Combining technical trading rules using particle swarm optimization

Fei WANG, Leung Ho Philip YU, David W. CHEUNG

Research output: Contribution to journalArticlespeer-review

28 Citations (Scopus)

Abstract

Technical trading rules have been utilized in the stock market to make profit for more than a century. However, only using a single trading rule may not be sufficient to predict the stock price trend accurately. Although some complex trading strategies combining various classes of trading rules have been proposed in the literature, they often pick only one rule for each class, which may lose valuable information from other rules in the same class. In this paper, a complex stock trading strategy, namely performance-based reward strategy (PRS), is proposed. PRS combines the two most popular classes of technical trading rules – moving average (MA) and trading range break-out (TRB). For both MA and TRB, PRS includes various combinations of the rule parameters to produce a universe of 140 component trading rules in all. Each component rule is assigned a starting weight, and a reward/penalty mechanism based on rules' recent profit is proposed to update their weights over time. To determine the best parameter values of PRS, we employ an improved time variant particle swarm optimization (TVPSO) algorithm with the objective of maximizing the annual net profit generated by PRS. The experiments show that PRS outperforms all of the component rules in the testing period. To assess the significance of our trading results, we apply bootstrapping methodology to test three popular null models of stock return: the random walk, the AR(1) and the GARCH(1, 1). The results show that PRS is not consistent with these null models and has good predictive ability. Copyright © 2013 Elsevier Ltd. All rights reserved.
Original languageEnglish
Pages (from-to)3016-3026
JournalExpert Systems with Applications
Volume41
Issue number6
Early online dateOct 2013
DOIs
Publication statusPublished - May 2014

Citation

Wang, F., Yu, P. L. H., & Cheung, D. W. (2014). Combining technical trading rules using particle swarm optimization. Expert Systems with Applications, 41(6), 3016-3026. doi: 10.1016/j.eswa.2013.10.032

Keywords

  • Technical trading rules
  • Particle swarm optimization
  • Bootstrapping

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