A computed condition or number that tells a system to act: enter, exit, or change position size.
A binary signal is on or off, such as price closing above a band. A continuous signal is a number whose size carries information, such as a z-score of the current spread, which then maps to a position size.
Continuous signals usually behave better in a portfolio because they scale down near the threshold instead of flipping the full position on a one-tick difference. They also make the parameter-sensitivity question easier: you can see the payoff change smoothly as the input changes.
Example: a spread with a z-score of minus 2.4 could trigger a fixed one-unit long (binary) or a position of 2.4 units capped at 3 (continuous). Over a year of noisy crossings the continuous version typically trades less and pays less in slippage.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
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