A hybrid multicategory framework for generating automated trading systems

Abstract

AbstractThis work proposes a framework for producing automatic trading systems that suggest making trading decisions in financial markets. The trading systems thus generated utilize multicategory classifiers. A collection of important technical indicators are considered as input features for the underlying multicategory classifiers. The proposed trading systems also have an option to use random forest (RF) algorithms for feature selection. The trading range breakout strategy is used to train the proposed trading systems thus generating “BUY/SELL/WAIT” trading signals on daily open prices. The performances of the proposed trading systems are evaluated over five future indices. Empirical findings suggest that the day trading systems based on the proposed multicategory SVM classifiers along with the RF technique outperform the day trading systems built using the multicategory classifiers taken from the literature. The trading range breakout strategy‐based systems are found to be superior to the traditional BUY‐HOLD strategy and that of RF‐PSVM (BUY/SELL) based strategy.