Prediction of Future Stock Market Prices

Even Cheng

Even Cheng
CS273A-Machine Learning
Jun 10, 2010

Prediction of Future Stock Market Prices

ABSTRACT
Everyone wants to make money from stock market. In real life the stock market is decided by
various factors, such as financial crisis in Europe will affect to financial stocks in the states, or the oil
spill in Gulf makes the stock value of British Petroleum cut into half after the crisis last for one
month. From the aspects of machine learning, these accidents are less predictable from data, but
instead, we want to simplify our prediction under the assert there is no obvious force outside to
affect the stock price and how is the curve of one stock price should be? Clearly, this report is based
on the idea: What if we can predict the price in the coming future? In that case we can know if a
stock price is going up in the near future, we will buy it more in. The other case, if we know the
stock price is going down drastically, we should be better selling it out quickly. In this report, we will
briefly review a couple classification methods that are used to predict stock prices in Section 2, and
in Section 3 we will introduce our dataset. In Section 4 we will introduce the way we do feature
selection and the implementation. Section 5 contains our experiment results and discussion. In last
two parts, we are going to conclude this report by proposing possible future works for this topic and
conclusion.

1. INTRODUCTION learning in machine learning. Most of main

For most people who invest in stock
market wants to know how will one stock
price go up or down tomorrow. If we know it
is going to go up, people will buy in the stock
more in order to earn the profit, and on the
contrary side, we will sell the shares as soon as
possible to prevent from significant loss. As a
result, in this paper we are going to make use
of our knowledge in the past: how does the
stock infatuates from time t-k to time t, to
build an empirical model, and predict the
highest price and lowest price in the time
frame from t+1 to t+5.
2. RELATED WORKS
There are a series of research on
predicting time series such as stock price by
empirical investigation on the behavior of one
stock price implemented with supervised
goal of these papers is evaluating the
direction of change (sign) in a stock. For
example, in Rodriguez’s paper an Adaboost
classifier is constructed by means of
integrating several weak classifiers into a
strong ensemble[2]. This method expect to
gather all the benefits from every weak
classifiers to retrieve a better result. Tsaih
purposed an hybrid AI approach which
incorporates a rule-based system to provide
the neural network training samples, and a
reasoning neural network is implemented
instead of back propagation network that
usually employed[3]. Another investigation
adopts the probabilistic neural network to
forecast the direction of price movement in
Taiwan stock index claimed to gain a higher
accuracy than other investment strategies
such as generalized methods of moments
with Kalman filter or random walk.[5]

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Even Cheng

3. DATA ANALYSIS
Our data is consist of 7 time series called
stock a, b, c, d, e, f, g respectively, and each
time series represents the fluctuation status of
one stock price. There are 441,843 data rows
in each series, which means this dataset
collects 441,843 minutes of data stock prices
for stock a to g. In every time series, there
contains following 6 columns:
• Open: This column indicates the
opening price of a stock at time t.
• Max: This column indicates the highest
stock price of a stock in time t. Figure 2: The decision process of KNN algorithm and
its decision curve based on the dataset.
• Min: This column indicates the lowest
stock price of a stock in time t.
neighbors which is calculated by computing
• Close: This column indicates the closing Euclidean distance from the new node to all
price of a stock at time t. the nodes in training dataset, while k is a
• No_trade: This column indicates the positive integer and run voting algorithm
Number of trades occur in time t. according to these labels.

• Volume: This column indicates the

Total volume of trades completed in time t.
4.2.FEATURE VECTOR SELECTION
4. IMPLEMENTATION
Intuitively, we use data in the past as our
4.1.CLASSIFICATION METHOD feature vector to build our model. We collect
data from time t-k to t, where time t indicates
In this report, we use K-Nearest Neighbor ‘now’ at one time point. We also incorporate
classification method to predict our results.
The idea of KNN classifier is simple. It
classifies a new data node, or testing data by
gathering the labels from its k nearest

Figure 3: compute Euclidean Distance from

node p to node q for p and q have n dimensions.

Figure 1: The stock price of NASDAQ:GOOG in one

day. miscellaneous data to assist our prediction,
such as the opening price, closing price,

