Program Objectives: The Alpha Prime algorithmic trading
platform a discretionary portfolio dedicated to providing superior returns on
investments in all market conditions.
The objective is capital appreciation and growth. The portfolio aims to
achieve a high absolute rate of return by utilizing proprietary metrics in
applied mathematics and technical analysis.
This is a
long / short strategy, buying highly liquid securities to achieve our desired performance
results. Taking into consideration concentration risk, we will be utilizing a
mix of long/short securities to mitigate systemic and idiosyncratic risk.
The Alpha
Prime algorithmic trading platform is based on the belief that a diligent and
nimble investor can take advantage of short- and medium-term market
inefficiencies. Opportunistic trading can produce profits for our investors and
manage the risk of overall market movements.
Program Rules: The basic underlying mathematical
premise behind the trading methodology assumes a highly mean-reverting strategy
and directional momentum bias. We intend on deploying a maximum of 5% of the
total portfolio buying power per trade to mitigate concentration risk. We will
maintain stop-losses per trade that equate to no more than 0.5% of the unlevered
portfolio value. Margin will be used. To mitigate portfolio volatility, we will maintain a downside
beta neutral strategy. Our profit objective is a gain within 5 - 15 days.
Security Selection Criteria: We will only buy those securities
that are highly liquid and trade above a certain dollar amount. For the
purposes of this program we will be buying securities that trade more than 1,000,000
shares daily at a price above $20.00.
Momentum Bias: The decision to be long or short
the security will depend on its individual momentum bias and that of the
momentum bias of the general market (S&P 500).
Long Candidates
The
securities to be considered are as following:
·
20-day exponential moving average
> 50-day exponential moving average
·
50-day exponential moving average
> 200-day exponential moving average
·
Slope of the 200-day exponential
average > 0
·
SCTR > 90 (will go as low as 75 if
warranted)[1]
The momentum
indicators in the SCTR used to determine directional bias include:
·
Percent above/below its 200-day
exponential moving average
·
125-Day rate-of-change
·
Percent above/below 50-day
exponential moving average
·
20-day rate-of-change
·
3-day slope of PPO-Histogram
·
14-day RSI
We prefer to
see a security rank in the strongest 10% of its peers prior to going long. For
short candidates, we prefer the security to rank in the bottom 10% of its
peers.
Short Candidates
The
securities to be considered are as following:
•
20-day exponential moving average
< 50-day exponential moving average
•
50-day exponential moving average
< 200-day exponential moving average
•
Slope of the 200-day exponential
average < 0
•
SCTR < 10 (will go as high as 25
if warranted)
We prefer to
see a security rank in the strongest 10% of its peers prior to going long. For
short candidates, we prefer the security to rank in the bottom 10% of its
peers.
Target Candidates
A security
will be targeted as a potential trade depending on the slow stochastics %K
(5,1)[2]
reading.
%K (5) = ((Current Close - Lowest
Low)/ (Highest High - Lowest Low) * 100) t-5
%D (1) = 1-day SMA of %K
Lowest Low = lowest low for the
look-back period
Highest High = highest high for the
look-back period
%K is multiplied by 100 to move the
decimal point two places
If the above
listed long criteria are met, then a long candidate is targeted when slow
stochastics %K (5,1) < 20.
If the above
listed short criteria are met, then a short candidate is targeted when slow stochastics
%K (5,1) > 80.
The Trigger
Buy a long
candidate near the close of trading when slow stochastics %K (5,1) rises above
20.
Sell a short
candidate near the close of trading when slow stochastics %K (5,1) falls below
80.
Exiting the Trade
The following
rules will be used to exit a trade.
For long positions:
Sell the
position when the daily slow stochastic %K (5,1) rises above 80 and the stock
price is below the 20-day exponential moving average.
or
If above the
20-day EMA, sell 1/2 position when the daily slow stochastics %K (5,1) rises
above 80. The 20-day EMA becomes your stop for the remainder of the position.
Sell on the open of the day after it breaches to the downside if the stock
opens lower than the 20-day EMA. If it opens higher than the 20-day EMA, the
20-day EMA becomes your intra-day stop.
or
When the
stock closes below the predetermined stop loss. Sell at the start of the next
trading day if the stock opens below the stop loss. If the stock opens above
the stop loss level, sell intra-day if the level is breached.
