The signal was built as a class, inheriting from bt.Signal. The signal was represented as a number—in this case, the difference between the current data point (self.data) and the moving average (bt.ind.SMA). If the signal is positive, it is an indication to go long (buy). A negative one indicates short (selling). The value of 0 means there is no signal.
The next step was to add the signal to Cerebro, using the add_signal method. When doing so, we also had to specify what kind of signal we were adding.
The following is a description of the available signal types:
- LONGSHORT: This takes into account both long and short indications from the signal.
- LONG: Positive signals indicate going long; negative ones are used to close the long position.
- SHORT: Negative signals indicate shorting; positive ones are used to close the short position.
- LONGEXIT: A negative signal is used to exit a long position.
- SHORTEXIT: A positive signal is used to exit a short position.
However, exiting positions can be more complex (enabling users to build more sophisticated strategies), as described here:
- LONG: If there is a LONGEXIT signal, it is used to exit the long position, instead of the default behavior mentioned previously. If there is a SHORT signal and no LONGEXIT signal, the SHORT signal is used to close the long position before opening a short one.
- SHORT: If there is a SHORTEXIT signal, it is used to exit the short position, instead of the default behavior mentioned previously. If there is a LONG signal and no SHORTEXIT signal, the LONG signal is used to close the short position before opening a long one.
As you might have already realized, the signal is calculated for every time point (as visualized in the bottom of the plot), which effectively creates a continuous stream of positions to be opened/closed (the signal value of 0 is not very likely to happen). That is why backtrader, by default, disables accumulation (the constant opening of new positions, even when we have one already opened) and concurrency (generating new orders without hearing back from the broker whether the previously submitted ones were executed successfully).