Forecasting the Market with Machine Learning Algorithms: An Application of NMC-BERT-LSTM-DQN-X Algorithm in Quantitative Trading

Although machine learning (ML) algorithms have been widely used in forecasting the trend of stock market indices, they failed to consider the following crucial aspects for market forecasting: (1) that investors’ emotions and attitudes toward future market trends have material impacts on market trend forecasting (2) the length of past market data should be dynamically adjusted according to the market status and (3) the transition of market statutes should be considered when forecasting market trends. In this study, we proposed an innovative ML method to forecast China's stock market trends by addressing the three issues above. Specifically, sentimental factors (see Appendix [1] for full trans) were first collected to measure investors’ emotions and attitudes. Then, a non-stationary Markov chain (NMC) model was used to capture dynamic transitions of market statutes. We choose the state-of-the-art (SOTA) method, namely, Bidirectional Encoder Representations from Transformers ( BERT ), to predict the state of the market at time t , and a long short-term memory ( LSTM ) model was used to estimate the varying length of past market data in market trend prediction, where the input of LSTM (the state of the market at time t ) was the output of BERT and probabilities for opening and closing of the gates in the LSTM model were based on outputs of the NMC model. Finally, the optimum parameters of the proposed algorithm were calculated using a reinforced learning-based deep Q-Network. Compared to existing forecasting methods, the proposed algorithm achieves better results with a forecasting accuracy of 61.77%, annualized return of 29.25%, and maximum losses of −8.29%. Furthermore, the proposed model achieved the lowest forecasting error: mean square error (0.095), root mean square error (0.0739), mean absolute error (0.104), and mean absolute percent error (15.1%). As a result, the proposed market forecasting model can help investors obtain more accurate market forecast information.

Stock Price Prediction using Machine Learning Algorithms

Machine learning has broad applications in the finance industry. Risk Analytics, Consumer Analytics, Fraud Detection, and Stock Market Predictions are some of the domains where machine learning methods can be implemented. Accurate prediction of stock market returns is extremely difficult due to volatility in the market. The main factor in predicting a stock market is a high level of accuracy and precision. With the introduction of artificial intelligence and high computational capacity, efficiency has increased. In the past few decades, the highly theoretical and speculative nature of the stock market has been examined by capturing and using repetitive patterns. Various machine learning algorithms like Multiple Linear Regression, Polynomial Regression, etc. are used here. The financial data contains factors like Date, Volume, Open, High, Low Close, and Adj Close prices. The models are evaluated using standard strategic indicators RMSE and R2 score. Lower values of these two indicators mean higher efficiency of the trained models. Various companies employ different types of analysis tools for forecasting and the primary aim is the accuracy to obtain the maximum profit. The successful prediction of the stock will be an invaluable asset for the stock market institutions and will provide real-life solutions to the problems of the investors. Keywords: Stock prices, Analysis, Accuracy, Prediction, Machine Learning, Regression, Finance