Statistically sound machine learning for algorithmic trading of financial instruments

542 Pages·2013·50.96 MB·English

by  David Aronson

Great effort has been undertaken to ensure that the content of this book, as well
as the TSSB program, are correct. However, errors and omissions are
impossible to avoid in a work of this extent. Neither this book nor the TSSB
program are meant as providing professional advice. No guarantee is made that
these items are free of errors and omissions, and the reader assumes full
liability for any losses associated with use of these items.
About this book:
This is a tutorial, with instruction organized from easy to sophisticated. If the
reader just skims through the entire text, hoping to gain an idea of how to use the
TSSB program, the reader will be hopelessly dismayed by the vast complexity
of options. The correct approach is to begin with the first, very simple example
and implement it. Then progress to the next, and so forth. Each example builds
on experience gained from prior examples. In this way, the reader will
painlessly become familiar with the program.
The TSSB program may be downloaded (free) from the TSSB website:
http://tssbsoftware.com/
Copyright © 2013 David Aronson and TimothyMasters
All rights reserved
ISBN 978-1489507716
About David Aronson
David Aronson is a pioneer in machine learning and nonlinear trading system
development and signal boosting/filtering. He has worked in this field since
1979. His accomplishments include:
• Started Raden Research Group in 1982 where he oversaw the development
of PRISM (Pattern Recognition Information Synthesis Modeling).
• Chartered Market Technician certified byTheMarket Technicians
Association since 1992.
• Proprietary equities trader for Spear, Leeds and Kellogg 1997 – 2002.
• Was an Adjunct Professor of Finance, teaching a graduate level course in
technical analysis, data mining and predictive analytics to MBA and
financial engineering students from 2002 to 2011.
• Author of “Evidence Based Technical Analysis” published by John Wiley
& Sons 2006. This was the first popular book to deal with data mining
bias and the Monte Carlo Permutation Method for generating bias-free p-
values.
• Co-designer of TSSB (Trading System Synthesis and Boosting), a software
platform for the automated development of statistically sound predictive-
model-based trading systems.
• Developed a method for indicator purification and Pure VIX.
• Innovated the concept of signal boosting: using machine learning to
enhance the performance of existing strategies.
About Timothy Masters
Timothy Masters received a PhD in mathematical statistics with a specialization
in numerical computing. Since then he has continuously worked as a consultant
for government and industry.
• Early research involved automated feature detection in high-altitude
photographs while developing applications for flood and drought
prediction, detection of hidden missile silos, and identification of
threatening military vehicles.
• Worked with medical researchers in the development of computer
algorithms for distinguishing between benign and malignant cells in needle
biopsies.
• Current focus is methods for evaluating automated financial market trading
systems.
• Authored five books on prediction, classification, and applications of
neural networks:
Practical Neural Network Recipes in C++ (Academic Press,
1993)
Signal and Image Processing with Neural Networks (Wiley,
1994)
Advanced Algorithms for Neural Networks (Wiley, 1995)
Neural, Novel, and Hybrid Algorithms for Time Series
Prediction (Wiley, 1995)
Assessing and Improving Prediction and Classification
(CreateSpace, 2013)
More information can be found on the author's website: TimothyMasters.info
Table of Contents
Introduction
Two Approaches to Automated Trading
Predictive Modeling
Indicators and Targets
Converting Predictions to Trade Decisions
Testing the Trading System
Walkforward Testing
Cross Validation
Overlap Considerations
Performance Criteria
Model Performance Versus Financial Performance
Financial Relevance and Generalizability
Performance Statistics in TSSB
Desirable Program Features
A Simple Standalone Trading System
The Script File
The Audit Log
A Walkforward Fold
Out-of-Sample Results for This Fold
The Walkforward Summary
A Simple Filter System
The Trade File
The Script File
The Audit Log
Out-of-Sample Results for This Fold
The Walkforward Summary
Common Initial Commands
Market Price Histories and Variables
Quick Reference to Initial Commands
Detailed Descriptions
INTRADAY BY MINUTE
