Definition
Signal (Quantitative)
A signal is a quantified indication, derived from price, fundamental or alternative data, that a security is likely to rise or fall, forming the predictive core of a systematic strategy.
Indian quant researchers build signals from inputs like price momentum, valuation ratios, earnings revisions, order-flow imbalance or alternative data, then test whether the signal predicts future returns. Raw signals are usually standardised and combined before they drive trades.
A signal's value is measured by its predictive power and its decay, how quickly the edge fades after the signal appears. Many promising signals vanish once realistic slippage and crowding are accounted for, which is why backtesting and out-of-sample validation are essential before a signal becomes a live strategy.
Related terms
- Mean Reversion StrategyA mean reversion strategy assumes that prices or spreads that deviate from a historical average will tend to return to it, so it sells what has risen sharply and buys what has fallen.
- BacktestingBacktesting is the process of simulating a trading strategy on historical data to estimate how it would have performed, including returns, drawdowns and risk, before committing real capital.
- Quantitative TradingQuantitative trading is an approach that uses mathematical models, statistics and computer algorithms to identify and exploit trading opportunities, replacing discretionary judgement with systematic, data-driven rules.
- Alpha vs Beta SeparationAlpha-beta separation is the framework of distinguishing returns earned from broad market exposure (beta) from returns earned through skill or unique strategies (alpha), and managing each independently.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.