What Is A Trading Signal?
Written by Andy Keh, Co-Founder @ Synchrony
We base the majority of our decisions on signals- a red light, the smell of smoke, a notification ding, hunger pangs. In traditional finance, making decisions based on signals in the marketplace is at the core of the industry. Within the cryptocurrency industry a potential approach to offsetting the risk of highly volatile and mobile assets, as well as the 24/7 nature of the market, is by utilizing a signal-based decision making process. So what are these signals, and what are the advantages and disadvantages they could bring to crypto portfolio management?
Broadly speaking, there are two types of signals – the first being “Quantitative Signals”, they are measurable metrics about a product, ecosystem or industry; moving averages, volume, market caps, volatility, etc. The other type are “Qualitative Signals”, which involve factors that are difficult to measure, but have an impact on an industry, ecosystem, or individual project. For example – it is thought that the threat of regulation can cause industry-wide volatility while the Polygon hack was a more localized event, both of which qualify as qualitative signals.
Both of these signal types are information-dense and may require a lot of time dedication. A fundamental issue here is that the intention behind signal trading is potentially misaligned with the outcome (see my past article on UX/UI intention). Users may not want to spend countless hours researching, they may want the right tools and information to make smarter decisions to make their money work harder. There are several methods that solve this problem with varying degrees of success. The following is a list of some of them:
Copy-Trading allows a user to mimic other user’s trades. It is a strategy employed by some traders to replicate the trades of a leader wallet; leader wallets are usually profitable traders and listed on a leaderboard maintained by the platform providing this copy-trading feature. They are generally non-custodial and the leader’s wallet doesn’t own your assets, but there is the potential of predatory behavior.
Index Funds are a type of mutual fund or exchange-traded fund (ETF) with a portfolio assembled to match or track the constituents of a financial market index, i.e the Financial Times Stock Exchange 100 or FTSE 100. An index mutual fund is said to render broad market exposure, low operating expenses, and low portfolio throughput; these funds follow their benchmark index regardless of whether the markets are considered bullish or bearish.
Signal Channels like Telegram / Patreon grant users paid (and free) access to communities of typically like-minded individuals, mentors, and alpha. The success of these communities / channels is generally dependent on the people that paid for the subscription and the ‘guru’ KOL who is at the helm.
Bots can be self-made or licensed, and are designed to execute programmed strategies. Bots can execute any strategy it is programmed to, from high-frequency trading strategies requiring superhuman speed to more procedural behavior. Bots are designed to execute strategies without emotion being a factor and operate with little to no downtime. However, a bot’s performance is generally dependent on the quality of its algorithm and the signals those algorithms utilize – otherwise you could end up like me:
Managed Funds pool money which they structure and maintain to match an investment objective as stated in its prospectus. Funds managed by an asset manager generally underperform against their benchmark (an index).
DYOR means “Do Your Own Research”. There are amazing platforms that aggregate protocol data and filter irrelevant information. But that’s just it – it’s YOUR research. Where to research, who to believe, when to act are all subject to the researcher’s abilities, bias and the quality of the information source.
A possible solution to better quality signals could utilize a combination of the above methods tailored for each individual user’s investment needs/objectives. The solution to getting better signals requires a combination of the above methods tailored to the individual user.
Stay tuned for more details on Synchrony, teasers, and community driven experiences in the run up to our Demo Day on September 14, 2021.
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