Evaluating machine learning classification for financial trading: An empirical approach

Technical and quantitative analysis in financial trading use mathematical and statistical tools to help investors decide on the optimum moment to initiate and close orders. While these traditional approaches have served their purpose to some extent, new techniques arising from the field of computational intelligence such as machine learning and data mining have emerged to analyse financial information. While the main financial engineering research has focused on complex computational models such as Neural Networks and Support Vector Machines, there are also simpler models that have demonstrated their usefulness in applications other than financial trading, and are worth considering to determine their advantages and inherent limitations when used as trading analysis tools. This paper analyses the role of simple machine learning models to achieve profitable trading through a series of trading simulations in the FOREX market. It assesses the performance of the models and how particular setups of the models produce systematic and consistent predictions for profitable trading. Due to the inherent complexities of financial time series the role of attribute selection, periodic retraining and training set size are discussed in order to obtain a combination of those parameters not only capable of generating positive cumulative returns for each one of the machine learning models but also to demonstrate how simple algorithms traditionally precluded from financial forecasting for trading applications presents similar performances as their more complex counterparts. The paper discusses how a combination of attributes in addition to technical indicators that has been used as inputs of the machine learning-based predictors such as price related features, seasonality features and lagged values used in classical time series analysis are used to enhance the classification capabilities that impacts directly into the final profitability.     

Bridging the divide in financial market forecasting: machine learners vs. financial economists

Financial time series forecasting is a popular application of machine learning methods. Previous studies report that advanced forecasting methods predict price changes in financial markets with high accuracy and that profit can be made trading on these predictions. However, financial economists point to the informational efficiency of financial markets, which questions price predictability and opportunities for profitable trading. The objective of the paper is to resolve this contradiction. To this end, we undertake an extensive forecasting simulation, based on data from thirty-four financial indices over six years. These simulations confirm that the best machine learning methods produce more accurate forecasts than the best econometric methods. We also examine the methodological factors that impact the predictive accuracy of machine learning forecasting experiments. The results suggest that the predictability of a financial market and the feasibility of profitable model-based trading are significantly influenced by the maturity of the market, the forecasting method employed, the horizon for which it generates predictions and the methodology used to assess the model and simulate model-based trading. We also find evidence against the informational value of indicators from the field of technical analysis. Overall, we confirm that advanced forecasting methods can be used to predict price changes in some financial markets and we discuss whether these results question the prevailing view in the financial economics literature that financial markets are efficient.     

Forecasting IBEX-35 moves using support vector machines

This research aims at examining the application of support vector machines (SVMs) to the task of forecasting the weekly change in the Madrid IBEX-35 stock index. The data cover the period between 10/18/1990 and 10/29/2010. A trading simulation is implemented so that statistical efficiency is complemented by measures of economic performance. The inputs retained are traditional technical trading rules commonly used in the analysis of equity markets such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) decision rules. The SVMs with given values of the RSI and MACD indicators are used in order to determine the best situations to buy or sell the market. The two outputs of the SVM are both the direction of the market and the probability attached to each forecast market move. The best result that it has been achieved is a hit ratio of 100% using the SVM classifier under some chosen risk-aversion parameters. However, these results are obtained analyzing recent periods rather than using all the dataset information.     

大数据分析的应用案例——投资模型的稳健性

交易模型的稳健性,指的是该模型的利润率曲线的波动性较小,没有大起大落。针对一个基于支持向量回归（SVR）技术的算法交易模型的稳健性问题,提出了使用若干导出指标训练统一的交易模型的策略,以及投资组合多样化的方法。首先,介绍基于支持向量回归技术的算法交易模型;然后,基于常用指标,构造了若干导出指标,用于股票价格的短期预测。这些指标,刻画了近期价格运动的典型模式、超买/超卖市场状态,以及背离市场状态。对这些指标进行了规范化,用于训练交易模型,使得模型可以泛化到不同的股票;最后,设计了投资组合多样化方法。在投资组合里,各个股票之间的相关性,有时会导致较大的投资损失;因为具有较强相关关系的股票,其价格朝相同方向变化。如果交易模型预测的价格走势不正确,引起止损操作,那么这些具有较强相关关系的股票,将引发雪崩式的止损,于是导致损失加剧。把股票根据相似性聚类到不同类别,通过从不同聚类类别中选择若干股票来构成多样化的投资组合,其中,股票的相似性,通过交易模型在不同股票上近期的利润曲线的相似度进行计算。在900只股票10年的价格大数据上进行了实验,实验结果显示,交易模型能够获得超过定期存款的超额利润率,年化利润率为8.06%。交易模型的最大回撤由13.23%降为5.32%,夏普指数由81.23%提高到88.79%,交易模型的利润率曲线波动性降低,说明交易模型的稳健性获得了提高。     

