I’m going to talk about the project I’m working on for my Capstone course at OSU this term. I think the idea behind the project is pretty cool and although our implementation is still early-stage / experimental at this point – the idea could have real value down the road. We call our app 3STAT which is short for the 3X Leveraged ETF Automated Trader (I’ll explain this terminology more in this blog post).
Our project is focused on creating an app that generates “signals” based off of a trading algorithm. Signals here simply means signals to buy or sell certain stocks. While quite a bit of thought and effort goes into creating a trading strategy, to mimic the activity of such a strategy all you need to know is what to buy/sell, when and in what quantity. So by providing these buy/sell signals it will allow subscribers of the app to mimic a trading algorithm that we’ve written in their own portfolio.
What need does this app fill?
Most retail (non-professional) investors are only familiar and comfortable with very simple trading strategies. The most common example is the buy-and-hold strategy. Here the investor buys the stock of a promising company to hold it over a longer period of time in the hopes that the price of the stock will increase over time and the investor will profit.
Most retail investors do not have the experience or expertise to incorporate more advanced trading strategies. But the problem is, these alternative strategies might be more attractive for their financial goals or help to provide more diversity to their trading portfolios.
The goal of this app is to bridge the gap for these types of retail investors allowing them to participate in more advanced strategies without needing to acquire the expertise to implement these strategies themselves (similar to very wealthy investors investing in hedge funds).
What strategy does the app employ?
The trading algorithm currently employed by our app is considered a momentum strategy. Momentum strategies seek to profit from general market trends. And specifically, our app uses a momentum strategy that only focuses on a stocks of 3X leveraged ETFs (without going into too much detail, these are stocks that will have 3X more extreme moves than the general market).
While our app is more of a proof-of-concept based on this single, more advanced trading strategy, the app could easily be expanded to include a variety of trading strategies in the future. This would allow retail investors to find strategies that best suit their financial goals.
Suitability of the strategy
There’s no single investment strategy that meets the financial goals of all investors. Instead, investors must search for strategies that best meet their needs. If an investor is considering mimicking the 3STAT strategy, they will naturally want to know how the strategy has performed in the past and see if that performance and risk profile meets what their goals. With that in mind, we provide historic performance metrics in our app to help this decision-making process for interested users.
Following the strategy
If an investor is happy with the historic performance and risk profile of the strategy and wanted to mimic it, our app seeks to make this an easy process. The user should be able to sign up to receive alerts (either via email or text for example) that will represent the trading signals I mentioned earlier in this post. That would provide all of the information in a simple format that users would need to mimic the strategy on whatever scale they are comfortable with.
Empowering retail investors
The ultimate goal of the project is to empower retail investors to access more advanced strategies that tend to only be employed by professionals and participated in by very wealthy or institutional investors. These more advanced strategies aren’t necessarily “better” than more basic buy-and-hold strategies, but all investors have different financial goals and alternative strategies can certainly be more suitable for those goals.