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Infographic: The Quant's Playbook for Feature Engineering

The Quant's Playbook

Engineering Alpha from Financial Data

In financial markets, true predictive signals are rare and buried in noise. Success depends not on complex algorithms, but on the craft of engineering informative features.

The Feature Universe

A quantitative strategy is built upon a diverse foundation of data. Each category provides a unique perspective on market dynamics.

This chart shows a conceptual breakdown of data types used in modern quantitative finance, from ubiquitous market data to specialized alternative sources.

The Stationarity Imperative

Raw price series are non-stationary, which violates the assumptions of many ML models. The goal is to make the data stationary while preserving its predictive 'memory'.

Fractional Differentiation

This technique finds the minimum differencing needed, balancing stationarity with memory preservation.

95%

Confidence in stationarity while maximizing correlation with the original series.

The Importance Gauntlet

Not all features are created equal. Determining which are truly predictive is critical to avoid overfitting. This requires robust, out-of-sample evaluation methods.

Comparison based on robustness against overfitting and reliability with correlated features. Higher scores indicate greater reliability for live trading.

State-of-the-Art Frameworks

The Triple-Barrier Method

This labeling technique aligns the ML problem with the reality of trading by using dynamic, volatility-adjusted profit-take and stop-loss levels.

Trade Entry
↓
Which barrier is hit first?
↓
Label: 1
Profit-Take
Label: -1
Stop-Loss
Label: 0
Time Limit

Meta-Labeling

A two-stage model that separates signal generation from bet sizing. An ML model learns to predict which signals from a simple primary model will be profitable.

Primary Model

(High Recall / Many Signals)

→
ML Meta-Model

(High Precision / Filters Signals)

→
Final Decision

(Trade Sizing & Execution)

The Ultimate Goal:

+25%

Potential Improvement in Strategy Sharpe Ratio

By applying robust feature engineering and frameworks like meta-labeling.


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