# Given a factor which is correlated to price, how to generate trading signal?

Let's say through different means, I have a factor which is fairly correlated with price. How can I create a trading strategy using this information? How can I generate buy and sell signals given a factor?

An example would be this: taking DE10Year yield minus US10Year yield, the spread shows strong correlation visually with EURUSD price. How can we generate a buy sell?

A common one is pairs trading, where you remain cashless in longing one asset and shorting the other. There are lots of ways to do pairs trading, but as a starter let's say you defined the spread $$\epsilon_t$$ between asset A and B (counting the ratio mentioned earlier to maintain cashless), since we think there's long run equilibrium between the two asset, $$\epsilon$$ series should follow normal distribution like a noise.
Your buy/sell signal then can be: once the spread exceeds say 2 standard deviation, we think the current spread is overvalued and thus we short the asset as the subtractor in our equation defining spread (e.g $$\epsilon$$ = A- some ratio * B, in this case asset A) and long the other one, vice versa on -2 std.
If two different assets are highly correlated this means the correlation will be already in the price. Unless you find a correlation like $$X\left[t\right] = Y\left[t+2\right]$$.