Signal Construction

Discretizing return direction allows observations to be grouped into two buckets for aggregate statistics. The trading signal is created by negating the lagged direction. The strategy uses the previous day's log return as the input feature and the current day's return direction as the prediction target. Direction is encoded as +1 for a positive prior-day return and -1 for a negative prior-day return. A down prior day produces a long signal, and an up prior day produces a short signal.