Exploiting Risk-Aversion and Size-dependent fees in FX Trading with Fitted Natural Actor-Critic

ArXiv ID: 2410.23294 “View on arXiv”

Authors: Unknown

Abstract

In recent years, the popularity of artificial intelligence has surged due to its widespread application in various fields. The financial sector has harnessed its advantages for multiple purposes, including the development of automated trading systems designed to interact autonomously with markets to pursue different aims. In this work, we focus on the possibility of recognizing and leveraging intraday price patterns in the Foreign Exchange market, known for its extensive liquidity and flexibility. Our approach involves the implementation of a Reinforcement Learning algorithm called Fitted Natural Actor-Critic. This algorithm allows the training of an agent capable of effectively trading by means of continuous actions, which enable the possibility of executing orders with variable trading sizes. This feature is instrumental to realistically model transaction costs, as they typically depend on the order size. Furthermore, it facilitates the integration of risk-averse approaches to induce the agent to adopt more conservative behavior. The proposed approaches have been empirically validated on EUR-USD historical data.

Keywords: Reinforcement Learning, Fitted Natural Actor-Critic, Intraday Price Patterns, Foreign Exchange (FX)

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 6.0/10
• Quadrant: Holy Grail
• Why: The paper employs a sophisticated Reinforcement Learning algorithm (Fitted Natural Actor-Critic) involving continuous action spaces, risk aversion modeling, and natural gradient theory, indicating high mathematical complexity. It is validated on real historical EUR-USD data with realistic transaction cost modeling, though it lacks specific code or detailed performance metrics in the excerpt, suggesting moderate empirical rigor.

  flowchart TD
    A["Research Goal<br>Identify & leverage intraday FX patterns<br>to optimize automated trading"] --> B["Methodology: Fitted Natural Actor-Critic<br>Reinforcement Learning with continuous actions"]
    B --> C["Data & Inputs<br>EUR-USD historical data"]
    C --> D["Key Features Implemented"]
    D --> E["Computational Process<br>Agent training & execution"]
    subgraph D ["Key Features Implemented"]
        F["Size-dependent fees<br>Realistic transaction costs"]
        G["Risk-aversion modeling<br>Conservative trading behavior"]
    end
    E --> H["Key Findings & Outcomes"]
    H --> I["Effective trading strategy<br>trained on intraday patterns"]
    H --> J["Realistic cost modeling<br>via variable order sizes"]
    H --> K["Risk-averse agent behavior<br>validated empirically"]