Statistically sound machine learning for algorithmic trading of financial instruments

This is a tutorial, with instruction organized from easy to sophisticated. If the reader just skims through the entire text, hoping to gain an idea of how to use the TSSB program, the reader will be hopelessly dismayed by the vast complexity of options. The correct approach is to begin with the first, very simple example and implement it. Then progress to the next, and so forth. Each example builds on experience gained from prior examples. In this way, the reader will painlessly become familiar with the program.

Introduction

Two Approaches to Automated Trading

Predictive Modeling

Indicators and Targets

Converting Predictions to Trade Decisions

Testing the Trading System

Walkforward Testing

Cross Validation

Overlap Considerations

Performance Criteria

Model Performance Versus Financial Performance

Financial Relevance and Generalizability

Performance Statistics in TSSB

Desirable Program Features

A Simple Standalone Trading System

The Script File

The Audit Log

A Walkforward Fold

Out-of-Sample Results for This Fold

The Walkforward Summary

A Simple Filter System

The Trade File

The Script File

The Audit Log

Out-of-Sample Results for This Fold

The Walkforward Summary

Common Initial Commands

Market Price Histories and Variables

Quick Reference to Initial Commands

Detailed Descriptions

INTRADAY BY MINUTE

INTRADAY BY SECOND

MARKET DATE FORMAT YYMMDD

MARKET DATE FORMAT M_D_YYYY

MARKET DATE FORMAT AUTOMATIC

REMOVE ZERO VOLUME

READ MARKET LIST

READ MARKET HISTORIES

MARKET SCAN

RETAIN YEARS

RETAIN MOD

CLEAN RAW DATA

INDEX

READ VARIABLE LIST

OUTLIER SCAN

DESCRIBE

CROSS MARKET AD

CROSS MARKET KL

CROSS MARKET IQ

STATIONARITY

A Final Example

Reading and Writing Databases

Quick Reference to Database Commands

Detailed Descriptions

RETAIN MARKET LIST

VARIABLE IS TEXT

WRITE DATABASE

READ DATABASE

READ UNORDERED DATABASE

APPEND DATABASE

IS PROFIT

A Saving/Restoring Example

Creating Variables

Overview and Basic Syntax

Index Markets and Derived Variables

An Example of IS INDEX and MINUS INDEX

Multiple Indices

Historical Adjustment to Improve Stationarity

Centering

Scaling

Normalization

An Example of Centering, Scaling, and Normalization

Cross-Market Normalization

Pooled Variables

MEDIAN pooling

CLUMP60 Pooling

Mahalanobis Distance

Absorption Ratio

Trend Indicators

MA DIFFERENCE ShortLength LongLength Lag

LINEAR PER ATR HistLength ATRlength

QUADRATIC PER ATR HistLength ATRlength

CUBIC PER ATR HistLength ATRlength

RSI HistLength

STOCHASTIC K HistLength

STOCHASTIC D HistLength

PRICE MOMENTUM HistLength StdDevLength

ADX HistLength

MIN ADX HistLength MinLength

RESIDUAL MIN ADX HistLength MinLength

MAX ADX HistLength MaxLength

RESIDUAL MAX ADX HistLength MaxLength

DELTA ADX HistLength DeltaLength

ACCEL ADX HistLength DeltaLength

INTRADAY INTENSITY HistLength

DELTA INTRADAY INTENSITY HistLength DeltaLength

REACTIVITY HistLength

DELTA REACTIVITY HistLength DeltaDist

