experiment3.md

A hybrid stock trading framework integrating technical analysis with machine learning techniques

Create a Trading Signal that determines when to buy, hold and sell a stock. Train a ann to predict the Trading Signal.

Trend

A Simple Moving Average (SMA) is used over the last 15 time steps (SMA15) for classifying the stock market movement as upward (Uptrend) or downward (downtrend) as follows:

• Trend = 'up': If closing price > SMA15 and SMA15 is rising for the last 5 days.
• Trend = 'down': if closing price < SMA15 and SMA15 is falling for the last 5 days.
• Trend = 'no': Otherwise. The Trend is only used in order to be able to calculate the Trading Signal (TS).

Trading Signal

A Trading Signal (TS) is calculated. TS is used as training target output to the ANN. Depending on if the last occurance of the Trend was 'up' or 'down' different calculations are used. Instances of 'no'-trend are ignored, i.e.:

• TS = TSup: if last occurance of the Trend was 'up'
• TS = TSdown: if last occurance of the Trend was 'down'

TSup and TSdown are given by:

• TSup = (close(t) - closeMin) / (closeMax – closeMin) × 0.5 + 0.5
• TSdown = (close(t) - closeMin) / (closeMax – closeMin) × 0.5

Where:

• closeMin = Min(close(t), close(t+1), close(t+2))
• closeMax = Max(close(t), close(t+1), close(t+2))

close	closeMin	closeMax	TSup	TSdown	Trend	TS
1877.7	1877.7	1904.01	0.5	0	down	0
1886.76	1886.76	1941.28	0.5	0	down	0
1904.01	1904.01	1941.28	0.5	0	down	0
1941.28	1927.11	1950.82	0.7988	0.2988	no	0.2988
1927.11	1927.11	1964.58	0.5	0	no	0
1950.82	1950.82	1964.58	0.5	0	no	0
1964.58	1961.63	1985.05	0.563	0.0629	no	0.0629
1961.63	1961.63	1985.05	0.5	0	no	0
1985.05	1982.3	1994.65	0.6113	0.1113	up	0.6113
1982.3	1982.3	2039.68	0.5	0	up	0.5
1994.65	1994.65	2039.68	0.5	0	up	0.5
2039.68	2038.25	2039.68	1	0.5	up	1
2038.25	2038.25	2039.82	0.5	0	up	0.5
2039.33	2039.33	2041.32	0.5	0	up	0.5
2039.82	2039.82	2063.5	0.5	0	up	0.5
2041.32	2041.32	2063.5	0.5	0	up	0.5
2063.5	2059.82	2063.5	1	0.5	up	1
2060.31	2026.14	2060.31	1	0.5	no	1
2059.82	2026.14	2059.82	1	0.5	no	1

Neural Network

Model:

• input is 6 technical indicators.
• output is one (1) node.
• training is of type regression.

Trading decision

Determine predicted trend (Trendpred) based on predicted trading signal (TSpred):

• Trendpred = 'up': if TSpred > 0.5.
• Trendpred = 'down': if TSpred <= 0.5.

Determine Buy, hold or Sell according to:

• BUY: if next day trend = 'up'
• SELL: if next day trend = 'down'
• HOLD: if BUY or SELL decisiom exist

Technical Indicators

The input to the NN are the following technical indicators:

• SMA
• MACD
• K%
• D%
• RSI
• R%

Simple Moving Average (SMA)

SMA(n) = (close(t) + close(t-1) + close(t-2) + . . . close(t-n)) / n

Where:

• n is the number of periods in the SMA
• close(t) is the closing price

Moving Average Convergence and Divergence (MACD):

The MACD shows the relationship between two exponential moving averages of prices.

MACD = EMA12 - EMA36

EMA(t) = (close(t)-EMA(t-1)) x m + EMA(t-1)

where:

• m = 2 / (no of days to be considered + 1)

Stochastic KD

Stochastic provides a mean of measuring price movement velocity. K% measures the relative position of current closing price in a certain time range, whereas D% specifies the three day moving average of K%.

K%(t) = [ close(t) - L(i) ] / [ (H(i) - L(i)] x 100

D%(t) = [K%(t) + K%(t-1) + K%(t-2)] / 3

where:

• close(t) is the closing price
• L(i) is the lowest price of the last i days.
• H(i) is the highest price of the last i days.

Relative Strength Index (RSI):

RSI is a momentum indicator calculated as follows:

RSI(t) = 100 - 100 / (1+RS(t))

where

• RS(t) = Average of t days where closing price was up / Average of t days where closing price was down

Larry William's R%:

William's R% is a stochastic oscillator, calculated as follows:

R%(t) = [ H(i) - close(t) ] / [ H(i) - L(i)] x 100

where:

• close(t) is the closing price
• L(i) is the lowest price of the last i days.
• H(i) is the highest price of the last i days.