term downtrend.

While the Death Cross is not a literal death sentence for a stock, once it occurs, we consider the chart to be technically broken and look for more favorable investment opportunities.

In the chart of Nvidia from August 2021 to March 2023, you can see it experienced a Death Cross in early April of 2022 and a long term down trend began.

When does a long term uptrend begin?

The Golden Cross

The opposite of the Death Cross is the Golden Cross.

This occurs when the 50-day moving average crosses back above the 200-day moving average, signaling the potential beginning of a longer-term uptrend.

We don’t assume that a long-term uptrend will start with the 50-day moving average cross alone. Instead, we wait for confirmation:

• The 100-day moving average must also cross above the 200-day moving average.

• The stock’s year over year return must also be positive.

If all three of these tests are met, we assign three technical analysis points to the stock.

• 1 point for 50 day moving average trending above the 200 day moving average to define the long term uptrend.

• 1 point for the 100 day moving average trending above the 200 day moving average to confirm the long term uptrend

• 1 point for the one year return being positive as a secondary confirmation of the long term uptrend.

By incorporating these moving average concepts into our algorithm, we stay invested with the long term trend.

In the chart of Nvidia from October 2022 to January 2025, you can see Nvidia’s Golden Cross in mid January of 2023 and the start of a new long term uptrend.

Want to See These Concepts in Action?

Try plotting these moving averages on your favorite stock chart—watch how prices react when they approach or cross these key levels!

Even better, try tracking these conditions on your watchlist stocks and simulate how they’d score using our point system. You’ll see just how systematic trend-following can be when it’s quantified.