Dynamic Stock Strategy Using Factor Model

In the previous article, we learned how we can create stock selection rules using Stock Screener. In this article, we will learn how we can create a dynamic strategy using the Factor Model.

Just like a strategy created using the screener, the actual stocks will change based on your rebalancing and exit strategy. We will learn more about this in the current article.

So first things first! How to create a dynamic strategy using a factor model? Go to the strategy page, click on Create New, and then select Stocks. The below shown window will open. 

This time, we will select the third option: Dynamic entry using a factor model. As we can see, we also have the option to select the heartbeat (the definition is highlighted in yellow). Currently, we support only 1-day heartbeat, but we will add more options in the coming months. 

Also, you can see all the steps included in the dynamic strategy creation using the factor model on the left. As you have noticed, there are more steps compared to the static baskets that we discussed in the first article. This is because dynamic strategy is more flexible and with our strategy builder you can create almost any kind of technical, fundamental, or technofunda strategy.

After selecting the second option, we will click on the next step (available at the left bottom).

In the next step, the screener window will open as shown below.

Here, you can add factors of your own by clicking on the ‘Add Factor’ button or load your saved factor models directly by clicking on the Load saved models button. 

Apart from that you have two important choices as highlighted in red.

• Universe: Here you can select an index or custom-made universe that will act as the universe for your screen.
• Signal generation: As per your rebalancing frequency, your trader orders will be generated when you paper trade your strategy. This specific feature allows you to manage when your orders are generated. 

For example, you want to do a weekly rebalancing on Friday. Then do you want to generate orders after Friday’s market close or on Monday at 9.30 AM? Some investors prefer ‘On market open’ as it gives you orders based on the latest data. 

Now let’s create a simple factor model that filters stocks that have high quality, value, and momentum scores. The below image has the factors and weights for the mentioned condition. Here we are giving equal weightage to all three factors. 

Once you add all the factors and assign weights, click on the Done button and then click on the View Stocks button to see the aggregate scores for stocks in your selected universe as shown in the image below. 

One more important thing. Our factor model is a one-of-its-kind tool designed to create factor investing-based quantitative strategies. The tool gives you complete control over your metric selection and the importance of each metric by assigning them weights. If you have not explored this tool in more detail and want to understand how you can get the best out of this, read our articles on the factor model

The next step is position sizing. We have discussed all the remaining steps in detail in an article series on strategy parameters. You can read them here.