Trading Signals
Understanding what is a trading signal
A trading signal, sometimes referred to as a trade signal, is an indicator or trigger to buy, sell, or hold a financial instrument. The signal is a numerical value that falls into a predefined range with an upper and a lower limit. All buy/sell signals on C-papafirm.com use a standardized format ranging from -1.00 (strong sell) to +1.00 (strong buy) to ensure cross-modal comparison, easy strategy implementation, coherent decision-making, and simplified integration. C-papafirm.com specializes in collecting and aggregating quantitative financial signals: the numerical output of complex mathematical and statistical models applied to financial instruments, representing past and present behavior and attempt to predict future behavior. We select signals based on past alpha generation, from professional "Quants": quantitative managers, hedge funds, and data scientists.
What's in a trading signal
A trading signal is a standardized value expressing how bullish or bearish a quantitative model is about a given financial instrument. It is the output value of a signal model (quant model): the application of mathematical and statistical analysis based on quantitative theory to vast input-data quantities.
Input-data can range from historical prices to social media posts, satellite imagery, patent applications, and any other data-type used to model the asset's past and current behavior.
Signal models may differ in input-data and analytical methodology (mean-reversion, trend-following, global macro, etc.); however, the goal remains to express the output in a standardized and straightforward format: the signal.
Note: One should regard quantitative signals as an opinion generated by a quantitative model. The trade signal provides helpful information for evaluating a stock's or another financial instrument's attractiveness, but it is only one piece of information. One should always consider additional information before making a sound investment decision.
Interpreting a trade signal
The trading signal represents how bearish or bullish the quant model is about a given instrument. Generally speaking, positive signals express a bullish or optimistic opinion about an asset, while negative signals suggest a bearish or pessimistic outlook. Signals of 0.00 are neutral, neither bullish nor bearish: As a general rule of thumb: positive signals mean that the model predicts that the instrument's value will increase in the future and that the trader should BUY. Negative signals indicate that the model is pessimistic about the instrument's future value and that the trader should SELL. Neutral signals suggest that the trader should do nothing.
Signal decay
The value, together with the expected accuracy, of a signal decays over time. As a general rule of thumb, a signal is most accurate when generated. As time passes from the generation point, new information such as price fluctuations, external events, or market factors will influence the signal's accuracy. Therefore, traders want to apply signals as close to the generation point as possible, assuming enough liquidity in the market. How quickly a signal decays depends in part upon the signal's time horizon. Shorter-term signals decay faster than mid-to-long-term signals. It would not make sense to apply an intraday signal with 24 hours delay, but it may make sense to implement a mid-term signal over-the-day to limit slippage, as the signal value does not decrease as fast as an intraday signal.