A real-time adaptive trading system using genetic programming

M. A. H. Dempster · Charles M. Jones

192 citations0/0 files storedQuantitative Finance

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Stock Market Forecasting Methods Financial Markets and Investment Strategies Evolutionary Algorithms and Applications

Abstract

Technical analysis indicators are widely used by traders in financial and commodity markets to predict future price levels and enhance trading profitability. We have previously shown a number of popular indicator-based trading rules to be loss-making when applied individually in a systematic manner. However, technical traders typically use combinations of a broad range of technical indicators. Moreover, successful traders tend to adapt to market conditions by 'dropping' trading rules as soon as they become loss-making or when more profitable rules are found. In this paper we try to emulate such traders by developing a trading system consisting of rules based on combinations of different indicators at different frequencies and lags. An initial portfolio of such rules is selected by a genetic algorithm applied to a number of indicators calculated on a set of US Dollar/British Pound spot foreign exchange tick data from 1994 to 1997 aggregated to various intraday frequencies. The genetic algorithm is subsequently used at regular intervals on out-of-sample data to provide new rules and a feedback system is utilized to rebalance the rule portfolio, thus creating two levels of adaptivity. Despite the individual indicators being generally loss-making over the data period, the best rule found by the developed system is found to be modestly, but significantly, profitable in the presence of realistic transaction costs.

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References

1997Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach 1997From the bird's eye to the microscope: A survey of new stylized facts of the intra-daily foreign exchange markets 1990Charts, Noise and Fundamentals in the London Foreign Exchange Market 1998The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence

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