What Exactly Is Multi-Factor Stock Selection? Understanding the Three-Layer Scoring Logic from Market to Sector to Individual Stocks
What Exactly Is Multi-Factor Stock Selection? Understanding the Three-Layer Scoring Logic from Market to Sector to Individual Stocks
The core of a multi-factor model is to break down the subjective feeling “I think this stock will rise” into hundreds of quantifiable, verifiable, and backtestable small questions, score each one, weight them, and get a final total score. High score = buy, low score = sell. Emotions are completely kicked out of the trading room.
Multi-factor is not fortune-telling; it turns complex investment decisions into a repeatable, comparable, risk-controllable scoring game
The parameters are always a black box. You only need to trust the logic: let data decide whom to believe today and how much.
Layer 1: Check the Market First – Is It Even Worth Trading Today?
Fundamentals
High-frequency macro data (PMI, credit impulse, CPI)
Technicals
Broad index trend & volatility regime
Capital Flow
Margin balance, northbound flow, money-market rates
Sentiment
Policy signals, VIX, put/call skew
Layer 2: Pick the Hot Sector – Pigs Fly in a Tailwind
Industry Prosperity
Earnings revision, policy support, cycle position
Capital Concentration
ETF inflow, institutional seats on dragon-tiger list
Theme Catalyst
AI, carbon neutrality, import substitution, etc.
When the wind rises, even pigs can fly; when it stops, dragons fall too
Layer 3: Hand-Pick Stocks – Best Horse on the Best Track
| Dimension | Key Question | Typical Factors |
|---|---|---|
| Quality | Is it a cash machine? | ROE, earnings growth, gross margin |
| Price/Trend | Is the chart just breaking out? | Momentum, volume-price, chip distribution |
| Smart Money | Are institutions loading up? | Large order net inflow, shrinking shareholder base |
| Catalysts | Has the trigger landed? | Earnings surprise, new orders, insider buying |
| Sentiment | Are retail investors still fearful? | Social media heat, option skew |
Real alpha always hides in the tiny overlap of “great sector + great company + perfect timing”.
The ultimate trading signal = Market Score × Sector Score × Stock Score. Rescore every day/week. Cut when the score drops, add when it rises — discipline over conviction.
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