Intelligent stock trading system by turning point confirming and probabilistic reasoning

Financial engineering such as trading decision is an emerging research area and also has great commercial potentials. A successful stock buying/selling generally occurs near price trend turning point. Traditional technical analysis relies on some statistics (i.e. technical indicators) to predict turning point of the trend. However, these indicators can not guarantee the accuracy of prediction in chaotic domain. In this paper, we propose an intelligent financial trading system through a new approach: learn trading strategy by probabilistic model from high-level representation of time series – turning points and technical indicators. The main contributions of this paper are two-fold. First, we utilize high-level representation (turning point and technical indicators). High-level representation has several advantages such as insensitive to noise and intuitive to human being. However, it is rarely used in past research. Technical indicator is the knowledge from professional investors, which can generally characterize the market. Second, by combining high-level representation with probabilistic model, the randomness and uncertainty of chaotic system is further reduced. In this way, we achieve great results (comprehensive experiments on S&P500 components) in a chaotic domain in which the prediction is thought impossible in the past. 2006 Elsevier Ltd. All rights reserved.