Stock timing using genetic algorithms
The authors propose a genetic algorithm to search a set of technical rules which gives buying and selling advices about individual stocks. Some of the most well-known trading strategies such as price channels, moving averages, rate of change, ease of movement value are briefly described. Then the genetic algorithm used to define the trading experts are presented. Genetic algorithms are search and global optimization methods based on principles of biological evolution. Such evolutionary algorithms begin with a population of solution candidates, which have been evaluated according to a fitness function and then made to evolve through genetic operators like selection, cross-over, mutation and replacement. A solution in this approach is an \(N\)-dimensional binary vector, denoted as \(e\), where \(N\) is the number of technical rules involved in the decision process. The value \(e_{i}\) is equal to 1 if \(e\) actually uses the \(i\)-th rule to advise buying or selling. The set of solutions at a given stage of the evolutionary process is called a generation of experts. Starting with the first random generation, the goal of the genetic algorithm is to improve the fitness of solutions by evolving generations of experts. The main purpose of the genetic algorithm is to discover `quasi-optimal' experts who take decisions based on the subset of technical rules selected among a set of rules introduced with no a priori on their relevance. The authors apply the model to French market stock prices; the period under study is divided into a learning period and a test period. The separating date between the two sub-periods is randomly chosen so as no to induce a bias related to the choice of this date. Half of the 40 stocks included in the CAC40 index of the Paris Stock Market are considered.
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