# Neural network trading robots, Neural Network Trading: A Getting Started Guide for Algo Trading

If you trading in mt4 binary options what you see, check out the entire curriculum here. Find out what Robot Wealth is all about here. Normally if you want to learn about neural networks, you need to be reasonably well versed in matrix and vector operations — the world of linear algebra.

This article is different.

The best place to start learning about neural networks is the perceptron. The perceptron is the simplest possible artificial neural network, consisting of just a single neuron and capable of learning a certain class of binary classification problems.

Perceptrons neural network trading robots the perfect introduction to ANNs and if you can understand how they work, the leap to more complex networks and their attendant issues will not be nearly as far.

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So we will explore their history, what they do, how they learn, where they fail. However, in the simple example below, my perceptron trading strategy returned a surprisingly good walk-forward result. Maybe they are worthy of a closer look after all.

A Brief History of the Perceptron The perceptron has a long history, dating back to at least the mid s. Following its discovery, the New York Times ran an article that claimed that the perceptron was the basis of an artificial intelligence AI that would be able to walk, talk, see and even demonstrate consciousness.

Soon after, this was proven to be hyperbole on a staggering scale, when the perceptron was shown to be wholly incapable of classifying certain types of problems. The disillusionment that followed essentially led to the first AI winter, and since then we have seen a repeating pattern of hyperbole followed by disappointment in relation to artificial intelligence.

Artificial Neural Networks: Modelling Nature Algorithms modelled on biology are a fascinating area of computer science. Nature has been used as a model for other optimization algorithms, as well as the basis for various design neural network trading robots.

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In this same vein, ANNs attempt to learn relationships and patterns using a somewhat loose model of neurons in the brain. The perceptron is a model of a single neuron. I neural network trading robots undertook some study in computational neuroscience, and one of the surprising take-aways was how little we know about how the brain actually works, not to mention the incredible research currently being undertaken to remedy that.

The neuron firstly sums the weighted inputs and the bias termrepresented by S in the sketch above. Then, S is passed to the activation function, which simply transforms S in some way. The output of the activation function, z is then the output of the neuron. The idea behind ANNs is that by selecting good values for the weight parameters and the biasthe ANN can model the relationships between the inputs and some target. In the sketch, we have a single neuron with four weights and a bias parameter to learn.

Modifications The first thing we need to do to improve the profitability of our model, is make a couple improvements on the code we wrote in the last article. If you do not yet have the code, you can grab it from my GitHub. Instead, it is inherently captured by the recursive nature of the network. Neural network trading robots each time step, the input from the data set is passed into the algorithm, along with the output from the last time step. Stationary Data It was also pointed out to me on the last article that our time series data is not stationaryand therefore, any machine learning model is going to have a hard time predicting future values.

This enables ANNs to approximate any arbitrary function, linear or nonlinear. The perceptron consists of just a single neuron, like in our sketch above.

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This greatly simplifies the problem of learning the best weights, but it also has implications for the class of problems that a perceptron can solve. There are many different activation functions that convert an input signal in a slightly different way, depending on the purpose of the neuron.

Recall that the perceptron is a binary classifier. That is, it predicts either one or zero, on or off, up or down, etc. It follows then that our activation function needs to convert the input signal which neural network trading robots be any real-valued number into either a one or a zero5or a 1 and a -1, or any other binary outputcorresponding to the predicted class.

What sort of function accomplishes this? The trick to making this useful is finding learning a set of weights, wthat lead to good predictions neural network trading robots this activation function. How Does a Perceptron Learn? We already know that the inputs to a neuron get multiplied by some weight value particular to each individual input.

The sum of these weighted inputs is then transformed into an output via an activation function. In order to find the best values for our weights, we start by assigning them random values and then start feeding observations from our training data to the perceptron, one by one.

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Each output of the perceptron is compared with the actual target value for that observation, and, if the prediction was incorrect, the weights adjusted so that the prediction would have been closer to the actual target.

This is repeated until the weights converge. In perceptron learning, the weight update function is simple: when a target is misclassified, we simply take the sign of the error and then add or subtract the inputs that led to the misclassifiction to the existing neural network trading robots.

In this way, weights are gradually updated until they converge. Each observation consists of four measurements sepal length, sepal width, petal length and petal width and the species of iris to which each observed flower belongs.

Three different species are recorded in the data set setosa, versicolor, and virginica. In the full iris data set, there are three species. However, perceptrons are for binary classification neural network trading robots is, for distinguishing between two possible outcomes. Therefore, for the purpose of this exercise, we remove all observations of one of the species here, virginicaand train a perceptron to distinguish between the remaining two.

We also need to convert the species classification into a binary variable: here we use 1 for the first species, and -1 for the other.

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Further, there are four variables in addition to the species classification: petal length, petal width, sepal length and sepal width. These data transformations result in the following plot of the remaining two species in the two-dimensional feature space of petal length and petal width: The plot suggests that petal length and petal width are strong predictors of species — at least in our training data set.

Can a perceptron learn to tell them apart? Training our perceptron neural network trading robots simply a matter of initializing the weights here we initialize them to zero and then implementing the perceptron learning rule, which just updates the weights based on the error of each observation with the current weights. In this example we perform five sweeps through the entire data set, that is, we train the perceptron for five epochs. At the end of each epoch, we calculate the total number of misclassified training observations, which we hope will decrease as training progresses.

### A Brief History of the Perceptron

In fact, after epoch 1, the perceptron predicted the same class for every observation! Therefore it misclassified 50 out of the observations there are 50 observations of each species in the data set.

However after two epochs, the perceptron was able to correctly classify the entire data set by learning appropriate weights. Another, perhaps more intuitive way, to view the weights that the perceptron learns is in terms of its decision boundary.

On one side of the line, the perceptron always predicts -1, and on the other, it always predicts 1.

Length', 'Petal. You just built and trained your first neural network. When we plot these species in their feature space, we get this: This looks a slightly more difficult problem, as this time the difference between the two classifications is not as clear cut. The learning rate controls the speed with which weights are adjusted during training.

We simply scale the adjustment by the learning rate: a high learning rate means that weights are subject to bigger adjustments. Sometimes this is a good thing, for example when the weights are far from their optimal values.

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But sometimes this can cause the weights to oscillate back and forth between two high-error states without ever finding a better solution. In that case, a smaller learning rate is desirable, which can be neural network trading robots of as fine tuning of the weights. Finding the best learning rate is largely a trial and error process, but a useful approach is to reduce the learning rate as training proceeds.

In the example below, we do that by scaling the learning rate by the neural network trading robots of the epoch number. Also note that the error rate is never reduced to zero, that is, the perceptron is never able to perfectly classify this data set. When we plot these species in their feature space, we get this: This time, there is no straight line that can perfectly separate the two species. This makes it an excellent choice for independent traders and those getting started with algorithmic trading.

However, sometimes simplicity is not a bad thing, it seems. Conclusions I hope this article not only whet your appetite for further exploration of neural networks, but facilitated your understanding of the basic concepts, without getting too hung up on the math. I intended for this article to be an introduction to neural network trading robots networks where the perceptron was to be nothing more than a learning aid.

If this interests you too, some ideas you neural network trading robots consider include extending the backtest, experimenting with different signals and targets, testing the algorithm on other markets and of course considering data mining bias.

Thanks for reading!