In recent years, with the advancement of Machine Learning and Deep Learning technologies,
there has been a growing interest in algorithmic trading. In particular, these technologies have become powerful tools for
processing and analyzing large amounts of data. This course will provide an in-depth understanding of the basic concepts of
algorithmic trading using Machine Learning and Deep Learning, as well as the data preprocessing process.
1. What is Algorithmic Trading?
Algorithmic trading refers to the automatic execution of trading strategies through computer programming.
This approach allows for the automatic analysis of various market variables based on pre-defined rules
and enables quick trading decisions. In particular, when the volume and speed of data maximize market volatility,
Machine Learning and Deep Learning can be effectively used to make accurate judgments.
2. Basic Concepts of Machine Learning
Machine Learning is a field that studies algorithms that improve performance through experience.
Key approaches include Supervised Learning, Unsupervised Learning, and Reinforcement Learning.
Selecting an appropriate Machine Learning technique for trading strategies is an important first step.
2.1 Supervised Learning
Supervised Learning involves training a model using labeled data.
It is useful for predicting trading prices or finding reliable trading points.
2.2 Unsupervised Learning
Unsupervised Learning leverages unlabeled data to discover structures or patterns within the data.
Clustering techniques can be used to detect various market clusters.
2.3 Reinforcement Learning
Reinforcement Learning is a technique where a learning agent interacts with the environment to discover optimal policies.
The algorithm learns optimal trading strategies through its experiences.
3. Importance of Deep Learning
Deep Learning, based on artificial neural networks, is a branch of Machine Learning that shows extremely powerful performance
in processing large amounts of unstructured data and pattern recognition.
It particularly shows superior results in specialized data forms like time series data.
3.1 CNN and RNN
Among Deep Learning models, the use of CNN (Convolutional Neural Network) and RNN (Recurrent Neural Network) is gaining attention.
CNN excels in processing image data, while RNN is more suitable for data that includes time series elements like stock data.
4. Importance of Data Preprocessing
Data preprocessing is a crucial process that determines the success or failure of model training,
as it is essential for improving data quality and enhancing model performance. Raw data often
contain missing values, outliers, and unstructured data, necessitating a cleansing process.
4.1 Data Collection
Data collection is the first step in algorithmic trading, where various information such as historical stock prices,
trading volumes, financial statements, and news can be collected. Based on this data, indicators for analysis are designed.
4.2 Handling Missing Values
Missing values can significantly impact data analysis. Methods for handling missing values include
deletion, mean imputation, or using Machine Learning techniques for prediction. Special care is needed to avoid
distorting the data during this process.
4.3 Outlier Detection and Removal
Outliers can be detected through statistical analysis, and removing or correcting them can increase
the reliability of the data. Various techniques, such as the IQR (Interquartile Range) method,
or Z-score can be employed.
4.4 Data Normalization and Standardization
This is the process of scaling data, which greatly influences model performance.
Normalization compresses values into a specific range, while standardization transforms data into a form that has a mean of 0 and a standard deviation of 1.
4.5 Feature Engineering
This refers to the process of creating new variables based on existing data.
For instance, trading indicators like moving averages or the Relative Strength Index (RSI) can be created and used as model inputs.
5. Building Machine Learning and Deep Learning Models
Once data preprocessing is complete, the focus shifts to building Machine Learning and Deep Learning models.
Here, various algorithms are compared, and optimal hyperparameters are set to maximize performance.
5.1 Model Selection
Model selection varies depending on the characteristics of the problem, the amount of data, and the objectives.
For stock prediction problems, models from the RNN family such as LSTM (Long Short-Term Memory) and GRU (Gated Recurrent Unit),
as well as decision tree models like XGBoost can be used.
5.2 Model Training
During the model training process, data is split into training, validation, and test sets, allowing for the measurement of important
performance metrics. Cross-validation techniques can be used to train the model on various combinations of data to
achieve optimal performance.
6. Model Evaluation and Deployment
After the model is trained, an evaluation process is necessary. Various metrics such as prediction accuracy, loss functions,
and classification accuracy are used to validate the model’s performance. Ultimately, it must be integrated into
an actual trading system to operate in real-time.
7. Conclusion
In this course, we explored the basic concepts of algorithmic trading using Machine Learning and Deep Learning, as well as the
importance of data preprocessing. The world of algorithmic trading is complex, but it offers opportunities to build
more sophisticated and effective trading strategies through Machine Learning and Deep Learning technologies.
I hope to see success in the future analysis of trading data.
8. References
- Deep Learning for Time Series Forecasting (Packt Publishing)
- Hands-On Machine Learning with Scikit-Learn, Keras, and TensorFlow (O’Reilly Media)
- Python for Finance: Mastering Data-Driven Finance (Packt Publishing)