Stock trading system based on the multi-objective particle swarm optimization of technical indicators on end-of-day market data

Stock traders consider several factors or objectives in making decisions. Moreover, they differ in the importance they attach to each of these objectives. This requires a tool that can provide an optimal tradeoff among different objectives, a problem aptly solved by a multi-objective optimization (MOO) system. This paper aims to investigate the application of multi-objective optimization to end-of-day historical stock trading. We present a stock trading system that uses multi-objective particle swarm optimization (MOPSO) of financial technical indicators. Using end-of-day market data, the system optimizes the weights of several technical indicators over two objective functions, namely, percent profit and Sharpe ratio. The performance of the system was compared to the performance of the technical indicators, the performance of the market, and the performance of another stock trading system which was optimized with the NSGA-II algorithm, a genetic algorithm-based MOO method. The results show that the system performed well on both training and outof-sample data. In terms of percent profit, the system outperformed most, if not all, of the indicators under study, and, in some instances, it even outperformed the market itself. In terms of Sharpe ratio, the system consistently performed significantly better than all the technical indicators. The proposed MOPSO system also performed far better than the system optimized by NSGA-II. The proposed system provided a diversity of solutions for the two objective functions and is found to be robust and fast. These results show the potential of the system as a tool for making stock trading decisions.