Level estimation, classification and probability distribution architectures for trading the EUR/USD exchange rate

Dunis and Williams (Derivatives: use, trading and regulation 8(3):211–239, 2002; Applied quantitative methods for trading and investment. Wiley, Chichester, 2003) have shown the superiority of a Multi-layer perceptron network (MLP), outperforming its benchmark models such as a moving average convergence divergence technical model (MACD), an autoregressive moving average model (ARMA) and a logistic regression model (LOGIT) on a Euro/Dollar (EUR/USD) time series. The motivation for this paper is to investigate the use of different neural network architectures. This is done by benchmarking three different neural network designs representing a level estimator, a classification model and a probability distribution predictor. More specifically, we present the Mulit-layer perceptron network, the Softmax cross entropy model and the Gaussian mixture model and benchmark their respective performance on the Euro/Dollar (EUR/USD) time series as reported by Dunis and Williams. As it turns out, the Multi-layer perceptron does best when used without confirmation filters and leverage, while the Softmax cross entropy model and the Gaussian mixture model outperforms the Multi-layer perceptron when using more sophisticated trading strategies and leverage. This might be due to the ability of both models using probability distributions to identify successfully trades with a high Sharpe ratio.

Paulo LisboaEmail: