STP Algo Trader - The Method

Welcome to this issue of STP Algo Trader "The Method."

Every Saturday, we will break down each of the inputs that go into our proprietary algorithmic trading system - Signal Trader Pro.

The goal is to show you how our system works and educate you on why and how these factors can be used to make you money.

In the last few weeks, we have been going through how our system adapts to changes in the stock market environment.

This is when we enact our "BULL SWITCH," which changes many of the parameter "settings" in our algorithm. This allows us to continue to produce good returns in a market environment where the trend has changed.

Our original plan when we launched “The Method” series at STP Algo Trader was to explain this process after we had gone through the basics of the system. The stock market volatility changed our plan!

With this issue, we will return to discussing our points system and how we calculate the "15" point score assigned to the stocks.

In the first few "The Method" issues, we discussed the points assigned to technical factors around the stock. These included the market capitalization, the number of analysts covering the stock, the "trend" of the stock price, and the RSI levels.

We will now begin to discuss the points assigned to the operating fundamentals of the companies.

This is why our system is called “Quantamental.” It is a combination of both quantitative (technical analysis) factors and fundamental ones.

When looking at the companies' operating performance, we look at three different financial metrics – revenue, cash flow (as measured by EBITDA), and profits (as measured by EPS).

Within these metrics, we look at the trends over the previous 12 quarters (three years). We want them to be "positive" at least three-quarters or 75% of the time over that period.

In future issues of "The Method," we will go through what we mean by "positive" and how each is different.

We won't go into the definitions of these metrics here, as many of you are familiar with them.

Why do we use all three metrics?

Using all three of them allows us to get the broadest view of the company's operating momentum. A company that can perform well across all three metrics is one that is doing well.

It is not uncommon for companies to have great earnings results while having poor revenue metrics. There is nothing wrong with this, which is a sign of a well-managed company.

In fact, these companies will get high operating scores in our system as they will get the "points" associated with the earnings per share.

Companies that also have strong revenue growth, however, will score even higher.

Why is this important?

The reason is that Wall Street applies greater value to companies hitting all these metrics. They view them as more attractive stocks.

This is important because it makes the likelihood that our technical signals will play out according to plan.

The reality is that our combination of technical signals does a good job of identifying opportunities on even poorly performing companies.

They do much better, though, when they are triggered on companies that are “winners.” Identifying companies that can “win” across all these financial metrics are the ones that the stock market wants to own.

This makes them that our system ALSO wants to own!

Click here for more information and to sign up for the market’s best algorithmic trading platform, Signal Trader Pro.