For short positions:
Cover the
position when the daily slow stochastic %K (5,1) falls below 20 and the stock
price is above the 20-day exponential moving average.
or
If below the
20-day EMA, sell 1/2 position when the daily slow stochastics %K (5,1) falls
below 20. The 20-day EMA becomes your stop for the remainder of the position.
Cover on the open of the day after it breaches to the upside if the stock opens
higher than the 20-day EMA. If it opens lower than the 20-day EMA, the 20-day
EMA becomes your intra-day stop.
or
When the
stock closes above the predetermined stop loss. Cover at the start of the next
trading day if the stock opens above the stop loss. If the stock opens below
the stop loss level, cover intra-day if the level is breached.
Maintaining a market neutral
position.
At the close
of trading each day we examine our total beta-neutral long/short bias within
the portfolio. We will utilize overnight protection against adverse price
swings using derivatives or ETF’s. This will mitigate systemic risk versus
unforeseen events when the market is closed.
On an
intraday basis, we will close the beta-neutral hedge if the market (S&P
500) opens higher.
If the
200-minute simple moving average is breached to the downside and the S&P 500 is turns negative during trading, beta-neutral
hedges will be redeployed. They will be removed should the market recover above
the 200-minute simple moving average and the market goes positive.
If the
market (S&P 500) opens lower we will maintain the over-night downside
beta-neutral hedge until the point where the market goes positive on the day and
a break to the upside on the 200-minute simple moving average occurs.
The breach
above or below the 200-minute moving average will be confirmed by a movement in
the MACD Histogram (1,200,20) one standard deviation above or below the mean
over a 200-minute time span.
Position Size.
We will
calculate the 90-day variance for each security that we add to the portfolio.
We will deploy assets to the position equal to the minus one standard deviation
downside that coincides with our total portfolio downside risk of 0.5% of the
unlevered portfolio value.
Trade Example:
Trade Example:
Joseph S.
Kalinowski, CFA
No part of this report may be reproduced in any manner
without the expressed written permission of Squared Concept Asset Management,
LLC. Any information presented in this report is for informational
purposes only. All opinions expressed in this report are subject to
change without notice. Squared Concept Asset Management, LLC is a
Registered Investment Advisory and consulting company. These entities may have
had in the past or may have in the present or future long or short positions,
or own options on the companies discussed. In some cases, these positions
may have been established prior to the writing of the report.
The above information should not be construed as a
solicitation to buy or sell the securities discussed herein. The
publisher of this report cannot verify the accuracy of this information.
The owners of Squared Concept Asset Management, LLC and its affiliated
companies may also be conducting trades based on the firm’s research
ideas. They also may hold positions contrary to the ideas presented in
the research as market conditions may warrant.
This analysis should not be considered investment advice and
may not be suitable for the readers’ portfolio. This analysis has been written
without consideration to the readers’ risk and return profile nor has the
readers’ liquidity needs, time horizon, tax circumstances or unique preferences
been considered. Any purchase or sale activity in any securities or other
instrument should be based upon the readers’ own analysis and conclusions. Past
performance is not indicative of future results.
[1] The
StockCharts Technical Rank (SCTR) is a numerical score that ranks a stock
within a group of stocks. The methodology for these rankings comes from the
wisdom of John Murphy, author of many books on technical analysis and
contributor to the Market Message at StockCharts.com. Stocks are assigned a
score based on six key indicators, which cover different timeframes. These
indicator scores are then sorted and assigned a technical rank.
[2] Developed
by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum
indicator that shows the location of the close relative to the high-low range
over a set number of periods. According to an interview with Lane, the
Stochastic Oscillator “doesn't follow price, it doesn't follow volume or
anything like that. It follows the speed or the momentum of price. As a rule,
the momentum changes direction before price.” As such, bullish and bearish
divergences in the Stochastic Oscillator can be used to foreshadow reversals.
This was the first, and most important, signal that Lane identified. Lane also
used this oscillator to identify bull and bear set-ups to anticipate a future
reversal. Because the Stochastic Oscillator is range bound, is also useful for
identifying overbought and oversold levels.
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