An Intelligent Stock Trading Decision Support System Using the Genetic Algorithm

An Intelligent Stock Trading Decision Support System Using the Genetic Algorithm

Monira Essa Aloud
Copyright: © 2020 |Pages: 15
DOI: 10.4018/IJDSST.2020100103
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Abstract

The authors present a simple data-driven decision support system for stock market trading using multiple technical indicators, decision trees, and genetic algorithms (GAs). It assembles technical indicators set into a decision tree based on stock trading rules and generates buy, hold, and sell classes that represent trading decisions. The main contribution of this study is the use of GAs based on a two-step classification method. This allows for selecting the relevant inputs and adapting them to the market dynamic. The GAs are used at the data input selection step and the weight selection step. Classifiers of different technical indicators are trained in the first step and combined into the trading rules in the second step. Random sampling and data input selection techniques were used to ensure the required variety of technical indicators in the first step. An evaluation shows that the proposed algorithm improved forecasting accuracy from 73.6% to 81.78%.
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Introduction

In financial trading, two major approaches are used for forecasting the price trend: technical analysis and fundamental analysis. In fundamental analysis, the most used indicators are market policy, financial statements, earnings, and sales on the asset price as well as macroeconomic and industry factors (Frankel & Froot, 1990). Technical analysis is based on analysing the behaviour of the asset price and defining indicators which facilitate identifying the direction of the current price trend (Murphy, 1999). Combinations of the technical and fundamental indicators can create potential trading rules. Identifying potential patterns in the price time series is a nontrivial task due to the uncertainties involved in the price values. The financial forecasting techniques used in the literature can be categorized as statistical models and artificial intelligence (AI) models. The statistical models, such as ARIMA and GARCH, are affected by the assumption of linear correlation structure for time-series values. AI techniques are effectively used in the development of algorithmic trading strategies (algo-trading). An algorithmic trading strategy is software that places automated orders to make a profit (Hsu, Lessmann, Sung, Ma, & Johnson, 2016). Algo-trading is designed to optimize pre-determined trading rules or generate new ones and optimize them afterwards. Several AI techniques have been effectively used on financial applications, including artificial neural networks (ANNs) (Grothmann, 2002; Zimmermann, Neuneier, & Grothmann, 2001; Chang, Liu, Lin, Fan, & Ng, 2009; Kamruzzaman & Sarker, 2003), evolutionary algorithms (EAs) (Aguilar-Rivera, Valenzuela-Rendón, & Rodríguez-Ortiz, 2015; Bauer, 1994; Chen & Yeh, 2001; Cliff, 1998; Dunis, Laws, & Karathanasopoulos, 2013; Hsu, 2011; Karatahansopoulos, Sermpinis, Laws, & Dunis, 2014; Leigh, Purvis, & Ragusa, 2002; Aloud, 2016; Aloud, 2017), and support vector machines (SVMs) (Tay & Cao, 2001; Kim, 2003; Lu & Wu, 2009). The agent-based approach is an effective technique to develop algo-trading designed for decision support systems. These AI techniques use a set of data points to identify patterns to forecast price movement. Although these techniques for forecasting trading signals are effective, they focus on constant values that restrict the time of trading, resulting in validity only for short-term trading.

The key to successful financial market forecasting is achieving the finest results with the minimum required input data and least complex algo-trading strategy. One of the key issues of AI learning processes designed for forecasting financial time series is selecting representative input data for the forecasting system. Data input selection is one of the critical steps in any machine-learning process, which is facilitated by selecting the most applicable data inputs and then reducing the dimensionality of the data. This will assure an improvement in the accuracy and efficiency of the designed algo-trading strategy.

The EAs and particularly genetic algorithms (GAs) for data input optimization are widely used as searching processes for an optimal subset of data inputs designed for a decision tree algorithm (Aguilar-Rivera, et al. 2015). The main issues with GAs are the time utilization and the random selection of the initial population of candidates for the decision tree algorithm. For these reasons, improvement of GAs for the selection of input data must be considered. For instance, all individuals of a population have the same stop criteria. As a result, the algorithm fails to provide a fitting solution. Different machine-learning approaches have been used to improve GAs using the results of a filter algorithm to optimize the set of input data (Hayward, 2006; Versace, Bhatt, Hinds, & Shiffer, 2004).

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