The Rise of the Algorithms
Markets move in patterns and they do so based on triggers. If you understand those patterns and their market implications (whether positive, negative, or indifferent), it allows you to figure out what is most likely to happen, and how to position your portfolio to profit. Or in other words, the best traders are those that can sniff out those patterns and trades, understand those implications, and time their respective entries and exits.
That’s actually a lot to ask from a trader – especially when you consider the many distractions he or she could face. Humans get sick, go out drinking with friends, take vacations, and experience a host of other life events. It’s hard to be crystal clear at every moment — understanding markets, trades, probabilities, patterns, timing and opportunities, all while mitigating risks, in order to grind out a winning record consistently over time.
That’s where algorithmic trading comes in. Today, we have the power of computers to identify patterns and execute strategies. Some 27% of stock trading volume is now executed by machine-driven quantitative algorithms – mathematical formulas that follow protocols based on various triggers and patterns. That’s up from only 14% as recently as 2013. In fact, algorithmic volume is catching up quickly to volume provided by traditional individual investors.
Meanwhile, according to the Wall Street Journal, quant money managers recently saw $4.6 billion in new investments, while the hedge fund industry experienced $5.5 billion in withdrawals. And why not? The computers are winning! In the past five years, machines on average delivered 5.1% returns per year, while hedge funds produced 4.3%.
That brings me to the Weiss Ratings Stock Model. It analyzes over 15,000 stocks every day, using data on balance sheets, income statements, cash flow statements, market prices, interest rates, and more. That, in turn, helps it tell investors like you which companies are worth buying, which are not, which are improving, and which are hitting the skids.
In fact, I just developed an entire trading strategy based on the Ratings model and the conclusions of reams of back-testing data. I use the strategy in a just-released service, called Weiss Ratings’ Quantum Trader.
You can find out more about the service here. My research showed it would have produced an average return of 27.6% per year since 2006, and handily beat the market as you can see in the chart below. The red line is the cumulative, estimated return of the Weiss Ratings’ Quantum Trader strategy, while the green line is the return generated by the S&P 500 during that same period:
Source: Weiss Ratings, using Standard and Poor’s Clarifi ®
In short, algorithmic trading and computer-driven strategies aren’t going away. If your fund or wealth manager charges too much, doesn’t perform, and/or just isn’t cutting it any more, perhaps it’s time to give algorithmic strategies like mine a try.
Small Cap Edition, By Mandeep Rai, Senior Analyst
Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.