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Stock selection heuristics for performing frequent intraday trading with genetic programming

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Abstract

Intraday trading attempts to obtain a profit from the microstructure implicit in price data. Intraday trading implies many more transactions per stock compared to long term buy-and-hold strategies. As a consequence, transaction costs will have a more significant impact on the profitability. Furthermore, the application of existing long term portfolio selection algorithms for intraday trading cannot guarantee optimal stock selection. This implies that intraday trading strategies may require a different approach to stock selection for daily portfolios. In this work, we assume a symbiotic genetic programming framework that simultaneously coevolves the decision trees and technical indicators to generate trading signals. We generalize this approach to identify specific stocks for intraday trading using stock ranking heuristics: Moving Sharpe ratio and a Moving Average of Daily Returns. Specifically, the trading scenario adopted by this work assumes that a bag of available stocks exist. Our agent then has to both identify which subset of stocks to trade in the next trading day, and the specific buy-hold-sell decisions for each selected stock during real-time trading for the duration of the intraday period. A benchmarking comparison of the proposed ranking heuristics with stock selection performed using the well known Kelly Criterion is conducted and a strong preference for the proposed Moving Sharpe ratio demonstrated. Moreover, portfolios ranked by both the Moving Sharpe ratio and a Moving Average of Daily Returns perform significantly better than any of the comparator methods (buy-and-hold strategy, investment in the full set of 86 stocks, portfolios built from random stock selection and Kelly Criterion).

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Notes

  1. ‘Fundamental analysis’ performs a macro or strategic assessment of where a stock should be trading on any criteria except the behavior of price itself. The criteria often include the economic condition of the country in which the stock conducts business, monetary policy, and other “fundamental” elements [12].

  2. ‘Technical analysis’ is that which is applied to the price behavior of the stock to develop a trading decision, irrespective of fundamental factors [12].

  3. ‘Technical indicators’ are any class of metrics whose value is derived from generic price activity in a stock or asset. Technical indicators look to predict the future price levels, or simply the general price direction, of a security by looking at past patterns [12].

  4. ‘Candlestick’ is a type of price chart that displays the high, low, open, and closing prices of a trading asset (currency pair, stock, etc.) for a specific period of time (e.g., 1 min, 5 min, etc.). [12]

  5. A stop loss is an order to buy or sell when the market moves to a specific price. A stop-loss order is designed to limit a loss when the price is moving in the opposite direction to the most recent buy or sell [12].

  6. A take profit is an order to buy or sell when the market reaches a target price to fix the profit [12].

  7. S is a number of stocks that can be traded in the daily portfolio (Fig. 1).

  8. All stocks from the portfolio are held, as there is no basis for selecting a subset of specific stock.

  9. Implies that each stock is invested in equally each day, subject to the 10% account balance and flat rate rules from Sect. 4.2.

  10. Naturally, the recommended stock is free to change each day.

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Acknowledgements

Alexander Loginov gratefully acknowledges support from the MITACS Accelerate Scholarship program.

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  1. Faculty of Computer Science, Dalhousie University, 6050 University Avenue, Halifax, NS, Canada

    Alexander Loginov, Malcolm Heywood & Garnett Wilson

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  1. Alexander Loginov
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  2. Malcolm Heywood
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Correspondence to Malcolm Heywood.

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Loginov, A., Heywood, M. & Wilson, G. Stock selection heuristics for performing frequent intraday trading with genetic programming. Genet Program Evolvable Mach 22, 35–72 (2021). https://doi.org/10.1007/s10710-020-09390-5

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