Hands-On Machine Learning for Algorithmic Trading

Alpha factor research and evaluation

Alpha factors are designed to extract signals from data to predict asset returns for a given investment universe over the trading horizon. A factor takes on a single value for each asset when evaluated, but may combine one or several input variables. The process involves the steps outlined in the following figure:

The Research phase of the trading strategy workflow includes the design, evaluation, and combination of alpha factors. ML plays a large role in this process because the complexity of factors has increased as investors react to both the signal decay of simpler factors and the much richer data available ...