The Stock-O-Matic Trading Algorithm

Stock-O-Matic is an end-of-day trading system that uses a computer algorithm to optimize buy and sell signals for each stock individually. It is unlike backtesting systems, which require you to figure out technical indicator parameters on a manual basis for each stock, or blanket strategies where the same parameters are applied to all stocks. Stock-O-Matic runs through an exhaustive set of permutations and combinations to isolate the parameters which give the best return for each stock in the system.

Stock-O-Matic optimizes for each stock's unique trading characteristics

Stock-O-Matic optimizes by backtesting a variety of technical indicators, in all combinations and permutations for the past 5 years. It also optimizes risk management, by varying stop loss % parameters, or introducing other exit criteria which minimize loss. With the infinite number of technical indicators available, it is almost impossible to select a strategy that works most of the time across many stocks. The more technical indicators that are used, the more complicated and time consuming backtesting becomes.

For example. for the S&P 500 ProShares ETF (SSO), a buy signal might be generated when the stock crosses above the parabolic SAR using an acceleration of 0.42 and the 12-day simple moving average is above the 38-day exponential moving average, and the price is between the lower and middle Bollinger Bands.

The parameters that can be varied for a buy signal might include:

  • The acceleration rate of Parabolic SAR
  • The number of days in the simple moving average
  • The number of days in the exponential moving average
  • The RSI 14-period value
  • The Bollinger band, below lower BB, between lower-middle BB, between middle-upper BB, or exceeding higher BB
  • Stop loss %, or some other method of exiting the stock to minimize loss

As you can imagine, figuring out these parameters for hundreds of stocks would take a lot of time and effort, without any guarantee of a viable strategy. See some examples of our optimizations here.

Stock-O-Matic finds the optimal portfolio for you

Seeing results for a single stock, while useful, isn't realistic. Buying and selling only one stock increases your potential exposure should bad news hit. Diversification is desirable when investing, and Stock-O-Matic makes it easy. We run through millions of combinations for choosing a group of stocks available in Stock-O-Matic, and find the portfolio with the best Sharpe Ratio. This optimal portfolio has the highest risk-adjusted return, i.e. it has the maximum return with the minimum volatility. A single person looking through individual stock performance pages would never be able to find this portfolio manually - automation of this process is key!

If you'd rather not use an automatically-generated portfolio, you can create your own Smartlist portfolios and see detailed walk-forward analysis for the entire group at once. See what it looks like.

Stock-O-Matic provides walk-forward analysis

Traditional backtesting services find a fixed set of indicators for some time period in the past, and then presents the computed optimal performance as if it represents actual attainable results. Using these static indicators in the future is very unlikely to provide similar performance to the optimal performance, since that was computed with foreknowledge of how the stock price would behave.

Stock-O-Matic instead does the following:

  1. Rewinds the clock to 5 years ago, and calculates the optimal set of technical indicators for the 5 years prior to that point (i.e., 10 years before today).
  2. These indicators are then used to generate buy and sell signals for the next quarter. These are generated without knowing how the stock price will behave during this time period. Thus, they represent signals that would actually have been generated.
  3. At the end of this quarter a new set of optimal technical indicators are computed for the previous 5 years.

The above process is repeated for each quarter of the past 5 years. The results shown for the walk-forward analysis represent actual buy and sell signals that would have been generated, and not just optimal, but purely theoretical results.

Read more about walk-forward analysis and backtesting at Wikipedia.

How to choose a trading system that actually works at Wikihow. Note that Stock-O-Matic does include all the features mentioned.

Stock-O-Matic frees your day

Many trading systems require you to be glued to the screen to monitor buy and sell signals. Because Stock-O-Matic buy and sell decisions are made just before the market closes, you can go about other business during the day and reduce poor decisions based on emotional responses resulting from watching the market tick-by-tick. Trading on Stock-O-Matic is simple, it will tell you to buy or sell a particular stock if and only if it looks like it will close above or below a certain price. All you have to do is check your dashboard every day before the close of market to see what trades you have to make. No fancy integrations with your brokerage are required.

Stock-O-Matic adapts

Over time, backtested trading systems may become less effective or stop working entirely. Stock-O-Matic adapts to changing stock characteristics in two ways: A) it weights recent performance more heavily, and B) re-optimizations are performed on a periodic basis.