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A Novel Stock Trading Model based on Reinforcement Learning and Technical Analysis

Author

Listed:
  • Zahra Pourahmadi

    (Yazd University)

  • Dariush Fareed

    (Yazd University)

  • Hamid Reza Mirzaei

    (Yazd University)

Abstract

This study investigates the potential of using reinforcement learning (RL) to establish a financial trading system (FTS), taking into account the main constraint imposed by the stock market, e.g., transaction costs. More specifically, this paper shows the inferior performance of the pure reinforcement learning model when it is applied in a multi-dimensional and noisy stock market environment. To solve this problem and to get a practical and reasonable trading strategies process, a modified RL model is proposed based on the actor-critic method where we have amended the actor by incorporating three metrics from technical analysis. The results show significant improvement compared with traditional trading strategies. The reliability of the model is verified by experimental results on financial data (S&P500 index) and a fair evaluation of the proposed method and pure RL and three benchmarks is demonstrated. Statistical analysis proves that a combination of a) technical analysis (role-based strategies) and b) RL (machine learning strategies) and c) restricting the action of the RL policy network with a few realistic conditions results in trading decisions with higher investment return rates.

Suggested Citation

  • Zahra Pourahmadi & Dariush Fareed & Hamid Reza Mirzaei, 2024. "A Novel Stock Trading Model based on Reinforcement Learning and Technical Analysis," Annals of Data Science, Springer, vol. 11(5), pages 1653-1674, October.
    • Handle: RePEc:spr:aodasc:v:11:y:2024:i:5:d:10.1007_s40745-023-00469-1
    DOI: 10.1007/s40745-023-00469-1
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    References listed on IDEAS

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    1. Koya Ishikawa & Kazuhide Nakata, 2021. "Online Trading Models with Deep Reinforcement Learning in the Forex Market Considering Transaction Costs," Papers 2106.03035, arXiv.org, revised Dec 2021.
    2. James B. Heaton & Nicholas Polson & Jan H. Witte, 2017. "Rejoinder to ‘Deep learning for finance: deep portfolios’," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 33(1), pages 19-21, January.
    3. James M. Tien, 2017. "Internet of Things, Real-Time Decision Making, and Artificial Intelligence," Annals of Data Science, Springer, vol. 4(2), pages 149-178, June.
    4. J. B. Heaton & N. G. Polson & J. H. Witte, 2017. "Deep learning for finance: deep portfolios," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 33(1), pages 3-12, January.
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