MIN REACTIVITY HistLength Dist

MAX REACTIVITY HistLength Dist

Trend-Like Indicators

CLOSE TO CLOSE

N DAY HIGH HistLength

N DAY LOW HistLength

Deviations from Trend

CLOSE MINUS MOVING AVERAGE HistLen ATRlen

LINEAR DEVIATION HistLength

QUADRATIC DEVIATION HistLength

CUBIC DEVIATION HistLength

DETRENDED RSI DetrendedLength DetrenderLength

Lookback

Volatility Indicators

ABS PRICE CHANGE OSCILLATOR ShortLen Multiplier

PRICE VARIANCE RATIO HistLength Multiplier

MIN PRICE VARIANCE RATIO HistLen Mult Mlength

CHANGE VARIANCE RATIO HistLength Multiplier

MIN CHANGE VARIANCE RATIO HistLen Mult Mlen

ATR RATIO HistLength Multiplier

DELTA PRICE VARIANCE RATIO HistLength Multiplier

DELTA CHANGE VARIANCE RATIO HistLength

Multiplier

DELTA ATR RATIO HistLength Multiplier

BOLLINGER WIDTH HistLength

DELTA BOLLINGER WIDTH HistLength DeltaLength

N DAY NARROWER HistLength

N DAY WIDER HistLength

Indicators Involving Indices

INDEX CORRELATION HistLength

DELTA INDEX CORRELATION HistLength DeltaLength

DEVIATION FROM INDEX FIT HistLength

MovAvgLength

PURIFIED INDEX Norm HistLen Npred Nfam Nlooks

Look1

Basic Price Distribution Statistics

PRICE SKEWNESS HistLength Multiplier

CHANGE SKEWNESS HistLength Multiplier

PRICE KURTOSIS HistLength Multiplier

CHANGE KURTOSIS HistLength Multiplier

DELTA PRICE SKEWNESS HistLen Multiplier DeltaLen

DELTA CHANGE SKEWNESS HistLen Multiplier

DeltaLen

DELTA PRICE KURTOSIS HistLen Multiplier DeltaLen

DELTA CHANGE KURTOSIS HistLen Multiplier

DeltaLen

Indicators That Significantly Involve Volume

VOLUME MOMENTUM HistLength Multiplier

DELTA VOLUME MOMENTUM HistLen Multiplier

DeltaLen

VOLUME WEIGHTED MA OVER MA HistLength

DIFF VOLUME WEIGHTED MA OVER MA ShortDist

LongDist

PRICE VOLUME FIT HistLength

DIFF PRICE VOLUME FIT ShortDist LongDist

DELTA PRICE VOLUME FIT HistLength DeltaDist

ON BALANCE VOLUME HistLength

DELTA ON BALANCE VOLUME HistLength DeltaDist

POSITIVE VOLUME INDICATOR HistLength

DELTA POSITIVE VOLUME INDICATOR HistLen

DeltaDist

NEGATIVE VOLUME INDICATOR HistLength

DELTA NEGATIVE VOLUME INDICATOR HistLen

DeltaDist

PRODUCT PRICE VOLUME HistLength

SUM PRICE VOLUME HistLength

DELTA PRODUCT PRICE VOLUME HistLen DeltaDist

DELTA SUM PRICE VOLUME HistLen DeltaDist

Entropy and Mutual Information Indicators

PRICE ENTROPY WordLength

VOLUME ENTROPY WordLength

PRICE MUTUAL INFORMATION WordLength

VOLUME MUTUAL INFORMATION WordLength

Indicators Based on Wavelets

REAL MORLET Period

REAL DIFF MORLET Period

REAL PRODUCT MORLET Period

IMAG MORLET Period

IMAG DIFF MORLET Period

IMAG PRODUCT MORLET Period

PHASE MORLET Period

DAUB MEAN HistLength Level

DAUB MIN HistLength Level

DAUB MAX HistLength Level

DAUB STD HistLength Level

DAUB ENERGY HistLength Level

DAUB NL ENERGY HistLength Level

DAUB CURVE HistLength Level

Follow-Through-Index (FTI) Indicators

Low-Pass Filtering and FTI Computation

Block Size and Channels

Essential Parameters for FTI calculation

Computing FTI

Automated Choice of Filter Period

Trends Within Trends

FTI Indicators Available in TSSB

FTI