Predicting risk/reward ratio in financial markets for asset management using machine learning

ArXiv ID: 2311.09148 “View on arXiv”

Authors: Unknown

Abstract

Financial market forecasting remains a formidable challenge despite the surge in computational capabilities and machine learning advancements. While numerous studies have underscored the precision of computer-generated market predictions, many of these forecasts fail to yield profitable trading outcomes. This discrepancy often arises from the unpredictable nature of profit and loss ratios in the event of successful and unsuccessful predictions. In this study, we introduce a novel algorithm specifically designed for forecasting the profit and loss outcomes of trading activities. This is further augmented by an innovative approach for integrating these forecasts with previous predictions of market trends. This approach is designed for algorithmic trading, enabling traders to assess the profitability of each trade and calibrate the optimal trade size. Our findings indicate that this method significantly improves the performance of traditional trading strategies as well as algorithmic trading systems, offering a promising avenue for enhancing trading decisions.

Keywords: Algorithmic Trading, Market Forecasting, Profit/Loss Prediction, Risk Management, Trade Sizing, Equities

Complexity vs Empirical Score

• Math Complexity: 4.0/10
• Empirical Rigor: 7.0/10
• Quadrant: Street Traders
• Why: The paper introduces specific ML architectures and features (technical indicators) but relies on standard implementations and lacks theoretical derivations or novel proofs, resulting in moderate math complexity. The empirical rigor is high due to the use of real historical Bitcoin data, detailed preprocessing, clear train/validation/test splits, and the focus on a backtest-ready algorithmic trading strategy, though actual backtest performance metrics are not provided in the excerpt.

  flowchart TD
    A["Research Goal<br>Predict Risk/Reward Ratio for Asset Management"] --> B["Data Input<br>Financial Market Data"]
    B --> C["Methodology Step 1<br>Forecast Profit/Loss Outcomes"]
    B --> D["Methodology Step 2<br>Integrate with Market Trend Predictions"]
    C --> E["Computational Process<br>Algorithmic Trading & Trade Sizing"]
    D --> E
    E --> F["Key Finding 1<br>Improved Traditional Strategy Performance"]
    E --> G["Key Finding 2<br>Enhanced Algorithmic Trading Systems"]