Quantitative Finance

ISSN: 1469-7688 (Print) 1469-7696 (Online) Journal homepage: https://www.tandfonline.com/loi/rquf20

Prediction of stock price movement based on daily

high prices

Marija Gorenc Novak & Dejan Velušček

To cite this article: Marija Gorenc Novak & Dejan Velušček (2016) Prediction of stock price
movement based on daily high prices, Quantitative Finance, 16:5, 793-826

To link to this article: https://doi.org/10.1080/14697688.2015.1070960

Published online: 15 Sep 2015.

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Quantitative Finance, 2016
Vol. 16, No. 5, 793–826, http://dx.doi.org/10.1080/14697688.2015.1070960

Prediction of stock price movement based on daily

high prices
MARIJA GORENC NOVAK∗ †‡ and DEJAN VELUŠČEK‡§¶
†XLAB d.o.o., Pot za Brdom 100, 1000 Ljubljana, Slovenia
‡Faculty of Mathematics and Physics, University of Ljubljana, Jadranska 19, 1000 Ljubljana, Slovenia
§Institute of Mathematics, Physics and Mechanics, University of Ljubljana, Jadranska 19, 1000 Ljubljana, Slovenia

(Received 13 January 2014; accepted 26 June 2015)

Prediction of stock close price movements has attracted a lot of research interest. Using machine
learning techniques, especially statistical classifiers, for day ahead forecasting of the movement of
daily close prices of a broad range of several hundreds of liquid stocks is generally not very successful.
We suspect that one of the reasons for failure is the relatively high volatility of prices in the last minutes
before the market closes. There have been some attempts to use less volatile daily high prices instead,
but the studies concentrated only on a specific non-statistical machine learning approach on a small
number of specific securities. We show that incorporating statistical classifiers for day ahead daily
high price movement predictions in to some simple portfolio management techniques significantly
increases their performance. Tests performed on S&P 500 stocks show that such a strategy is robust,
i.e. the difference in reliability for different stocks does not vary significantly, and that such a strategy
greatly outperforms the S&P 500 index and several other benchmarks while increasing the risk only
by a small amount.

Keywords: Stock price movement prediction; Trading strategy; Daily high price; Support vector
machines; Linear discriminant analysis; Naïve Bayes
JEL Classification: C10, C38, C45, C53, G11

