Alpha factors in practice – from data to signals
Alpha factors are transformations of raw data that aim to predict asset price movements. They are designed to capture risks that drive asset returns. A factor may combine one or several inputs, but outputs a single value for each asset, every time the strategy evaluates the factor to obtain a signal. Trade decisions may rely on relative factor values across assets or patterns for a single asset.
The design, evaluation, and combination of alpha factors are critical steps during the research phase of the algorithmic trading strategy workflow, which is displayed in Figure 4.1:
Figure 4.1: Alpha factor research and execution workflow
This chapter focuses on the research phase; the next chapter covers the execution phase. The remainder of this book will then focus on how to leverage ML to learn new factors from data and effectively aggregate the signals from multiple alpha factors.
Alpha factors...
