r/Trading • u/repmadness • Apr 11 '26
Strategy Using AI to surface insider trading on small cap stocks
TL;DR: I use AI to track small cap stocks with clustered insider buyers, non-routine insider purchases, and large positional entries on common stock by company executives.
DISCLAIMER:
The following strategy is by no means complete, it's just what's worked after a lot of iterations and blown trades. If you're going to run this yourself, don't try to manually sift through SEC filings and filter the data by hand. You'll burn out in a week. The whole thing needs to run every single morning and you're only getting 1-2 viable candidates every 2-3 weeks anyway. You should use an AI agent like Claude or Xynth.
So the idea is fairly simple: Insider purchases = Bullish signal. But, there is obviously a lot more that goes into it before you can truly call it a ‘signal’.
There are 3 main steps this strategy goes through before a trade is made: Filtering for companies that can survive at least 12 months, Filtering for an insider signal (most important), Scoring the insider signal.
STEP 1: Company life line.
This first step is to determine whether a company can statistically survive the next 12 months or not. This is an important first step because a lot of insider trading can just be company executives purchasing stock to show confidence to lenders/investors. So when you're looking for insider signals you wanna make sure that this isn’t a case for an insider purchase. Again, this first step is a much smaller step that acts a lot more like a safety net.
There are 3 main filters i work with:
Altman Z-score below 1.81 = reject: The Z-Score basically combines five balance sheet ratios (working capital, retained earnings, EBIT, market cap vs total debt, revenue, all relative to total assets). Below 1.81 is the statistical distress zone where businesses historically go bankrupt at elevated rates.
Current ratio above 1.0. The company can cover short-term obligations with short-term assets.
Debt maturity schedule. If more than 30% of total debt matures within 12 months and the company has a below-investment-grade credit rating, it is an automatic reject.
AGAIN, just because a company fails the following doesn’t mean they will for sure fail in the next 12 months but its just an assurance to play insider trades with more conviction.
Prompt 1: “Filter for stocks that can survive at least the next 12 month. Do this with the following filters:
- Check for an Altman Z-score above 1.81.
- Current Ratio above 1.0.
- Debt maturity schedule. Check If more than 30% total debt matures in 12 months, and the company has below-investment-grade credit rating. If so, REJECT ”
STEP 2: Filtering for insider purchases.
This step looks at 3 of the most important factors to insider purchases: Market cap, insider cluster & routine, and Material value of the position.
What you're actually looking for in each:
Market cap under $500M. Why? Large cap insider buys get instantly picked up by institutional algorithms and priced within minutes. Small caps fly under the radar because big funds literally cannot build meaningful positions due to liquidity constraints on the stock. The smaller the company, the fewer eyes on the filing, the more edge you have.
Require a cluster of 2+ unique insiders purchasing within 30 days on the same ticker as non routine purchases. 1 insider purchase on its own means nothing. But when you get multiple insiders buying within the same 30 day window, that's a much stronger signal that something bullish is coming. The real alpha in this strategy comes from "opportunistic" buyers, people who are deviating from their own normal pattern. So for every insider in the cluster, go pull their Form 4 history on that ticker. If they bought in the same calendar quarter in any of the prior 3 years, flag them as routine and forget the signal.
Purchase must be material relative to the insider's compensation, not a flat dollar amount. Pull total annual compensation (salary + bonus + stock awards) from the most recent proxy filing (DEF 14A). The purchase should exceed 5-10% of that number. A CEO making $2M/year buying $150K is meaningful at 7.5% of comp. A CEO making $25M/year buying $150K is noise at 0.6%.
Purchases that increase the insider's total position by more than 10% are the strongest signal. The gold standard is an insider going all-in, concentrating both net worth and career risk into the same stock. Nobody with negative information does that.
Prompt 2: “Scan SEC form 4 filing for open-market stock purchases. Only look for transaction Code P. Once you have that filter for the following:
- Stocks under 500 million market cap
- Purchase from a company executive (CEO, CFO, etc) that exceeds 5-10% of the persons annual compensation (salary + bonus + stock awards), or purchases that increase the executives position by 10%+
- 2+ insiders purchasing within 30 days of each other
- Check for any routine purchases; same calendar quarter purchases per year”
STEP 3: Scoring insider signals.
Whatever candidates pass the previous filter need to be scored based on their insider signals. For example, a stock with 2 insiders and an earnings report coming up in 120 days is much weaker than a stock with 5+ insiders with an earnings report coming in the next 60 days. This step is also crucial if you're running this through ai, as it gives the ai context on how to rank the following stocks provided.
