How to measure the quality of a trading signal
The quality of a trading signal depends on its ability to predict future target returns and to generate material economic value when applied to positioning. Statistical metrics of these two properties are related but not identical. Empirical evidence must support both. Moreover, there are alternative criteria for predictive power and economic trading value, which are summarized in a Macrosynergy post linked below.
The right choice depends on the characteristics of the trading signal and the objective of the strategy. Each strategy calls for a bespoke appropriate criterion function. This is particularly important for statistical learning that seeks to optimize hyperparameters of trading models and derive meaningful backtests. The use of standard statistical criteria may be greatly misleading.
View full post is based on proprietary research of Macrosynergy
Managing Member, CEO AMPHI Research and Trading
1yGood piece that covers all of the key areas for discussion. The confusion matrix is a tool that should be used by all who develop trading signals.
Adjunct Professor of Globalized Financial Mkts and of Financial Microstructure and Liquidity Analysis@Unicatt
1yTks for sharing Ralph, as usual a great and deeply analyzed point of view about a key topic for algo trading…👏🏻🔝