Using Machine Learning in Trading and Finance

Endogenous and Exogenous trading rule

• Endo: long/short decision based on price data
• Exgo: uses other factors to make decision
  • Are stock price and voluem data sufficient to enter a trade
  • Can patterns of past predict?
  • Extrapolate data pattern?
  • E.g.
    • Monetary policy
    • Geopolitical
    • Derivative market
• Excit rules
  • Profit-exit
    • Bid-ask spread, Brokerage commisions, Exchange fees
  • Stopped out losses
    • Close position at acceptable loss
    • To reduce risk: stop-loss level based on risk tolerance
      • market noise can trigger temporary price drops
        • volatilie and less liquid market
      • Tight/Loose trade off between limiting risk and a lot of small losses
      • Static Stop Loss
      • Dynamic Stop Loss
      • Variable Dynamic Stop Loss
  • Time out Exit
    • Can’t risk holding overnight