1. Introduction and related work
The market can be considered as a system that takes in a lot
of information, such as fundamental information (e.g. formal
records that are in financial statements), political events, news,
rumours, general economic conditions, investors’ expectations
and psychology of investors, and produces an output. A model
tries to capture the behaviour of the financial market, but it takes
as an input only a small subset of this information. The other
information cannot be modelled and plays the role of noise as
far as the input is concerned (Abu-Mostafa and Atiya 1996).
Even with the presence of noise, there is considerable evidence
showing that the stock market prices or stock market trends are
to some extent predictable (Baba and Suto 2000, Leigh et al.
2001, Huang et al. 2005, Yu et al. 2005, Ou and Wang 2009,
Tsai and Hsiao 2010). This paper focuses on prediction based
on daily high prices (we take 370 companies which are included
in the S&P 500) instead of commonly used daily close prices. It
was shown that the S&P 500 exhibits unusually large realized
volatility in the last 15 min of daily trading sessions, which is
due to large volumes of trades in stocks that are its members
∗ Corresponding author. Email: manja.gorenc@xlab.si
¶Current address: J. Stefan Institute, Jamova cesta 39, 1000 Ljubljana, Slovenia.
© 2015 Taylor & Francis
(ter Horst et al. 2012). Consequently, the daily high prices are
significantly less volatile than daily close prices (see figure 1),
since the daily high price is usually not achieved during the
most volatile 15 min.
Machine learning models using more volatile data describe
more noise than with less volatile data. In cases where learning
was performed on noisy data, the machine learner may adjust
to very specific random features of the training data that have
no causal relation to the target function.
The fact that high prices are less volatile than close prices
makes the price movement based on daily high prices more
predictable. It seems that we can get enough information about
daily high price behaviour to be useful for successful day-
ahead forecasting. Despite the fact that the volatility of daily
high prices is significantly lower than the volatility of daily
close prices and that the knowledge on day-ahead movement of
daily high price would be able to contribute to, e.g. automatic
trading strategies, expert systems for portfolio management,
etc., the majority of related works only try to forecast close
price movements (Jung and Bond 1996, Lendasse et al. 2000,
Gestel et al. 2001, Chen et al. 2003, Huang et al. 2005, Kim
2006, Huang and Tsai 2009, Lu et al. 2009, Kara et al. 2011,
Subha and Nambi 2012, Kao et al. 2013). The reason why
794 M. Gorenc Novak and D. Velušček
researchers prefer to analyse close-to-close price movement is
that the times of close prices are well-defined, while the time
of daily low and high prices is not. Although the moment at
which a daily high price is achieved is a random number that
is not even a stopping time, considering the natural filtration
of the price process we claim that we can still construct trad-
ing strategies which would significantly profit from machine
learning model predictions.
The academic literature which examines the forecasting of
daily high and low prices is relatively rare (e.g. Martinez et al.
2009, Mettenheim and Breitner 2012), compared with the
amount of literature based on daily close data: the authors
Martinez et al. (2009) show that using an artificial neural
network (ANN), they can forecast the lowest and highest stock
prices of the current trading day of the two main stocks of the
Brazilian stock market. Mettenheim and Breitner (2012) show
that it is possible to successfully model the intraday dynamics
of five liquid US securities using ANN model forecasts. For
each day, they forecast daily low and high prices and propose a
trading system. These works are good motivation for research
to see if the predictions of daily high (or inversely daily low)
return movements using statistical classifiers give good per-
formance on a large part of the stocks in the S&P 500 index.
In our research, the focus is on daily high prices because in the
proposed trading strategies there are no short positions.
We build several models with a subset of information as
an input that captures the movement of daily high prices. The
hit rate of 60% was experimentally achieved, which is good
enough for building profitable trading strategies. Different
studies select their indicators as an input for model construc-
tion differently. The central idea to successful stock market
prediction is achieving the best results using the minimum
required input data and the least complex stock market model.
Much related work considers only one type of indicator (either
technical indicators or fundamental indicators). The authors
Vanstone and Finnie (2009) conclude that prediction models
which are designed for a long-term period should use funda-
mental indicators while those for a short-term period, such
as with daily prediction models, should focus on technical
indicators. Considering this research, we include only technical
indicators as input data. Atsalakis and Valavanis (2009) survey
over 100 related scientific articles applied to stock market prob-
lems and find out that the average number of input indicators
in articles is between 4 and 10. The big majority of authors
include only technical indicators, and with them they try to
predict the daily or weekly price index or movement of the
index (Lendasse et al. 2000, Yu et al. 2005, Huang and Tsai
2009, Kara et al. 2011). In our study, 11 technical indicators
are used and calculated on a lagged time series (volume, open,
high, low, close and adjusted values) to check whether the time
series properties of the past stock price movement contain any
information that is useful in predicting the future daily high
price movement. In the calculations for technical indicators, we
mainly use the lag length (indicator length) of 10 days. Shorter
indicator lengths will produce more entry signals than longer
indicator lengths and are best suited for short-term trading.
The chosen indicators in our study are selected by a review of
domain experts and prior research (Kim and Han 2000, Yao and
Tan 2000, Kim 2003, Kamruzzaman and Sarker 2004, Kumar
and Thenmozhi 2006, Kordos and Cwiok 2011, Faghani et al.
2014). In appendix 1, we briefly describe the used technical
indicators and in appendix 7, we perform some classification
tests of indicator usefulness.
Predicting the movement of price returns is a practical issue
which usually affects a financial trader’s decision to buy or to
sell an instrument. There have been a number of studies that
use the application of machine learning techniques to forecast
the stock price movement, but only a few presented empirical
results of a trading performance using obtained forecasts on
real stock market data, e.g. Ang and Quek (2006), Gestel et al.
(2001) and Saad et al. (1998). In our work, we also test whether
the classification results can be applied to self-financing trading
strategies with non-zero starting wealth. Their performance is
then compared with some benchmarks and the S&P 500. The
rest of this paper is organized as follows: section 2 presents
experimental work including a description of the data; section
3 provides the classification results; and section 4 describes
the trading strategies. The portfolio measurements and the
performance of the proposed strategies are given in section
5. Then, in section 6, our conclusions are summarized.
2. Experiments
The data used in this study are sourced from ‘Yahoo! Finance’.†
Daily open, high, low, close and volume time series are con-
sidered, where OHLC prices have been adjusted for dividends
and splits. The data comprise of daily OHLCV time series
from 31 October 2003 to 14 June 2013, a total of 2420 trading
days. We analysed time series for all 370 companies which
were members of S&P 500 index on 1 August 2013, and for
which data were available for every trading day in the above-
mentioned period. Each feature component x in our data-set is
normalized to a variable with zero mean and unit variance as
(x −μ)/σ , where μ is the mean and σ is the standard deviation
for x. The sliding window method is used and the description
of it is below.
The first period, the training set of 500 trading days (in figure
2 marked as ‘Training 1’), is used for building a forecasting
model. The chosen length of 500 trading days is a compromise
between a small stationary set which can be insufficient for
a successful training and a large but less stationary training
set (Lendasse et al. 2000). The second period, h days after
the training period (in figure 2 marked as ‘T’), is the reserved
test set and is used for comparing the classified values to the
actual. After the prediction is made and recorded, the training
set then slides forward for one period (h days) and the process
of training and testing is carried out again. This training and
testing scheme is applied to one-month models (h = 20). The
proper length of testing period h is chosen by the previous
analysis (see appendix 2, tables B1–B4). Ninety-six test set
forecasts (for each company) of daily high prices are generated
for the purpose of testing. Shortly, the described procedure
means that we update our models every 20 days. The dependent
variables are 11 technical indicators (see appendix 1). Daily
high returns are categorized as −1 or 1 where −1 means that
the next day’s daily high price is predicted to be lower than
today’s daily high price and 1 means that the next day’s daily
†http://finance.yahoo.com/
 Prediction of stock price movement 795

