Stock Picker: Hidden Titans for MicroCap (FA)

Overview and Suitability: This robot is an AI-driven trading robot specifically designed for beginners who are interested in long-day trading within mid-volatility environments. The robot exclusively utilizes technical analysis (TA) methods to assess and trade micro-cap stocks (companies with market capitalizations between $50 million and $300 million).

The trading strategy of this robot is based on James O’Shaughnessy's "Tiny Titans" strategy, which focuses on identifying undervalued micro-cap stocks with strong growth potential. By combining value investing principles with relative strength analysis, the robot identifies stocks that are positioned to outperform the broader market, specifically comparing them to the SP500 index.

This robot is ideal for traders seeking automated exposure to higher-growth, undervalued stocks within the micro-cap space while leveraging a systematic, rule-based trading strategy.

Strategic Features and Technical Basis

Strategic Features:

• MicroCap Focus: The robot selects micro-cap stocks with market capitalizations ranging from $50 million to $300 million. These small companies often offer higher growth potential due to market inefficiencies.
• Value-Oriented Approach: The strategy prioritizes stocks with a price-to-sales (P/S) ratio lower than 1, highlighting undervalued companies poised for long-term gains.
• Relative Strength Analysis: The robot calculates the relative strength of each stock compared to the SP500 by dividing the stock's price change over the past year by the index's price change. This helps identify the strongest-performing stocks relative to the broader market.

Technical Basis: The robot follows these steps to execute trades:

1. Stock Selection: It scans the smallest 10% of the market capitalization universe, focusing on stocks valued between $50 million and $300 million.
2. Value Filtering: Stocks with a price-to-sales ratio below 1 are filtered in.
3. Relative Strength Scoring: The rate of price change of each stock is compared to the SP500’s performance. The highest-scoring stocks (those outperforming the SP500) are prioritized for trading.
4. Portfolio Construction: The 25 lowest-scoring stocks are selected, and an equal amount of capital is allocated to each position.

Investment Rationale:

• Higher Growth Potential: Small-cap stocks have historically provided higher growth opportunities compared to larger-cap counterparts.
• Value Premium: By targeting undervalued stocks, the strategy aims to capitalize on the value premium, where these stocks tend to outperform in the long run.
• Market Inefficiencies: Micro-cap stocks are often under-researched, creating opportunities to find hidden gems that are mispriced.

Risks:

• Volatility: Small-cap stocks tend to be more volatile, leading to more significant price fluctuations.
• Liquidity Risk: With lower trading volumes, it may be challenging to execute large orders without affecting stock prices.

Position and Risk Management

Position Sizing and Risk Controls:

• Max Open Trades: The robot limits the number of open positions to 25, helping to ensure portfolio diversification while maintaining focused exposure to high-potential stocks.
• Stop Loss/Take Profit: Each trade is assigned a fixed stop loss of 20%, capping potential downside risk. A take-profit target of 75% is used to secure gains on successful trades.
• Trailing Stop Loss: For each 20% profit increment, a new stop loss is triggered at 20% of the current price. This dynamic stop loss helps lock in profits while allowing for further upside potential.

Trade Execution:

• Ranking Process: Once the stocks are ranked according to their relative strength scores, the robot initiates long positions in those with the highest score.
• Market Orders: All trades are executed using market orders within 1-2 hours after the market opens. This ensures that trades are executed at optimal liquidity levels and that favorable entry prices are achieved.

Trading Dynamics:

• Monthly Rebalancing: The robot processes and analyzes the stocks at the beginning of each month, ensuring that the portfolio is updated to reflect new opportunities and market conditions.

Trading Dynamics and Specifications:

• Maximum Open Positions: Medium, allowing for diversified exposure while managing concentration risk.
• Robot Volatility: Medium, offering a balanced approach between capturing significant market movements and mitigating sharp declines.
• Universe Diversification Score: Low, indicating a narrow array of instruments to hedge against sector-specific downturns and enhance profit opportunities.
• Profit to Dip Ratio (Profit/Drawdown): High, suitable for traders who are able to tolerate and manage greater levels of risk in exchange for potentially higher returns.
• Optimal Market Condition: This robot shows its best performance when market volatility is high, making it particularly adept at navigating turbulent market phases.

Disclaimer:  Disclaimers and Limitations 

Simulated Performance: All simulated performance results are derived solely from real-time calculations using historical data. Algorithms receive minute-by-minute historical prices and other data from Morningstar and generate trades in real time based on these historical inputs, effectively eliminating any hindsight bias. 

Actual Performance: All actual performance results are derived solely from real-time calculations using current data. Algorithms receive minute-by-minute current prices and other data from Morningstar and generate trades in real time based on these current inputs, effectively eliminating any hindsight bias. 

Gross Performance: Gross performance results do not deduct any fees or expenses. These results reflect the total returns generated by the AI Robots without considering the costs associated with accessing the service. 

Net Performance (current performance chart): Net performance results deduct fees to provide a more accurate representation of returns experienced by the user. These deductions can include: Model Fee Deduction: Net performance results may deduct a model fee equivalent to the highest subscription fee charged to the intended audience. Actual Subscription Fees: Net performance results may also deduct the actual subscription fees paid by the user for access to AI Robots.