Integrating piecewise linear representation and weighted support vector machine for stock trading signal prediction

Piecewise linear representation (PLR) and back-propagation artificial neural network (BPN) have been integrated for the stock trading signal prediction recently (PLR–BPN). However, there are some disadvantages in avoiding over-fitting, trapping in local minimum and choosing the threshold of the trading decision. Since support vector machine (SVM) has a good way to avoid over-fitting and trapping in local minimum, we integrate PLR and weighted SVM (WSVM) to forecast the stock trading signals (PLR–WSVM). The new characteristics of PLR–WSVM are as follows: (1) the turning points obtained from PLR are set by different weights according to the change rate of the closing price between the current turning point and the next one, in which the weight reflects the relative importance of each turning point; (2) the prediction of stock trading signal is formulated as a weighted four-class classification problem, in which it does not need to determine the threshold of trading decision; (3) WSVM is used to model the relationship between the trading signal and the input variables, which improves the generalization performance of prediction model; (4) the history dataset is divided into some overlapping training–testing sets rather than training–validation–testing, which not only makes use of data fully but also reduces the time variability of data; and (5) some new technical indicators representing investors’ sentiment are added to the input variables, which improves the prediction performance. The comparative experiments among PLR–WSVM, PLR–BPN and buy-and-hold strategy (BHS) on 20 shares from Shanghai Stock Exchange in China show that the prediction accuracy and profitability of PLR–WSVM are all the best, which indicates PLR–WSVM is effective and can be used in the stock trading signal prediction.     

Discovery of trading points based on Bayesian modeling of trading rules

Mining hidden patterns with different technical indicators from the historical financial data has been regarded as an efficient way to determine the trading decisions in the financial market. Technical analysis has shown that a number of specific combinations of technical indicators could be treated as trading patterns for forecasting efficient trading directions. However, it is a challenging assignment to discover those combinations. In this paper, we innovatively propose to use a biclustering algorithm to detect the trading patterns. The discovered trading patterns are then utilized to forecast the market movement based on the Naive Bayesian algorithm. Finally, the Adaboost algorithm is applied to improve the accuracy of the forecasts. The proposed method was implemented on seven historical stock datasets and the average performance was compared with that of four existing algorithms. Experimental results demonstrated that the proposed algorithm outperforms the other four algorithms and can provide a valuable reference in the financial investments.     

Robust support vector regression networks for function approximation with outliers

Support vector regression (SVR) employs the support vector machine (SVM) to tackle problems of function approximation and regression estimation. SVR has been shown to have good robust properties against noise. When the parameters used in SVR are improperly selected, overfitting phenomena may still occur. However, the selection of various parameters is not straightforward. Besides, in SVR, outliers may also possibly be taken as support vectors. Such an inclusion of outliers in support vectors may lead to seriously overfitting phenomena. In this paper, a novel regression approach, termed as the robust support vector regression (RSVR) network, is proposed to enhance the robust capability of SVR. In the approach, traditional robust learning approaches are employed to improve the learning performance for any selected parameters. From the simulation results, our RSVR can always improve the performance of the learned systems for all cases. Besides, it can be found that even the training lasted for a long period, the testing errors would not go up. In other words, the overfitting phenomenon is indeed suppressed.     

组合粗糙集和支持向量回归的船舶交通流预测

影响交通流变化的因素众多,为改进传统的船舶交通流预测精度不高,一种结合粗糙集和支持向量回归智能算法的交通流预测模型提出,通过ROSETTA软件进行属性约简预处理,筛选出影响交通流变化的关键影响因素,剔除冗余信息。筛选结果显示外轮进出艘次、对外贸易总额、港口GDP、集装箱标准箱、港口货物吞吐量为输入变量,运用Libsvm软件构建基于遗传算法参数寻优的支持向量回归模型预测2008年和2009年的交通流。算例结果表明,与BP神经网络和SVM模型相比,组合预测模型是有效和实用的预测工具。     

A Takagi–Sugeno fuzzy model combined with a support vector regression for stock trading forecasting

The turning points prediction scheme for future time series analysis based on past and present information is widely employed in the field of financial applications. In this research, a novel approach to identify turning points of the trading signal using a fuzzy rule-based model is presented. The Takagi–Sugeno fuzzy rule-based model (the TS model) can accurately identify daily stock trading from sets of technical indicators according to the trading signals learned by a support vector regression (SVR) technique. In addition, when new trading points are created, the structure and parameters of the TS model are constantly inherited and updated. To verify the effectiveness of the proposed TS fuzzy rule-based modeling approach, we have acquired the stock trading data in the US stock market. The TS fuzzy approach with dynamic threshold control is compared with a conventional linear regression model and artificial neural networks. Our result indicates that the TS fuzzy model not only yields more profit than other approaches but also enables stable dynamic identification of the complexities of the stock forecasting system.     

