Prediction Signal Efficacy (PSE)

Source: Notion | Last edited: 2023-10-30 | ID: 0720b62e-ee8...

Absolutely, let’s strip this down and build it back up like a killer playlist that even a music noob can jam to! 🎵

FE (Favorable Excursion): This is how far the asset price goes in your favor after your prediction. Think of it as scoring the number of goals for your team.
AE (Adverse Excursion): This is how far the asset price goes against you after your prediction. It’s like goals scored by the opposing team.
TC (Transaction Costs): These are the fees you pay to play the game, including everything from broker commissions to slippages. Think of it as the admission fee for a concert.
T (Time Limit): Time’s ticking! You’ve got a clock running to see if your prediction pans out in a given time. Picture this as the duration of the concert.
U (Unit Step Function): It’s like a light switch. If the condition is met, it turns on (equals 1), otherwise, it stays off (equals 0).
$\alpha$ (Multiplier Factor): This is your leverage, your risk appetite. Higher the $\alpha$ , more stringent the criteria. It’s like setting the volume on your speaker, louder isn’t always better!

Our goal is to create a formula that’s as compact as a Tweet but as meaningful as a Shakespeare sonnet. 🐦+🖋

S = U(F, A, T) \times R

Ooooh, short and sweet, right? 😎 Here’s what each letter means:

$S$ : Signal Score, either 1 (Excellent Signal) or 0 (Poor Signal)
$U(F, A, T)$ : Checks three things:
- $F$ : $FE > \alpha \times TC$
- $A$ : $AE > \alpha \times TC$
- $T$ : Time must be less than the allowed time
$R$ : Risk-Reward ratio, defined as $\frac{FE - TC}{AE + TC} \geq 1$ So, if $S=1$ , your signal’s solid gold, baby! 🌟 If $S=0$ , back to the drawing board. 📉

How’s that for keeping things jazzy yet crystal-clear? 🎺✨