Application of evolutionary computation for rule discovery in stock algorithmic trading: A literature review

Yong Hu, Kang Liu, Xiangzhou Zhang, Lijun Su, Wai Ting Ngai, Mei Liu

Research output: Journal article publicationReview articleAcademic researchpeer-review

75 Citations (Scopus)

Abstract

Despite the wide application of evolutionary computation (EC) techniques to rule discovery in stock algorithmic trading (AT), a comprehensive literature review on this topic is unavailable. Therefore, this paper aims to provide the first systematic literature review on the state-of-the-art application of EC techniques for rule discovery in stock AT. Out of 650 articles published before 2013 (inclusive), 51 relevant articles from 24 journals were confirmed. These papers were reviewed and grouped into three analytical method categories (fundamental analysis, technical analysis, and blending analysis) and three EC technique categories (evolutionary algorithm, swarm intelligence, and hybrid EC techniques). A significant bias toward the applications of genetic algorithm-based (GA) and genetic programming-based (GP) techniques in technical trading rule discovery is observed. Other EC techniques and fundamental analysis lack sufficient study. Furthermore, we summarize the information on the evaluation scheme of selected papers and particularly analyze the researches which compare their models with buy and hold strategy (B&H). We observe an interesting phenomenon where most of the existing techniques perform effectively in the downtrend and poorly in the uptrend, and considering the distribution of research in the classification framework, we suggest that this phenomenon can be attributed to the inclination of factor selections and problem in transaction cost selections. We also observe the significant influence of the transaction cost change on the margins of excess return. Other influenced factors are also presented in detail. The absence of ways for market trend prediction and the selection of transaction cost are two major limitations of the studies reviewed. In addition, the combination of trading rule discovery techniques and portfolio selection is a major research gap. Our review reveals the research focus and gaps in applying EC techniques for rule discovery in stock AT and suggests a roadmap for future research.
Original languageEnglish
Pages (from-to)534-551
Number of pages18
JournalApplied Soft Computing Journal
Volume36
DOIs
Publication statusPublished - 23 Aug 2015

Keywords

  • Algorithmic trading
  • Classification framework
  • Evolutionary computation
  • Literature review
  • Rule discovery
  • Stock trading rule

ASJC Scopus subject areas

  • Software

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