INTRADAY BY SECOND
MARKET DATE FORMAT YYMMDD
MARKET DATE FORMAT M_D_YYYY
MARKET DATE FORMAT AUTOMATIC
REMOVE ZERO VOLUME
READ MARKET LIST
READ MARKET HISTORIES
MARKET SCAN
RETAIN YEARS
RETAIN MOD
CLEAN RAW DATA
INDEX
READ VARIABLE LIST
OUTLIER SCAN
DESCRIBE
CROSS MARKET AD
CROSS MARKET KL
CROSS MARKET IQ
STATIONARITY
A Final Example
Reading and Writing Databases
Quick Reference to Database Commands
Detailed Descriptions
RETAIN MARKET LIST
VARIABLE IS TEXT
WRITE DATABASE
READ DATABASE
READ UNORDERED DATABASE
APPEND DATABASE
IS PROFIT
A Saving/Restoring Example
Creating Variables
Overview and Basic Syntax
Index Markets and Derived Variables
An Example of IS INDEX and MINUS INDEX
Multiple Indices
Historical Adjustment to Improve Stationarity
Centering
Scaling
Normalization
An Example of Centering, Scaling, and Normalization
Cross-Market Normalization
Pooled Variables
MEDIAN pooling
CLUMP60 Pooling
Mahalanobis Distance
Absorption Ratio
Trend Indicators
MA DIFFERENCE ShortLength LongLength Lag
LINEAR PER ATR HistLength ATRlength
QUADRATIC PER ATR HistLength ATRlength
CUBIC PER ATR HistLength ATRlength
RSI HistLength
STOCHASTIC K HistLength
STOCHASTIC D HistLength
PRICE MOMENTUM HistLength StdDevLength
ADX HistLength
MIN ADX HistLength MinLength
RESIDUAL MIN ADX HistLength MinLength
MAX ADX HistLength MaxLength
RESIDUAL MAX ADX HistLength MaxLength
DELTA ADX HistLength DeltaLength
ACCEL ADX HistLength DeltaLength
INTRADAY INTENSITY HistLength
DELTA INTRADAY INTENSITY HistLength DeltaLength
REACTIVITY HistLength
DELTA REACTIVITY HistLength DeltaDist
MIN REACTIVITY HistLength Dist
MAX REACTIVITY HistLength Dist
Trend-Like Indicators
CLOSE TO CLOSE
N DAY HIGH HistLength
N DAY LOW HistLength
Deviations from Trend
CLOSE MINUS MOVING AVERAGE HistLen ATRlen
LINEAR DEVIATION HistLength
QUADRATIC DEVIATION HistLength
CUBIC DEVIATION HistLength
DETRENDED RSI DetrendedLength DetrenderLength
Lookback
Volatility Indicators
ABS PRICE CHANGE OSCILLATOR ShortLen Multiplier
PRICE VARIANCE RATIO HistLength Multiplier
MIN PRICE VARIANCE RATIO HistLen Mult Mlength
CHANGE VARIANCE RATIO HistLength Multiplier
MIN CHANGE VARIANCE RATIO HistLen Mult Mlen
ATR RATIO HistLength Multiplier
DELTA PRICE VARIANCE RATIO HistLength Multiplier
DELTA CHANGE VARIANCE RATIO HistLength
Multiplier
DELTA ATR RATIO HistLength Multiplier
BOLLINGER WIDTH HistLength
DELTA BOLLINGER WIDTH HistLength DeltaLength
N DAY NARROWER HistLength
N DAY WIDER HistLength
Indicators Involving Indices
INDEX CORRELATION HistLength
DELTA INDEX CORRELATION HistLength DeltaLength
DEVIATION FROM INDEX FIT HistLength
MovAvgLength
PURIFIED INDEX Norm HistLen Npred Nfam Nlooks
Look1
Basic Price Distribution Statistics
PRICE SKEWNESS HistLength Multiplier
CHANGE SKEWNESS HistLength Multiplier
PRICE KURTOSIS HistLength Multiplier
CHANGE KURTOSIS HistLength Multiplier
DELTA PRICE SKEWNESS HistLen Multiplier DeltaLen
DELTA CHANGE SKEWNESS HistLen Multiplier
DeltaLen
DELTA PRICE KURTOSIS HistLen Multiplier DeltaLen
DELTA CHANGE KURTOSIS HistLen Multiplier
DeltaLen
Indicators That Significantly Involve Volume
VOLUME MOMENTUM HistLength Multiplier
DELTA VOLUME MOMENTUM HistLen Multiplier
DeltaLen
VOLUME WEIGHTED MA OVER MA HistLength
DIFF VOLUME WEIGHTED MA OVER MA ShortDist
LongDist
PRICE VOLUME FIT HistLength
DIFF PRICE VOLUME FIT ShortDist LongDist
DELTA PRICE VOLUME FIT HistLength DeltaDist
ON BALANCE VOLUME HistLength
DELTA ON BALANCE VOLUME HistLength DeltaDist
POSITIVE VOLUME INDICATOR HistLength
DELTA POSITIVE VOLUME INDICATOR HistLen
DeltaDist
NEGATIVE VOLUME INDICATOR HistLength
DELTA NEGATIVE VOLUME INDICATOR HistLen
DeltaDist
PRODUCT PRICE VOLUME HistLength
SUM PRICE VOLUME HistLength
DELTA PRODUCT PRICE VOLUME HistLen DeltaDist
DELTA SUM PRICE VOLUME HistLen DeltaDist
Entropy and Mutual Information Indicators
PRICE ENTROPY WordLength
VOLUME ENTROPY WordLength
PRICE MUTUAL INFORMATION WordLength
VOLUME MUTUAL INFORMATION WordLength
Indicators Based on Wavelets
REAL MORLET Period
REAL DIFF MORLET Period
REAL PRODUCT MORLET Period
IMAG MORLET Period
IMAG DIFF MORLET Period
IMAG PRODUCT MORLET Period
PHASE MORLET Period
DAUB MEAN HistLength Level
DAUB MIN HistLength Level
DAUB MAX HistLength Level
DAUB STD HistLength Level
DAUB ENERGY HistLength Level
DAUB NL ENERGY HistLength Level
DAUB CURVE HistLength Level
Follow-Through-Index (FTI) Indicators
Low-Pass Filtering and FTI Computation
Block Size and Channels
Essential Parameters for FTI calculation
Computing FTI
Automated Choice of Filter Period
Trends Within Trends
FTI Indicators Available in TSSB