Component:Signal Generation

Signal Generation & Trade Management

Purpose

"Should we trade? Which direction? Where's entry/stop/target?"

This component is the decision maker. It receives graded setups from Layer 3 and decides:

1. Should we take this trade? (passes all gate filters)
2. Which direction? (LONG or SHORT)
3. Where to enter, stop, and exit? (entry techniques)

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Trading Market Principle

"Trade with the trend, not against it"

• MA21 rising = LONG only → don't fight a rising market
• MA21 declining = SHORT only → don't catch falling knives
• MA21 flat = use MTF direction as tiebreaker
• Gate filters protect capital → blocked hours, wrong zone, weak confirmation = skip
• Only high-quality setups traded → A+, A, B grades only

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The Asymmetric Probability Edge

When odds are low on one outcome, the opposite side usually carries high odds:

• If new high probability drops to 15%, then 85% odds favor reversal
• We position ourselves on the high-probability side

Decision Flow

           ┌─────────────────────────────────┐
           │  Setup Quality Result (Layer 3) │
           │  Grade: A+/A/B/C/D/F            │
           └─────────────────────────────────┘
                         │
                         ▼
           ┌─────────────────────────────────┐
           │  GATE 1: Grade Filter           │
           │  Only A+, A, B pass             │
           │  C, D, F → REJECTED             │
           └─────────────────────────────────┘
                         │
                         ▼
           ┌─────────────────────────────────┐
           │  GATE 2: Hour Filter            │
           │  Blocked: 9 AM, 10 PM, 11 PM    │
           │  (Loss-making hours)            │
           └─────────────────────────────────┘
                         │
                         ▼
           ┌─────────────────────────────────┐
           │  GATE 3: Direction Determination│
           │  MA21 rising → LONG             │
           │  MA21 declining → SHORT         │
           │  Flat/unclear → NO TRADE        │
           └─────────────────────────────────┘
                         │
                         ▼
           ┌─────────────────────────────────┐
           │  GATE 4: Probability Zone Filter│
           │  Top third + LONG = OK          │
           │  Bottom third + LONG = BLOCKED  │
           │  (Trades with probability)      │
           └─────────────────────────────────┘
                         │
                         ▼
           ┌─────────────────────────────────┐
           │  Calculate Entry/Stop/Target    │
           │  Generate Signal                │
           └─────────────────────────────────┘

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Gate Filters

Gate 1: Grade Filter

Only high-quality setups are traded:

Grade	Action
A+, A, B	PASS → Generate signal
C, D, F	BLOCKED → No signal generated

Gate 2: Hour Filter

Block historically loss-making hours:

Blocked Hours: [9, 22, 23]  // 9 AM, 10 PM, 11 PM IST

IF current_hour IN blocked_hours:
    RETURN None  // No signal

Gate 3: Direction Determination

Direction is determined by MA21 slope:

trend_direction = market_state.trend_direction

IF trend_direction == "up":
    direction = LONG    // MA21 rising → trade long

ELIF trend_direction == "down":
    direction = SHORT   // MA21 declining → trade short

ELSE:
    // MA21 flat/unclear → use MTF fallback
    IF mtf_direction == "up":
        direction = LONG
    ELIF mtf_direction == "down":
        direction = SHORT
    ELSE:
        RETURN None  // No clear direction → no trade

Gate 4: Probability Zone Filter

Filters trades based on price position within range:

Zone	LONG	SHORT	Logic
Top Third	Blocked	Allowed	80% continuation down, 15% up
Middle Half	Allowed	Allowed	Neutral zone
Bottom Third	Allowed	Blocked	80% continuation up, 15% down

Sideways Market Exception: In creeper/consolidation, uses mean reversion (opposite logic).

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Stop Loss Calculation

Stop placement based on entry technique:

Entry Technique	LONG Stop	SHORT Stop
GREEN_BAR_PULLBACK	Below pullback low	Above rally high
BREAKOUT_PULLBACK	min(last 3 lows)	max(last 3 highs)
MA_BOUNCE	MA21 - 5 points	MA21 + 5 points
BOS_ENTRY	min(last 10 lows) + buffer	max(last 10 highs) - buffer
DISCOUNT_ZONE	entry × 0.99	entry × 1.01
DEFAULT	entry - 40 points	entry + 40 points

Minimum Stop Distance: 40 points (prevents tight stops hitting on noise)

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Take Profit Calculation

Implements "cut the move in half" principle:

distance_to_ma = |entry_price - MA21|
target_distance = distance_to_ma × 0.5

IF LONG:
    take_profit = entry_price + target_distance
ELSE:
    take_profit = entry_price - target_distance

Minimum R:R: 1.5 (target must be at least 1.5× risk)

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Cost Calculations

Commission (Dhan Broker)

commission = position_size × Rs 20 per lot

CTT (Commodity Transaction Tax)

contract_value = entry_price × lot_size × position_size
tax = contract_value × 0.0001  // 0.01% total (0.005% per leg)

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Configuration

Parameter	Value	Description
commission_per_lot	20.00	Rs per lot (Dhan)
transaction_tax_rate	0.00005	0.005% per leg × 2 = 0.01% CTT
lot_size_multiplier	100	MCX lot size
min_stop_distance	40	Minimum stop in points
default_risk_reward	1.5	Minimum R:R ratio
enable_hour_filter	True	Block loss-making hours
blocked_hours	[9, 22, 23]	Hours to skip
enable_ma_direction_filter	True	MA21 alignment required
enable_probability_zone_filter	True	Zone probability check
enable_color_change_filter	False	Disabled (too restrictive)

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Output

Signal Object:

Field	Type	Description
direction	Enum	LONG or SHORT
entry_price	float	Current close price
stop_loss_price	float	Calculated stop level
take_profit_price	float	Calculated target level
position_size	int	From setup quality (1 or 2 lots)
setup_quality	Enum	A+, A, or B
entry_technique	Enum	How stop was determined

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Dependencies

Upstream:

• multi_timeframe_analysis.py - MTF direction fallback
• market_state_analysis.py - Trend direction, market state
• setup_quality_detection.py - Grade, position size

Internal:

• probability_zone_analysis.py - Zone filtering logic

Downstream:

• trade_execution_engine.py - Executes the signal

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