Build Your First Strategy: A Step-by-Step Guide

  1. Pure Momentum

 

Momentum trading strategies focus on capturing stocks that are showing strong price action, riding the wave of upward trends. In this guide, we'll walk through creating a simple, purely technical momentum strategy starting from a fresh stock screener.

This approach relies solely on price-based criteria—no fundamentals involved. It's ideal as a starting point for models to run in bull markets, where it can outperform benchmarks like the SPY ETF. We'll cover setting up the screener, applying filters, and backtesting the results.

  • Begin by creating a new stock screener with no initial filters applied. This gives you a blank slate to build your universe of potential trades.

    • Select "Asset Type" as your primary filter and choose "Common Stock" to exclude ETFs, cryptos, or other asset classes.

    • Apply the filter.

    • Next, add an "Exchange" filter and select all US exchanges (e.g., NYSE, NASDAQ). Ignore any duplicates.

    • Apply the filter. Your list now consists only of US-traded common stocks.

    • Add the "Dollar Volume Average" filter, using a 3-month period. This measures daily trading volume in dollars to focus on liquid stocks that are easy to enter and exit.

    • Set the rule to select the top 1000 stocks by this metric.

    • Apply the filter. You're now working with the most liquid US stocks.

    • Add the "Sigma Score (200 Day)" filter. A positive Sigma Score means the stock is trading above its 200-day moving average.

    • Set the minimum to 0 and the maximum to 1 to select only stocks above this average.

    • Apply the filter.

    • Repeat for "Sigma Score (50 Day)": Set minimum to 0 and maximum to 1 to ensure stocks are also above their 50-day moving average.

    • Apply the filter. This reduces your universe to around 400 stocks showing upward momentum.

    • Add the "Z-Score Relative" filter. This measures how much the stock deviates (in standard deviations) from its benchmark over a 2-year window.

    • Set it to a minimum of 0 to exclude underperformers, allowing positive values (even high ones like 10 standard deviations).

    • Apply the filter to keep only stocks outperforming their benchmark.

    • Search for and add the "Medium Term GEX to Volume" filter (related to options data).

    • Set the minimum to 0 and maximum to 100 to select stocks with positive medium-term options sentiment.

    • Apply the filter. This ensures alignment with market expectations and reduces your list to around 320 stocks.

    • Add the "Sharpe Ratio" as a top-15 filter. This ranks stocks by risk-adjusted returns, selecting the best 15 from your remaining universe.

    • Apply the filter. You now have a portfolio of 15 high-momentum stocks.

Launch and Configure the Backtest

  • Click "Launch Backtest" and select "Strategy" mode.

  • Run in "Dynamic" mode to allow stocks to flow through without preselection.

  • Set to "Equal Weight" allocation.

  • Specify a minimum of 15 positions; if fewer qualify, replace gaps with SPY (S&P 500 ETF).

  • Set rebalancing to every 2 weeks (avoids overly frequent or infrequent trades).

  • Name your strategy and run the backtest for a 3-year period to evaluate performance.

Analyze the Results

  • Review the backtest output: Expect around 15 stocks in the portfolio.

  • The strategy may underperform in flat or bear markets but should excel in bull markets. For example, over the last two years of a bull run, it typically beats SPY.

  • In the tested period, it showed strong outperformance during upward market trends, confirming its momentum focus.

This strategy serves as a solid foundation for momentum trading, selecting stocks that rise with the market. While it's purely technical, you can enhance it by layering in fundamental filters tailored to your goals. Feel free to replicate this screener in your own tools and experiment with backtests to refine it for your investing style.

Model Screener Link: https://live.signal-sigma.com/invitation/stock-screener/wB3ZF0Wi

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Model Strategy Link: https://live.signal-sigma.com/invitation/strategy/0RSbx-Fy