Methodology

Foreword

The SIT methodology was built around the need of stock investors to identify potential big moves in the market. Even a 5-10% move in a stock can be considered 'big', and we emphasize that investors should have realistic expectations when navigating the stock markets. The main approach we encourage is the 'buy-hold-sell' strategy. The 'hold' aspect of the investment strategy can range from one week to several months.

The SIT platform is not designed for intraday trading.

As a reminder, the SIT platform is designed for experienced stock investors with substantial capital seeking medium- to long-term investment opportunities.

General Framework

On this page, we will outline the methodology we use to analyze insider trading activity. Due to the complexity of the platform, we can only partially disclose the principles that guide our selection of trading ideas.

Focused on "Buy" and "Sell" Transactions

We prioritize the collection and presentation of insider transactions that involve "buy" and "sell" activities. These transactions represent instances where company insiders, such as executives, directors, or employees, either acquire (buy) or dispose (sell) of their company's stock. We believe that monitoring these transactions can provide valuable signals about insider sentiment and potential market trends.

Exclusion of Other Transaction Types

To ensure precision and clarity in our data, we have chosen to exclude certain types of insider transactions from our platform. Transactions such as "Gifts," "Option Exercises," or any non-purchase or non-sale related activities are not included in our curated data. By focusing solely on "buy" and "sell" transactions, we streamline the information to provide you with the most relevant insights directly related to insider trading actions.

Understanding ICB Codes

At SmartInsiderTrades, we leverage the Industry Classification Benchmark (ICB) system to categorize companies based on their primary line of business, allowing for a more detailed analysis of insider trading trends. These codes provide a consistent framework for grouping companies, making it easier to compare and contrast insider activities across industries. We do use ICB on SmartInsidersTrades.com to provide you with more precise insights into insider trading.

Using USD as a Reference Currency

We understand that insider trading occurs in various countries and currencies. To maintain consistency and facilitate effective data analysis and filtering on our platform, we have chosen the United States Dollar (USD) as our primary reference currency. This choice allows us to provide our users with a unified experience when searching, filtering, and comparing insider trades across different regions and currencies.

To ensure accurate and up-to-date currency conversion, we rely on foreign exchange rates provided by the European Central Bank (ECB). You can access these rates directly on the ECB's official website.

Beta Calculation

The beta value associated with a stock represents its historical price volatility in relation to a chosen benchmark, often a market index. When you view the beta for a particular stock on our platform, note that this value is derived from an analysis of the stock's performance over the past 5 years, providing a focused view of recent market behavior.

Discipline Index

We've developed the Discipline Index to evaluate the timeliness and reliability of insider trading reports for each company in our database. This index is a reflection of a company's commitment to promptly reporting insider transactions to the public.

How it Works:

• A Discipline Index of 100% signifies a company that consistently reports insider transactions within 3 days of their occurrence. Such companies are considered highly transparent and reliable in disclosing their insider trading activities.
• For companies that take longer than 3 days to report insider transactions, the Discipline Index adjusts proportionally. For example, a delay of 4 days might result in a 99% Discipline Index, while a delay of 10 days might correspond to a lower index value.
• Companies with a Discipline Index below 50% may have a history of significant delays in reporting, which can affect the accuracy and reliability of the data.

Why It Matters:

The Discipline Index is a valuable indicator for investors and analysts. It helps gauge the level of commitment a company has to transparency and timely reporting. Companies with high Discipline Index scores are often seen as more trustworthy and their insider trading data as more dependable for making investment decisions.

The discipline index can be computed for both individual companies and specific insiders. Updated weekly.

Approach to Index and ETF Performance

Our mission is to highlight the profitability of stock-picking compared to broad market investments. When evaluating performance, we focus on analyzing stock indices directly rather than specific Exchange-Traded Funds (ETFs). We believe in the power of individual stock selection to maximize returns, and our approach reflects our commitment to showcasing the advantages of strategic stock investments over broad market strategies.

Acquisition Cost

In our analysis, we operate under the assumption that brokerage fees associated with buying, selling, and holding a stock for a specific period are negligible or, in many cases, nonexistent (zero commission). This assumption allows us to focus on the intrinsic performance of stocks without the impact of significant transaction costs, providing a clearer view of the stock's potential for profitability.

Precision in Value Fraction

In our analysis of insider transactions, we ensure precision by considering fractions of 'price' or 'qty' attributes with an 8-digit precision. This ensures accurate rounding of values, enabling us to provide reliable insights into transaction data.

Country of Insider Transactions

The country where an insider transaction is reported serves as the origin of the transaction in our analysis. While the first two letters of ISINs (International Securities Identification Numbers) associated with insider transactions may indicate a different country, our approach prioritizes the country where the transaction is officially reported.

Understanding Long-Term Insiders

In our methodology, "long-term" insiders include both individuals and corporate entities that have consistently engaged in transactions within a given company for an extended period. Specifically, these insiders have completed at least 10 transactions over the span of the last 3 years.

Insider Activity Score (IAS) Calculation

The Insider Activity Score (IAS) is a key metric used to quantify insider trading activity for a given stock. This score is calculated using a combination of two primary factors: the number of insider transactions and the total value of these transactions. Specifically, the IAS is determined by the following formula:

IAS = (0.6 * Transaction Count) + (0.4 * Total Transaction Value)

In this formula, the transaction count contributes 60% to the IAS, reflecting the frequency of insider trades. The total transaction value contributes 40%, capturing the overall financial significance of these trades. The result is a comprehensive score that highlights the level of insider trading activity relative to both the volume and value of transactions.

This approach ensures that stocks with high frequency and/or high-value insider transactions receive a higher IAS, providing investors with a clearer understanding of insider activity.

Insider Pattern Window (IPW)

An Insider Pattern Window is a sequence of events that highlights significant insider activity within a specific timeframe.

The pattern begins with a notable price movement in a stock, either a decline or an increase of at least 5%. This price shift is often followed by a cluster of insider transactions, where key individuals within the company buy or sell shares. The pattern is completed when the stock's price moves in the opposite direction by at least 5%, either recovering from a dip or adjusting after a rise.

StockSense Machine Learning Model

StockSense is a machine learning model that predicts the 1, 3, and 6-month potential movements of a given stock based on multiple criteria.

The specific algorithms and variables used in StockSense are a commercial secret.

Despite the advanced technologies involved in StockSense, investors should be aware of the high risks associated with stocks.

Anything that carries tail risk is not a reliable store of value.

SITI

The SITI Index, calculated daily, represents the overall market sentiment across all supported countries. Details regarding the calculation methodology are provided on the SITI page.

Anomalies

Detecting unusual activity in insider transactions is a top priority for the SIT platform. We use different methods to spot and highlight any strange behavior in transactions.

1. "UBSTA"

"UBSTA" stands for "Upper Bound of Standardized Transaction Amount". It represents the maximum expected transaction amount. When calculating this metric, we use 2 standard deviations (2STD). This means that there is a 5% probability that a certain transaction would be over a specified amount. Please note, this is a dynamic and unique metric calculated for every public company. If a transaction exceeds the "UBSTA," we consider it an anomaly.