Stock trading using computational intelligence

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Stock Trading using Computational Intelligence

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Computational Intelligence has been widely used in recent years in many areas, such as speech recognition, image analysis, adaptive control and time series prediction. This research attempts to explore the usefulness of neural network and support vector machine in financial market. Two popular stock market indexes have been studied: Hong Kong Hang Seng Stock Index and Dow Jones Transportation Index. The performance of neural network and support vector machine are evaluated in two dimensions: error in forecasting and trading profits.

Popular technical indicator, percentage price oscillator (PPO), has been selected as training input and output. Predictive models use previous 8 days PPO to forecast future 5 days PPO. Empirical results on Hong Kong Hang Seng Index show that multilayer perceptron optimized with GA (MLP-GA) trading system obtain 6.71 times of original capital from 1997-1-29 to 2007-3-8, totally 2500 trading days. While support vector regression optimized by genetic algorithms (SVR-GA) trading system generates 5.705 times of original capital during the same time horizon. In contrast, conventional non-predictive trading system only produces 2.064 times of starting equity. “Buy and Hold” strategy gives 1.605 times return to investors. A recent published fuzzy trading system provides 5.781 dollars as final equity for 1 dollar initial investment.

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Further evaluations of two intelligent trading systems have been made. A back test using the same parameters and same assumptions on Dow Jones Transportation Index have further proved the robustness of the proposed trading systems. MLP-GA trading system provides 4.87 times of initial capital and SVR-GA trading system obtains 5.168 as final equity. These two intelligent trading systems again outperform conventional trading system, which generate 2.805 dollars for 1 dollar investment.

Acknowledgements

I am very grateful to my final year project supervisor, Associate professor Wang Lipo, and would like to take this opportunity to thank him for his patient and insightful guidance throughout the project. Professor Wang always offers me detailed and valuable explanations and suggestions in our discussion, and provides me useful knowledge about doing research. Not only professor Wang enlightens me in academic area, he also arranges meeting with industrial professionals for me to discuss this project. Again, I would like to express my sincere appreciation to professor Wang.

Zhu Ming

April, 2010.

Stock Trading using Computational Intelligence

List of Figures

Fig 2‑1 A multi layer neural network with L layers 13

Fig 2‑2 Maximum-margin hyperplane and margins for a SVM trained with samples from two classes. 16

Fig 2‑3 Genetic Algorithm flowchart, with maximum 100 generation 18

Fig 2‑4 One point crossover 19

Fig 2‑5 roulette-wheel selection 20

Fig 3‑1 Dow Jones Industrial Average price,

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