Book Image

Machine Learning for Algorithmic Trading - Second Edition

By : Stefan Jansen
Book Image

Machine Learning for Algorithmic Trading - Second Edition

By: Stefan Jansen

Overview of this book

The explosive growth of digital data has boosted the demand for expertise in trading strategies that use machine learning (ML). This revised and expanded second edition enables you to build and evaluate sophisticated supervised, unsupervised, and reinforcement learning models. This book introduces end-to-end machine learning for the trading workflow, from the idea and feature engineering to model optimization, strategy design, and backtesting. It illustrates this by using examples ranging from linear models and tree-based ensembles to deep-learning techniques from cutting edge research. This edition shows how to work with market, fundamental, and alternative data, such as tick data, minute and daily bars, SEC filings, earnings call transcripts, financial news, or satellite images to generate tradeable signals. It illustrates how to engineer financial features or alpha factors that enable an ML model to predict returns from price data for US and international stocks and ETFs. It also shows how to assess the signal content of new features using Alphalens and SHAP values and includes a new appendix with over one hundred alpha factor examples. By the end, you will be proficient in translating ML model predictions into a trading strategy that operates at daily or intraday horizons, and in evaluating its performance.

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Table of Contents (27 chapters)
Preface
Preface
What to expect
What's new in the second edition
Who should read this book
What this book covers
To get the most out of this book
Get in touch
1
Machine Learning for Trading – From Idea to Execution
Machine Learning for Trading – From Idea to Execution
The rise of ML in the investment industry
Designing and executing an ML-driven strategy
ML for trading – strategies and use cases
Summary
Free Chapter
2
Market and Fundamental Data – Sources and Techniques
Market and Fundamental Data – Sources and Techniques
Market data reflects its environment
Working with high-frequency data
API access to market data
How to work with fundamental data
Efficient data storage with pandas
Summary
3
Alternative Data for Finance – Categories and Use Cases
Alternative Data for Finance – Categories and Use Cases
The alternative data revolution
Sources of alternative data
Criteria for evaluating alternative data
The market for alternative data
Working with alternative data
Summary
4
Financial Feature Engineering – How to Research Alpha Factors
Financial Feature Engineering – How to Research Alpha Factors
Alpha factors in practice – from data to signals
Building on decades of factor research
Engineering alpha factors that predict returns
From signals to trades – Zipline for backtests
Separating signal from noise with Alphalens
Alpha factor resources
Summary
5
Portfolio Optimization and Performance Evaluation
Portfolio Optimization and Performance Evaluation
How to measure portfolio performance
How to manage portfolio risk and return
Trading and managing portfolios with Zipline
Measuring backtest performance with pyfolio
Summary
6
The Machine Learning Process
The Machine Learning Process
How machine learning from data works
The machine learning workflow
Summary
7
Linear Models – From Risk Factors to Return Forecasts
Linear Models – From Risk Factors to Return Forecasts
From inference to prediction
The baseline model – multiple linear regression
How to run linear regression in practice
How to build a linear factor model
Regularizing linear regression using shrinkage
How to predict returns with linear regression
Linear classification
Summary
8
The ML4T Workflow – From Model to Strategy Backtesting
The ML4T Workflow – From Model to Strategy Backtesting
How to backtest an ML-driven strategy
Backtesting pitfalls and how to avoid them
How a backtesting engine works
backtrader – a flexible tool for local backtests
Zipline – scalable backtesting by Quantopian
Summary
9
Time-Series Models for Volatility Forecasts and Statistical Arbitrage
Time-Series Models for Volatility Forecasts and Statistical Arbitrage
Tools for diagnostics and feature extraction
How to diagnose and achieve stationarity
Univariate time-series models
Multivariate time-series models
Cointegration – time series with a shared trend
Statistical arbitrage with cointegration
Summary
10
Bayesian ML – Dynamic Sharpe Ratios and Pairs Trading
Bayesian ML – Dynamic Sharpe Ratios and Pairs Trading
How Bayesian machine learning works
Probabilistic programming with PyMC3
Bayesian ML for trading
Summary
11
Random Forests – A Long-Short Strategy for Japanese Stocks
Random Forests – A Long-Short Strategy for Japanese Stocks
Decision trees – learning rules from data
Random forests – making trees more reliable
Long-short signals for Japanese stocks
Summary
12
Boosting Your Trading Strategy
