Genetic Programming Applied to Technical Analysis

Many investors study the movement of and the statistical properties of market prices and volumes and base their decisions upon such technical analysis.

A Typical Technical Analysis Investment System

• Enter a long order when the closing price of the stock is greater than the 30-day simple moving average of the closing price.
• Close a long order when the closing price of the stock falls below the 10-day weighted moving average of the low price.

The construction of an successful investment system is often time-consuming and must be performed periodically as market conditions change. Furthermore, a system which works well for one stock may not be profitable for another stock.

Because of the number of possible indicator terms multiplied by the number of variations of each indicator, a genetic programming search may be efficiently employed to quickly find investment systems.

Examples of Genetic Programming Operations on Technical Analysis Rules

The genetic programming engine inside the Genetic System Search for Technical Analysis program uses several operations to arrive at a set of technical analysis trading rules.

Comparing Exhaustive Search and Evolutionary Computation

Exhaustive Search Method

In the construction of technical analysis trading systems one might use a brute-force or exhaustive search for the optimized set of rules. You select a list of indicators and, for each indicator, the range of possible values.

As an example, one indicator would be the simple moving average. There are versions of that average for the open, high, low, close and volume values at each trading bar. Each of those versions must be tested with a range of periods. One might build tests for each period from 5 to 300 bars.

All indicators must be tested with each of the possible variables. That's everything from the 5-bar, simple moving average of the open to the 300-bar simple moving average of the volume. Now multiply that by the number of bars in your stock's data file.

So far you have built the tests for just one indicator. The number of test combinations quickly explodes.