Signal Decay

Signal decay is the process by which a trading strategy or alpha signal loses its effectiveness over time. Markets are adaptive, and once a profitable pattern is identified and exploited by many participants, the market adjusts to neutralize that edge.

In the competitive world of crypto derivatives, signals can decay very rapidly due to the high speed of information dissemination and algorithmic competition. A strategy that worked perfectly last year may become unprofitable as more traders adopt similar models or as market structure changes.

Recognizing when a signal has decayed is vital for portfolio maintenance. It prevents traders from holding onto outdated strategies that are no longer generating positive expected value.