Building Technical Trading System with Genetic Programming: A New Method to Test the Efficiency of Chinese Stock Markets

Testing whether technical trading rules can beat buy-and-hold strategy is a common approach to study the efficiency of stock markets. Noticing that the common approach of evaluating popular technical trading rules’ profitability would result in the biases of data snooping and incomplete test, we build a technical trading system with genetic programming to test the efficiency of Chinese stock markets. This system takes historical prices and volumes as inputs, randomly generates treelike structured technical trading rules composed of basic functions, and optimizes the rules using genetic programming according to the inputs. Using daily prices and volumes of Shenzhen Stock Exchange 100 index from January 2, 2004 to March 12, 2010, we find out that the optimal technical trading rules generated by our technical trading system have statistically significant out-of-sample excess returns compared with buy-and-hold strategy considering realistic transaction costs. Therefore, we conclude that Chinese stock markets have not achieved weak-form efficiency.     

支持向量回归参数的混合选择

为提高支持向量回归算法的学习能力和泛化性能，提出了一种优化支持向量回归参数的混合选择算法。根据训练样本的规模和噪声水平等信息，确定支持向量回归参数的取值范围，用实数编码的免疫遗传算法搜索最佳参数值。混合选择算法具有较高的精度和效率，在选择支持向量回归参数时，不必考虑模型的复杂度和变量维数。仿真实验结果表明，该算法是选择支持向量回归参数的有效方法，应用到函数逼近问题时具有优良的性能。     

一种分布式智能推荐系统的设计

为提高支持向量回归算法的学习能力和泛化性能,提出了一种优化支持向量回归参数的混合选择算法.根据训练样本的规模和噪声水平等信息,确定支持向量回归参数的取值范围,用实数编码的免疫遗传算法搜索最佳参数值.混合选择算法具有较高的精度和效率,在选择支持向量回归参数时,不必考虑模型的复杂度和变量维数.仿真实验结果表明,该算法是选择支持向量回归参数的有效方法,应用到函数逼近问题时具有优良的性能.     

改进的FS算法选取支持向量回归机参数及应用*

针对支持向量回归机SVR的拟合精度和泛化能力取决于相关参数的选取,提出了基于改进FS算法的SVR参数选择方法,并应用于交通流预测的研究。FS(free search)算法是一种新的进化计算方法,提出基于相对密集度的灾变策略改进FS算法的个体初始位置选择机制,以扩大搜索空间,提高全局搜索能力。对实测交通流量进行滚动预测仿真实验,结果表明该方法优化SVR参数是有效、可行的,与经验估计法和遗传算法相比,得到的SVR模型具有更好的泛化性能和预测精度。     

Evolving trading strategies using directional changes

The majority of forecasting methods use a physical time scale for studying price fluctuations of financial markets, making the flow of physical time discontinuous. Therefore, using a physical time scale may expose companies to risks, due to ignorance of some significant activities. In this paper, an alternative and original approach is explored to capture important activities in the market. The main idea is to use an event-based time scale based on a new way of summarising data, called Directional Changes. Combined with a genetic algorithm, the proposed approach aims to find a trading strategy that maximises profitability in foreign exchange markets. In order to evaluate its efficiency and robustness, we run rigorous experiments on 255 datasets from six different currency pairs, consisting of intra-day data from the foreign exchange spot market. The results from these experiments indicate that our proposed approach is able to generate new and profitable trading strategies, significantly outperforming other traditional types of trading strategies, such as technical analysis and buy and hold.     

An intelligent short term stock trading fuzzy system for assisting investors in portfolio management

Financial markets are complex systems influenced by many interrelated economic, political and psychological factors and characterised by inherent nonlinearities. Recently, there have been many efforts towards stock market prediction, applying various fuzzy logic techniques and using technical analysis methods.This paper presents a short term trading fuzzy system using a novel trading strategy and an “amalgam” between altered commonly used technical indicators and rarely used ones, in order to assist investors in their portfolio management. The sample consists of daily data from the general index of the Athens Stock Exchange over a period of more than 15 years (15/11/1996 to 5/6/2012), which was also divided into distinctive groups of bull and bear market periods.The results suggest that, with or without taking into consideration transaction costs, the return of the proposed fuzzy model is superior to the returns of the buy and hold strategy. Τhe proposed system can be characterised as conservative, since it produces smaller losses during bear market periods and smaller gains during bull market periods compared with the buy and hold strategy.     

