How Signal Changes Translate into Trading Orders

# Why the diff of signal is called positions and what does it mean in backtesting?


# Why the diff of signal is called positions and what does it mean in backtesting?












I'm trying to learn Backtesting 101. I found this example which is very simple but I do not quite understand some of the terms. I understand Moving Average algorithm which is to measure trends or to smooth the graph. But it the code, the author said `# Take the difference of the signals in order to generate actual trading orders` which I don't quiet understand what this means? Because from the code the `signals` is going to be between `0` and `1` why does it need o be diff again?

Here's the code in Python Pandas

```
def generate_signals(self):
  # Create DataFrame and initialise signal series to zero
  signals = pd.DataFrame(index=self.bars.index)
  signals['signal'] = 0

  # Create the short/long simple moving averages
  signals['short_mavg'] = pd.rolling_mean(bars['Adj Close'], self.short_window, min_periods=1)
  signals['long_mavg'] = pd.rolling_mean(bars['Adj Close'], self.long_window, min_periods=1)

  # When the short SMA exceeds the long SMA, set the ‘signals’ Series to 1 (else 0)
  signals['signal'][self.short_window:] = np.where(signals['short_mavg' [self.short_window:] > signals['long_mavg'][self.short_window:], 1, 0)

  # Take the difference of the signals in order to generate actual trading orders
  signals['positions'] = signals['signal'].diff()
  return signals
```

Becuase that `positions` is going to be used in the actual backtesting.

## Answer by Kiwiakos (score 5, accepted)

https://quant.stackexchange.com/a/22925

My understanding, in that context, is that signal indicates that you want to hold a share (signal is 1) or hold no shares (signal is zero). Therefore taking the diff will tell you if you want to buy (signal zero to 1, diff is 1), sell (signal 1 to zero, diff is -1) or do nothing (signal stays at zero or stays at 1, diff is zero).