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 Prediction of Future Stock Market Prices
Even Cheng
number of trade, and volume of one stock
price.
4.3.EVALUATION METHOD
We evaluate our prediction results by
computing the root mean square error
(RMSE) between real maximum/minimum in
next 5 minutes and the predicted maximum/
minimum returned by our classification
method. And our baseline is predicting the
maximum and minimum in next 5 minutes by
guess they are the same to the highest and
lowest price at this minute. The way to
compute root mean square error is illustrated
as:
5. EXPERIMENT RESULTS
5.1.KNOWLEDGE TO THE PAST
Figure 4: The definition of root mean square error
(RMSE)
Figure 5: Feature vector extraction: looking back from time t to t-k minute
The following results are trained by using
time series between time 1 to time 400,000,
and testing data are consists of time series
from time 400,001 to time 441,838. However,
for the need of displaying data in this paper,
we will only crop a small scope of them. All
results are run with Matlab 7, on a Macbook
Pro laptop with bootcamp under Windows
operation system.
First of all, from Figure 5 we can tell
usually as we have more knowledge to the
past, the error rate is going to decrease
gradually. The error is dropped from 10 the
beginning which when we just have
knowledge about current data to almost 8.5
when we have the highest price in past 8
minutes.
5.2.AMOUNT OF NEIGHBORS
From Figure 6 we learnt for both of the
highest and lowest price, the errors drop
down significantly before k=10. However, the
error of predicting maximum climbs up after
k is great than 10. And it results to after a
certain degree, the nearest data is not ‘near’
as expected and it becomes noise to
correctness of our prediction.
There is an interesting phenomenon here
for the case of predicting minimum data.
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Prediction of Future Stock Market Prices

Even Cheng

Figure 6: Labels gather from K nearest neighbors when K varies and error rate.

There is no obvious variance after the
number of K is greater than 10 and it may
result from the special attribute of data itself.
5.3.PREDICTING MAXIMUM AND
MINIMUM IN NEXT 5 MINUTES
After set up appropriate feature vectors
and selected the a good K where K=7, we
run the classifier to predict the label of new
data, which is the maximum or minimum
value we are looking for and painted them in
Figure 7. The dotted blue line indicates the
real answer, green line represents the highest
price at time t, and black dotted lines indicate
predicted values returned from our classifier.
We adopt two rules that described in the
following in order to get rid of unwanted
prediction.

Figure 7: Predicting maximum of stock ‘A’ in next 5 minutes with assistant lines.

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Prediction of Future Stock Market Prices
Even Cheng

Figure 8: Prediction result after removing the highest and lowest.

First of all we restore predicted values
which have Euclidean distance higher than 10
to current highest or lowest value of this
stock. After this, we removed the highest value
and lowest one in order to prevent outliers
before averaging them, and the red line here
in Figure 8 indicates our final prediction
results.
The error distribution is drawn below in
Figure 9. We can tell there are more than
90% of the our prediction errors fall between
-5 to +5 in both case of predicting the highest
and lowest price in next 5 minutes.
In Figure 10 the upper part of graph
indicates those minutes we correctly predicted
and the lower part indicates which we mis-
classified. The first data indicates we predict
the stock price is going to go up and in the
reality in next five minutes it goes up. The
second one indicates what we predicted and
in reality both stay unchanged. The third one
indicates we correctly predicted the stock

Figure 9: Distribution of error in predicting maximum and minimum data -5-

Prediction of Future Stock Market Prices
Figure 10: Signal of predicting the stock price goes up/goes down or stay unchanged.
price is going to go down. From the lower
part of Figure 10 we can tell most
classification error comes from predicting data
nodes which stay unchanged. Owing to the
special attribute of data, usually there is a
section of 5 time nodes when there is a local
maximum or minimum value. If we can make
good use of this property, and there is high
possibility we can narrow down the error.
6. FUTURE WORK
Due to the limitation of team size and
time, we can only deal with one classification
method and try to minimum the prediction
error by tuning the results. But it is very
worthy to do if we can compare this
classification results with other classification
methods, so we can compare one another and
see which classification method can fit this
stock price dataset better.
7. DISCUSSIONS AND CONCLUSION
From this report we learned the essence of
machine learning is to learn the behaviors of
data in training set, and find out an
appropriate classifier or regression model to fit
the data. We spend most our efforts in model
Even Cheng
select because we think it is a tougher
problem to choose a set of proper feature that
can fit the data well than to pick an adequate
classification method. Also, during this report,
with involving a lot of time, I learned a lot
about how to select the feature vector while
not overfitting the training data, the way to
test data, and to evaluate the final results and
interpret it by means of the root mean square
error. At last, we achieved to predict the
unseen data for 90% of the data can be
predicted less than 5 units of error.
REFERENCES
1. C. Bishop: Pattern Recognition and Machine
Learning, 2006.
2. EF Fama, The behavior of stock market prices,
Journal of Business 30, 34-105, 1965.
3. PN Rodriguez, SS Rivero, Using machine learning
algorithms to find patterns in stock prices, 2006.
4. R Tsaih, Y Hsu, CC Lai - Decision Support
Systems, Forecasting S&P 500 stock index futures
with a hybrid AI system, Decision Support System
23, 161-174, 1998.
5. AS Chen, M Leung, H Daouk, Application of
neural networks to an emerging financial market:
Forecasting and trading the Taiwan stock index,
Computers and Operations Research 30, 901-923,
2003.
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