The first rebalance of StockPickingLab

Our company deals with software development, data and text analysis. However, the creation of models and software based on the principles of artificial intelligence is only the first step in commercially successful applications.

One of our applications is StockPickingLab, which selects the most appropriate stocks to build a long & short portfolio based on macro-predictor analysis, company-specific predictors and subsequent Bayesian predictor selection. The goal is to outperform the S&P 500 index while eliminating loss periods. The average annual yield is 17.69%, while the maximum decline is -13.72%.

Having a well-performing backtest is great, but the models must then work on real money as well. In order to validate our models, we logically trade ourselves through our applications. Trading is associated with various specifics, which we will point out to you through our articles, so that you can avoid them in your practice or learn from them. We trade through Interactive Brokers. You can certainly find articles on setting up and setting up an account, so we will focus directly on situations that arise during trading.

Pattern Day Trader „problem“

We rebalance our s&p 100 portfolio once a month. Due to the amount of invested capital and fees for individual transactions, a monthly basis was chosen. Based on current data and calculations, the software prepares a rebalancing dose, in Excel we can display it as follows:

Subsequently, we can use the IB API for rebalancing (execution of orders) or execute instructions manually via TWS (Trader Work Station Interactive Brokers).

Now to the merits of the problem. After entering orders for the first time, Interactive Brokers evaluated us as a so-called „Pattern Day Trader“  (regulatory designation for traders or investors who carry out four or more daily trades during five working days using a margin account). With no more than $ 25,000 in our account, Interactive Brokers closed some of our positions on its own.

As the stock exchange is not working today (Independence Day is being celebrated on 4 July), we will replenish the necessary funds on account and carry out a new rebalance at the beginning of next week.

The results after the first month are:
+ 5.5% excluding fees (the figure is interesting because, for example, retail investors in the US do not pay fees, for the Czech user the minimum fee is approximately USD 1 per trade) and

5% when fees are included. Detailed reports of our systems can be found here here.

Jiří Fuchs