Automated trading using deep learning and machine learning, combining reinforcement learning and momentum strategies to improve the performance of momentum-based trading strategies through reinforcement learning.

1. Introduction

In recent years, the popularity of cryptocurrencies like Bitcoin has surged. Additionally,
machine learning and deep learning techniques have gained attention in the financial sector,
leading many investors to utilize these technologies to develop automated trading systems.
This article will explore methods to enhance the performance of momentum-based trading strategies
through reinforcement learning.

2. Basic Concepts

2.1. Machine Learning and Deep Learning

Machine learning is the field that develops algorithms to learn patterns and make predictions from
data. In contrast, deep learning is a subset of machine learning that utilizes artificial neural
networks to learn complex patterns. These two technologies serve as powerful tools for data
analysis and prediction.

2.2. Reinforcement Learning

Reinforcement learning is a method where an agent learns to maximize rewards by interacting with
the environment. In this process, the agent learns the impact of its actions on the outcomes.
This approach is suitable for automated trading systems, as it can harness market volatility to
pursue profits.

2.3. Momentum Strategy

The momentum strategy is an investment technique that predicts future prices based on past price trends.
Generally, it involves buying assets believing that the uptrend will continue and selling them
believing that the downtrend will persist. This strategy includes purchasing assets that are
rising in price over a certain period.

3. Combining Reinforcement Learning and Momentum Strategy

3.1. System Design

When designing an automated trading system, the first step is to define the environment.
This environment consists of price data and trading information, and the agent will make trading
decisions within this environment. The agent’s ultimate goal is to achieve the maximum reward.

3.2. Data Collection

Bitcoin price data can be collected from various sources.
Here, we will collect price data through a simple API and use it for training the reinforcement
learning model. The data may consist of historical prices, trading volume, etc.

3.3. Defining States and Actions

The agent selects actions based on the current state.
The state is defined using price data along with technical indicators (moving average, RSI, etc.),
and actions can be set as buying, selling, or holding.

3.4. Designing the Reward Function

The reward function serves as a criterion to assess how successful the agent’s actions are.
Typically, it is designed to reward the agent when a profit is made after buying, and impose
a penalty when a loss occurs. The reward can be based on trading profits and losses.

4. Example Code

Below is a simple example code for automated trading of Bitcoin using reinforcement learning.
This code structures the environment using OpenAI’s Gym and demonstrates how to train the agent using
the deep learning library TensorFlow.

        
        import numpy as np
        import pandas as pd
        import gym
        from gym import spaces
        from tensorflow.keras import Sequential
        from tensorflow.keras.layers import Dense
        from tensorflow.keras.optimizers import Adam

        class BitcoinEnv(gym.Env):
            def __init__(self, data):
                super(BitcoinEnv, self).__init__()
                self.data = data
                self.action_space = spaces.Discrete(3)  # 0: Sell, 1: Buy, 2: Hold
                self.observation_space = spaces.Box(low=0, high=1, shape=(data.shape[1],), dtype=np.float32)
                self.current_step = 0
                self.balance = 1000  # Initial capital
                self.position = 0  # Current holdings

            def reset(self):
                self.current_step = 0
                self.balance = 1000
                self.position = 0
                return self.data[self.current_step]

            def step(self, action):
                current_price = self.data[self.current_step]['close']
                reward = 0

                if action == 1:  # Buy
                    self.position = self.balance / current_price
                    self.balance = 0
                elif action == 0:  # Sell
                    if self.position > 0:
                        self.balance = self.position * current_price
                        reward = self.balance - 1000  # Profit
                        self.position = 0

                self.current_step += 1
                done = self.current_step >= len(self.data) - 1
                next_state = self.data[self.current_step]
                return next_state, reward, done, {}

        # Define a simple neural network model.
        def build_model(input_shape):
            model = Sequential()
            model.add(Dense(24, input_shape=input_shape, activation='relu'))
            model.add(Dense(24, activation='relu'))
            model.add(Dense(3, activation='linear'))  # 3 actions
            model.compile(optimizer=Adam(lr=0.001), loss='mse')
            return model

        # Main execution code
        if __name__ == "__main__":
            # Load data
            data = pd.read_csv('bitcoin_price.csv')  # Bitcoin price data
            env = BitcoinEnv(data)
            model = build_model((data.shape[1],))

            # Agent training
            for episode in range(1000):
                state = env.reset()
                done = False

                while not done:
                    action = np.argmax(model.predict(state.reshape(1, -1)))
                    next_state, reward, done, _ = env.step(action)
                    model.fit(state.reshape(1, -1), reward, verbose=0)  # Simple training
                    state = next_state
        
    

5. Result Analysis

After running the code, various metrics can be used to analyze how efficiently the agent traded Bitcoin.
For example, the final return, maximum drawdown, and Sharpe ratio can be calculated to evaluate the
performance of the strategy.

6. Conclusion

This course introduced methods to improve momentum-based trading strategies through reinforcement learning.
It demonstrated how machine learning and deep learning technologies can be utilized in automated trading
in financial markets, and provided hints on future research directions.
This field still has great potential for development, and more innovative automated trading systems can be
developed through various techniques.

7. References

  • 1. Sutton, R. S., & Barto, A. G. (2018). Reinforcement Learning: An Introduction.
  • 2. Goodfellow, I., Yoshua Bengio, & Aaron Courville. (2016). Deep Learning.
  • 3. Bitcoin historical data source: CoinGecko.