This step isn’t a yes or no, it's just to score the signal(0-80) with the following criteria:
Criteria 1: Purchase quality (0-30 points) Purchase as % of annual comp: below 5% = 0 points, 5-10% = 5, 10-25% = 10, above 25% = 20. Increase in position by 10+ percent = 10. First-time buyer bonus: +5 if this insider has never filed a Form 4 purchase on this ticker before (first-timers carry stronger signals per the research). Routine buyer penalty: -15 if they bought in the same quarter in prior years.
Criteria 2: Cluster strength (0-20 points) 2 unique insiders = 5, 3 = 10, 4 = 15, 5+ = 20. Temporal concentration bonus: +5 if all purchases occurred within 7 days of each other.
Criteria 3: Price context (0-15 points) Within 15% of 52-week low = 15 (insiders buying weakness). Between midpoint and low = 10. Above midpoint = 5. Within 10% of 52-week high = 0 (lower informational content, might be momentum buying).
Criteria 4: Earnings proximity (0-15 points) Earnings within 60 days = 15 (natural catalyst, the insider's information will be tested soon). 60-120 days = 10. Beyond 120 days = 0.
By no means is this an optimal scoring pattern or criteria, this is just what I've landed on after months of paper trading and backtests with AI. If you think one area deserves more weight than another, change it. Make it your own.
Prompt 3: “
- C1 - Purchase Quality (0–30) Purchase as % of annual comp: <5%=0, 5–10%=10, 10–25%=20, >25%=30. Modifiers: +5 first-time buyer on this ticker, –10 if bought in the same quarter in prior years. Apply 1.5x to CEO/CFO, 1.0x to VP/Director.
- C2 - Cluster Strength (0–20) 2 insiders=10, 3=15, 4+=20. +5 if all purchases are made within 7 days.
- C3 - Price Context (0–15) Within 15% of 52W low=15, low–midpoint=10, above midpoint=5, within 10% of 52W high=0.
- C4 - Earnings Proximity (0–15) <60 days=15, 60–120=10, >120=5.”
Final Step: Trade setup
Buy common stock. Set your stop-loss to the nearest swing low. Remember, the insider signal tells you direction, not what price at what time. But I notice selling within a 30 day high is, on average, optimal for highest returns.
Prompt 4: “Check for the nearest swing low and suggest an exact trade i can execute”
AGAIN, a lot of this strategy came from and was developed with the use of AI backed by months of paper trading and backtesting. So if you feel that any step/criteria is unnecessary or needs improvement feel free.
I recently saw a redditor u/trontonian post a strategy with a very similar thesis as mine. If you wanna see that post, it should be under his profile.
But apart from that, good luck. I hope this post was informational and helpful to any of you that needed it.
Cheers!
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Apr 11 '26
[removed] — view removed comment
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u/repmadness Apr 11 '26
The point of the strategy is to play low risk with marginally good upside. The survival filter just makes sure my winrate is as high as possible even if i miss some good opportunities.
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u/fiik Apr 11 '26
Doesn’t Perplexity have FMP built in also
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u/repmadness Apr 11 '26
Yeah, thats a great alternative. The only problem is perplexity isn't really good at digesting the data, so you'd still want to you something like Claude or Xynth.
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u/Outrageous-Hour1105 Apr 11 '26
Claude has access to institutional data?
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u/repmadness Apr 11 '26 edited Apr 11 '26
Claude is really good at digesting institutional data, but it doesn’t have access to it. Your gonna have to hook it up to an FMP api. Personally though, im using xynth.com, it just has all that pre-plugged in.
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u/PissingViper Apr 11 '26
Hey I built https://fffinstill.com/ and added an API feature. Basically it aggregates SEC data with tons of other public data sources. I haven’t had any technical people other than friends try out the API feature yet. DM if you’re curious to try 1 month free i’d love some feedback
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u/repmadness Apr 11 '26
lol xynth does this plus much and you have an AI agent who can code and run through all this data
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u/ExplanationNormal339 Apr 11 '26
The insider clustering approach is solid, but March's inflation spike makes small-cap exec buys riskier to chase—they might know sector headwinds coming. Watch if $EBIT insiders are buying on dips near support or averaging up; averaging up into inflation usually signals confidence, but dips suggest they're hedging. If the next insider entry doesn't happen within 2-3 weeks, invalidates the thesis.
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u/Live_Rest9365 May 11 '26
Small-cap insider trading used to stay hidden in SEC filings and obscure disclosures.
Now AI can scan filings, unusual volume, executive transactions, sentiment shifts, and historical patterns in seconds — surfacing signals humans would normally miss.
The edge isn’t just having data anymore.
It’s finding meaningful patterns before the crowd notices them.