STP Algo Trader - The Method

Vol. 1, Issue 18: BULL SWITCH Engaged! Part 2

April 15, 2025

Here at STP Algo Trader, we have a weekly series called “The Method.”

This series of essays describes the inner workings and drivers behind our proprietary algorithmic trading system – Signal Trader Pro.

Usually, we run these notes on Saturday, but this week, we are publishing an additional issue of "The Method."

We are doing this because we have recently entered into a relatively rare phase of the stock market.

 We call this phase the “NON-BULL” phase.

We described our view about the TWO different stock market phases and how they impact our system "settings" in the last issue of "The Method."

You can read that note here.

As we discussed in that note, the core underlying methodology of our program works in all market environments.

When, however, we move from an uptrending stock market to one that is consolidating - or will eventually enter into a downtrend – we adjust our settings.

We adapt by only generating new ENTRY SIGNALS in higher quality companies (only “14” and “15” quality rankings) as well as looking for more oversold conditions.

We outlined these changes in another previous STP Algo Trader note, which you can read here.

The other significant change is that we do a one-time exit of existing lower-quality EXIT SIGNALS in our BULLSEYE strategy.

This involves generating a “forced” EXIT SIGNALS for all OPEN SIGNALS in the BULLSEYE category that have a “12” or “13” quality score.

The process of generating these EXIT SIGNALS began yesterday – Monday, April 14.

Here are some thoughts and guidance on what we are doing…

1) Mean Reversion Reset

At its core, Signal Trader Pro has a strong element of mean reversion.

When the trend changes, the system will generate more signals than normal.

These signals will also begin to lose relevancy because we have generated a new trend.

In this stock market, we have gone from an uptrend to a violent consolidation at best. At worst, it is the start of a new downtrend.

This means previous levels are based on a different trend environment and must be reset.

These “forced” exit signals are part of that process.

2) Number of Positions

During the normal tests of an existing uptrend, we see the number of signals increase in the sell-offs. They then go down when the market returns to its highs.

When the environment changes, not only will the system generate signals that need to be reset, but it will also generate a large number of signals.

Now, we have outdated signals and too many of them.

This is another drive of our changes.

3) Volatility + Quality

By definition, the NON-BULL phase of the stock market is always much more volatile than the BULL phase.

This means that we need far fewer positions to generate attractive returns.

We also will see much higher quality companies generate ENTRY SIGNALS than we would in a BULL phase. This happens even with the higher bar on the oversold entry signal.

A lower number of higher quality positions is a great position.

This will also lead us to reset the existing profit EXIT SIGNALS on the high-quality "14" and "15" BULLSEYE signals that remain.

4) Risk

There is both greater opportunity AND greater risk in a NON-BULL phase of the stock market.

This is a driver of our focus on a lower number of higher-quality positions as well.

Our existing EXIT SIGNAL stop loss is "alpha" based, so it takes into account the move in the stock market, but in these environments, it could lead to greater loss.

As a result, we will also be tightening up that on the existing signals.

5) Exit Process

Beginning on Monday, April 14, we took all of the "12 and "13" OPEN SIGNALS in the BULLSEYE category and broke them into FIVE groups.

Over five days, we will liquidate the bottom quartile of these based on return since inception over the course of the day. Our realized price will be the volume-weighted average price for that day.

The existing EXIT SIGNALS will persist, so we may see additional exits.

This multi-day process aims to adjust for the extreme volatility of the market environment and not generate sub-optimal EXIT SIGNALS.

At the end of the period (Friday, April 18), the BULLSEYE OPEN SIGNALS will only include the "14" and "15" quality scores with reset EXIT SIGNALS.

As we said in the last issue of "The Method"…

The algorithmic trading system that drives Signal Trader Pro is something we have developed over our three-decade career in the markets.

The most important part of being a successful trader is not making money in BULL markets but learning how to SURVIVE when not in a BULL market.

We have implemented systems and practices to react to a change in the overall environment properly. These are in place to optimize our returns over a market cycle.

We now are engaging that BULL SWITCH and look forward to taking advantage of this period of heightened volatility.