Integrating a Piecewise Linear Representation Method and a Neural Network Model for Stock Trading Points Prediction

Recently, the piecewise linear representation (PLR) method has been applied to the stock market for pattern matching. As such, similar patterns can be retrieved from historical data and future prices of the stock can be predicted according to the patterns retrieved. In this paper, a different approach is taken by applying PLR to decompose historical data into different segments. As a result, temporary turning points (trough or peak) of the historical stock data can be detected and inputted to the backpropagation neural network (BPN) for supervised training of the model. After this, a new set of test data can trigger the model when a buy or sell point is detected by BPN. An intelligent PLR (IPLR) model is further developed by integrating the genetic algorithm with the PLR to iteratively improve the threshold value of the PLR. Thus, it further increases the profitability of the model. The proposed system is tested on three different types of stocks, i.e., uptrend, steady, and downtrend. The experimental results show that the IPLR approach can make significant amounts of profit on stocks with different variations. In conclusion, the proposed system is very effective and encouraging in that it predicts the future trading points of a specific stock.

I. Introduction

The Stock market is a highly nonlinear dynamic system. It is affected by many factors such as interest rates, inflation rates, economic environments, political issues, and many others. Although there are dependencies and correlations between these factors, the relationship of the stock price and these factors is rather difficult to model through mathematic formula.