Stock market one-day ahead movement prediction using disparate data sources

There are several commercial financial expert systems that can be used for trading on the stock exchange. However, their predictions are somewhat limited since they primarily rely on time-series analysis of the market. With the rise of the Internet, new forms of collective intelligence (e.g. Google and Wikipedia) have emerged, representing a new generation of “crowd-sourced” knowledge bases. They collate information on publicly traded companies, while capturing web traffic statistics that reflect the public’s collective interest. Google and Wikipedia have become important “knowledge bases” for investors. In this research, we hypothesize that combining disparate online data sources with traditional time-series and technical indicators for a stock can provide a more effective and intelligent daily trading expert system. Three machine learning models, decision trees, neural networks and support vector machines, serve as the basis for our “inference engine”. To evaluate the performance of our expert system, we present a case study based on the AAPL (Apple NASDAQ) stock. Our expert system had an 85% accuracy in predicting the next-day AAPL stock movement, which outperforms the reported rates in the literature. Our results suggest that: (a) the knowledge base of financial expert systems can benefit from data captured from nontraditional “experts” like Google and Wikipedia; (b) diversifying the knowledge base by combining data from disparate sources can help improve the performance of financial expert systems; and (c) the use of simple machine learning models for inference and rule generation is appropriate with our rich knowledge database. Finally, an intelligent decision making tool is provided to assist investors in making trading decisions on any stock, commodity or index.     

System reliability prediction by support vector regression with analytic selection and genetic algorithm parameters selection

We address the problem of system reliability prediction, based on an available series of failure time data. We consider support vector regression (SVR) as solution approach, for its known performance on time series forecasting. However, SVR parameters selection is very critical for obtaining satisfactory forecasting. Currently, two different ways are followed to set the values of SVR parameters. One way is that of choosing parameters based on prior knowledge or experts experience on the problem at hand: this is a simple and quick, practical way but often not optimal in complex situations and for non-expert users. Another way is that of searching the values of the parameters via some intelligent methods of optimization of the SVR regression performance: for doing this efficiently, one must avoid problems like divergence, slow convergence, local optima, etc.In this paper, we propose the combination of an analytic selection (AS) method of prior selection followed by a genetic algorithm (GA) for intelligent optimization. The combination of these two methods allows utilizing the available prior knowledge by AS for guiding the GA optimization process so as to avoid divergence and local optima, and accelerate convergence. To show the effectiveness of the method, some simulation experiments are designed, based on artificial or real reliability datasets. The results show the superiority of our proposed ASGA method to the traditional GA method, in terms of prediction accuracy, convergence speed and robustness.     

An intelligent hybrid trading system for discovering trading rules for the futures market using rough sets and genetic algorithms

Discovering intelligent technical trading rules from nonlinear and complex stock market data, and then developing decision support trading systems, is an important challenge. The objective of this study is to develop an intelligent hybrid trading system for discovering technical trading rules using rough set analysis and a genetic algorithm (GA). In order to obtain better trading decisions, a novel rule discovery mechanism using a GA approach is proposed for solving optimization problems (i.e., data discretization and reducts) of rough set analysis when discovering technical trading rules for the futures market. Experiments are designed to test the proposed model against comparable approaches (i.e., random, correlation, and GA approaches). In addition, these comprehensive experiments cover most of the current trading system topics, including the use of a sliding window method (with or without validation dataset), the number of trading rules, and the size of training period. To evaluate an intelligent hybrid trading system, experiments were carried out on the historical data of the Korea Composite Stock Price Index 200 (KOSPI 200) futures market. In particular, trading performance is analyzed according to the number of sets of decision rules and the size of the training period for discovering trading rules for the testing period. The results show that the proposed model significantly outperforms the benchmark model in terms of the average return and as a risk-adjusted measure.     

支持向量机最优模型选择的研究

通过对核矩阵的研究,利用核矩阵的对称正定性,采用核校准的方法提出了一种SVM最优模型选择的算法——OMSA算法．利用训练样本不通过SVM标准训练和测试过程而寻求最优的核参数和相应的最优学习模型,弥补了传统SVM在模型选择上经验性强和计算量大的不足．采用该算法在UCI标准数据集和FERET标准人脸库上进行了实验,结果表明,通过该算法找到的核参数以及相应的核矩阵是最优的,得到的SVM分类器的错误率最小．该算法为SVM最优模型选择提供了一种可行的方法,同时对其他基于核的学习方法也具有一定的参考价值．