How Does Wootrader Work?

Posted: July 6, 2015, 3:29 a.m. by

The stock markets are notoriously difficult to crack, especially in the last years, with so many factors influencing them - information comes fast (and furious), more individual investors are managing their portfolios and computerized trading systems are getting prevalent. So it's not a surprise that 80%+ of the professional money managers will underperform the the general stock markets as measured with the S&P500 index.

When we started designing Wootrader, we had one main goal in mind - finally provide an investment strategy that can consistently outperform the S&P500. Now that Wootrader is released, we felt we owe it to our users to be fully transparent and explain how it works, even at the risk of multiple copy-cats springing up.

At the heart of Wootrader lies its unique statistical engine that constantly measures the performance of various indicators that can influence the future growth/decline of stock prices. Currently, Wootrader tracks 5 major categories of such indicators:

Analysts Estimates

Securities analysts are professionals that actively evaluate companies and give estimates on their projected earnings(profits), revenue(sales). They also publish ratings on the stocks (from strong buy to strong sell) and price targets (the price they believe the stock will reach in the future (usually within a year).

Fundamental Analysis

Fundamental analysis uses the past financial statements of a company (income statement, balance sheet and cash flow) to evaluate the financial and operations health of the company by looking at the underlying business.

Technical Analysis

Technical analysis uses past market data (price and volume of the stock) to forecast the direction of stocks.

Options Volatility

Options are contracts on buying/selling a stock in the future at a specific price. The risk implied in the future stock price is reflected by the implied volatility of the options.

Guru Strategies

The strategies are a combination of several other indicators - fundamental, technical that are grouped together to pick stocks with a growth potential.

Each of those categories has its proponents, and they can all be used to try to beat the markets with various success during *different* markets.

What makes Wootrader unique, is that every day it measures all those factors and determines how well they perform in the *current* markets. Based on this dynamic performance, Wootrader assigns different weights to the different screeners - from the ones that are currently working best at predicting stock growth get the highest weight (100) to the screeners/indicators that can not match the S&P500 and get a weight of 0.


P/E (Price to Earnings) Ratio

The P/E ratio is a fundamental indicator that measures how cheap/expensive a stock is compared to the amount of profits the company generates. Every day we look at what were the specific 5/10/25 top stocks that the P/E ratio screener picked a week, a month etc. ago and we verify by how much those picks grew in value:

P/E performance

Hmm - not that great, right? Even though the P/E ratio picked AGTC and it grew by 22% for the week, the mean of all 5 top stocks underperformed the S&P500 for the same period if you bought all of the 5 top picks. Conclusion - right now the P/E is not working very well for picking stocks that will grow and Wootrader gives it a weight of 0 (the P/E ratio will not affect the stock rankings at all).

RoC (Rate of Change)

The Rate of Change is a technical indicator that measures the percent change of the stock's price, and here is the average performance:

Rate of Change

Here we can see a much better result - the RoC indicator, when used to compare stocks by industry gave a 10%+ return in the last month. And here are the specific stocks picked by the RoC a month ago:

Rate of Change Stocks

Since it works better in the current markets, Wootrader will give a higher weight to the rankings of the RoC indicator.

As of the writing of this article, the technical indicators perform a bit better than the fundamental ones, but this is not always the case. February of this year, when the markets were upbeat and the S&P500 was consistently rising, the fundamental indicators were ruling the Wootrader rankings, then the Analysts Estimates took over at some point in May/June.

I hope this gives a picture of how Wootrader manages to outperform the S&P500. The actual algorithm is a bit more complicated - it smoothes out the performances to avoid screeners that are one-day wonders, accounts for different sizes of portfolios, takes into account the performance when measuring all stocks against each other or only to stocks within their industry and a couple more tricks.