Boosting Your Trading Strategy
Getting started – adaptive boosting
Gradient boosting – ensembles for most tasks
Using XGBoost, LightGBM, and CatBoost
A long-short trading strategy with boosting
Boosting for an intraday strategy
Summary
13
Data-Driven Risk Factors and Asset Allocation with Unsupervised Learning
Data-Driven Risk Factors and Asset Allocation with Unsupervised Learning
Dimensionality reduction
PCA for trading
Clustering
Hierarchical clustering for optimal portfolios
Summary
14
Text Data for Trading – Sentiment Analysis
Text Data for Trading – Sentiment Analysis
ML with text data – from language to features
From text to tokens – the NLP pipeline
Counting tokens – the document-term matrix
NLP for trading
Summary
15
Topic Modeling – Summarizing Financial News
Topic Modeling – Summarizing Financial News
Learning latent topics – Goals and approaches
Probabilistic latent semantic analysis
Latent Dirichlet allocation
Modeling topics discussed in earnings calls
Topic modeling for with financial news
Summary
16
Word Embeddings for Earnings Calls and SEC Filings
Word Embeddings for Earnings Calls and SEC Filings
How word embeddings encode semantics
How to use pretrained word vectors
Custom embeddings for financial news
word2vec for trading with SEC filings
Sentiment analysis using doc2vec embeddings
New frontiers – pretrained transformer models
Summary
17
Deep Learning for Trading
Deep Learning for Trading
Deep learning – what's new and why it matters
Designing an NN
A neural network from scratch in Python
Popular deep learning libraries
Optimizing an NN for a long-short strategy
Summary
18
CNNs for Financial Time Series and Satellite Images
CNNs for Financial Time Series and Satellite Images
How CNNs learn to model grid-like data
CNNs for satellite images and object detection
CNNs for time-series data – predicting returns
Summary
19
RNNs for Multivariate Time Series and Sentiment Analysis
RNNs for Multivariate Time Series and Sentiment Analysis
How recurrent neural nets work
RNNs for time series with TensorFlow 2
RNNs for text data
Summary
20
Autoencoders for Conditional Risk Factors and Asset Pricing
Autoencoders for Conditional Risk Factors and Asset Pricing
Autoencoders for nonlinear feature extraction
Implementing autoencoders with TensorFlow 2
A conditional autoencoder for trading
Summary
21
Generative Adversarial Networks for Synthetic Time-Series Data
Generative Adversarial Networks for Synthetic Time-Series Data
Creating synthetic data with GANs
How to build a GAN using TensorFlow 2
TimeGAN for synthetic financial data
Summary
22
Deep Reinforcement Learning – Building a Trading Agent
Deep Reinforcement Learning – Building a Trading Agent
Elements of a reinforcement learning system
How to solve reinforcement learning problems
Solving dynamic programming problems
Q-learning – finding an optimal policy on the go
Deep RL for trading with the OpenAI Gym
Summary
23
Conclusions and Next Steps
Conclusions and Next Steps
Key takeaways and lessons learned
ML for trading in practice
Conclusion
24
References
References
25
Index
Index
Appendix: Alpha Factor Library
Appendix: Alpha Factor Library
Common alpha factors implemented in TA-Lib
WorldQuant's quest for formulaic alphas
Bivariate and multivariate factor evaluation

Preface

If you are reading this, you are probably aware that machine learning (ML) has become a strategic capability in many industries, including the investment industry. The explosion of digital data closely related to the rise of ML is having a particularly powerful impact on investing, which already has a long history of using sophisticated models to process information. These trends are enabling novel approaches to quantitative investment and are boosting the demand for the application of data science to both discretionary and algorithmic trading strategies.

The scope of trading across asset classes is vast because it ranges from equities and government bonds to commodities and real estate. This implies that a very large range of new alternative data sources may be relevant above and beyond the market and fundamental data that used to be at the center of most analytical efforts in the past.

You also may have come across the insight that the successful application of ML or data science requires the integration of statistical knowledge, computational skills, and domain expertise at the individual or team level. In other words, it is essential to ask the right questions, identify and understand the data that may provide the answers, deploy a broad range of tools to obtain results, and interpret them in a way that leads to the right decisions.

Therefore, this book provides an integrated perspective on the application of ML to the domain of investment and trading. In this preface, we outline what you should expect, how we have organized the content to facilitate achieving our objectives, and what you need both to meet your goals and have fun in the process.

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