Financial Ratios Fundamental Strategy

This trading strategy utilises financial ratios to determine entry and exit points for trades based on liquidity, leverage, efficiency, profitability, and market value metrics, entering a long position when these metrics improve and exiting when they deteriorate.

To trade this strategy manually on TradingView:

• Access financial data for the specific company: current assets, liabilities, debt, equity, inventories, etc.
• Calculate the financial ratios: Current Ratio, Quick Ratio, Cash Ratio, Debt Ratio, Debt to Equity Ratio, Interest Coverage Ratio, Asset Turnover Ratio, Payables Turnover Ratio, Gross Margin, Operating Margin, ROA, ROE, Earnings Per Share (EPS), Book Value per Share, and Dividend Yield Ratio.
• Enter a long position when:
  • Current Ratio, Quick Ratio, or Cash Ratio increases compared to the previous period.
  • Debt Ratio or Debt to Equity Ratio decreases compared to the previous period.
  • Asset Turnover Ratio or Payables Turnover Ratio increases compared to the previous period.
  • Gross Margin, Operating Margin, ROA, or ROE increases compared to the previous period.
  • Dividend Yield, EPS, or Book Value per Share increases compared to the previous period.
• Exit the long position when the inverse of the above conditions occurs, indicating a deterioration in financial health.

The Financial Ratios Fundamental Strategy uses a set of financial ratios to inform trading decisions on stocks. To enhance this strategy manually, consider the following improvements:

• Expand financial data sources: In addition to quarterly financial statements, consider using real-time data feeds, analyst reports, and industry news. This can provide a more timely reflection of a company's financial health, which can be crucial for catching early signs of improvement or decline.
• Incorporate macroeconomic factors: Financial ratios do not operate in a vacuum. Supplement the strategy with macroeconomic analysis to contextualize a company's performance within the broader economic environment, potentially adjusting positions ahead of significant economic events.
• Utilize technical analysis: Incorporate chart patterns, volume analysis, and trend indicators to confirm entry and exit signals derived from financial ratios. For example, a bullish breakout on high volume can reinforce a long entry based on improving financial ratios.
• Refine ratio selection: Assess each ratio's historical relevance to stock performance by backtesting. Identify which ratios have the strongest correlation with price movements and adjust their significance within the strategy accordingly.
• Adjust for sector and size variations: Different industries and company sizes have different financial benchmarks. Personalize the strategy to a stock's specific context by using industry-specific ratio thresholds and benchmarks.
• Overlay sentiment analysis: Track investor sentiment using news analysis, social media monitoring, and market commentary. Positive sentiment can complement improving financial ratios and vice versa, reinforcing entry or exit decisions.
• Implement risk management tools: Integrate stop losses, take-profit levels, and position sizing based on the volatility of the stock and overall market conditions to better manage the inherent risks of trading.
• Apply portfolio diversification: Analyze and trade a portfolio of stocks from different sectors to spread risk and exploit the strategy's effectiveness across various market conditions.
• Continuous learning and adaptation: The market evolves, and so should the strategy. Regularly review and adjust the ratio calculations, screens, and interpretations to align with changing financial reporting standards and market dynamics.

The Financial Ratios Fundamental Strategy is well-suited for traders who prioritize in-depth analysis of a company's financial standing and who incorporate long-term economic trends into their trading decisions. This strategy demands a meticulous approach, making it ideal for:

• Fundamental analysts: Traders who perform a qualitative assessment of a company's financial reports, looking beyond the numbers to the story they tell about the company's future.
• Swing traders: Individuals who hold positions for several days to several months, aiming to capture gains from a stock's predicted upward or downward trends indicated by improvements or declines in financial ratios.
• Position traders: Traders with the longest time horizon, who base their trades on a company's longer-term performance forecasts derived from analyzing financial ratios over sequential quarters.

This style of trading requires a patient, disciplined approach and a willingness to delve into corporate finance and economic principles.

• Strategy essence: Utilizes key financial ratios to inform trading decisions, focusing on liquidity, leverage, efficiency, profitability, and market value metrics.
• Operation mechanics: Enters/exits long positions based on quarterly financial ratio trends, ascending signals entries, descending signals exits.
• Automation vs Manual: Scripted for automation in TradingView, with the option to use alerts or supplement with manual analysis for greater precision.
• Enhancement tips: Include real-time data, macroeconomic context, technical indicators, and refined ratio analysis tailored to industry and company size variations.
• Risk management: Implement stop losses, dynamic position sizing, and integrate portfolio diversification strategies to mitigate risks.
• Trader profile: Suitable for fundamental analysts, swing traders, and position traders who value company fundamentals and have a longer-term view.
• Optimization strategies: Regularly update and adjust measures to account for evolving markets and financial reporting changes.
• Sentiment overlay: Bolster financial ratio signals with market sentiment analysis from news and social media sources.