Figure 1. Comparison of standard deviations of daily high and close returns for the entire sample period. The stocks are ordered by increasing
standard deviation based on daily high returns. Most stocks have lower standard deviation based on daily high prices.

Figure 2. Sliding window method by one-month-based testing data.

high price is predicted to be higher than today’s daily high price.

Table 1. Confusion matrix.
To measure the predictive performance, hit rate, sensitivity,
specificity and precision for a class 1 and for a class −1 are Actual ↓ / Predicted→ Rise Fall
employed and defined in table 1. The R software environment
Rise a b
R Core Team (2014) with related packages is used to conduct Fall c d
the whole experiment.
a+d
Notes: Hit rate = a+b+c+d .
a
Sensitivity = a+c .
d .
Specificity = b+d
3. Results d .
Prec −1 = c+d
a .
Prec 1 = a+b
3.1. Choosing proper kernels and tuning SVM parameters
Selection of kernel functions is important due to different
performances of SVM. In this study, we use Gaussian radial parameter that needs to be tuned is the soft-margin constant C.
basis function (RBF) and linear function as kernels of SVM. The Gaussian RBF kernel tends to give a good performance.
The linear kernel provides a useful baseline. The only hyper- Between two kernels, the Gaussian RBF kernel usually out-
796 M. Gorenc Novak and D. Velušček
performs the polynomial kernel in both accuracy and con-
vergence time (Tay and Cao 2001, Kim 2003, Ben-Hur and
Weston 2010). There are two hyperparameters associated with
RBF kernels: C and γ which play an important role on the
generalization performance of SVMs. Too small values for C
will under-fit the training data while if C is too large, SVM
will over-fit the training set (Tay and Cao 2001, Keerthi and
Lin 2003, Kim 2003). We decided to choose bounds of the
C between 1 and 100. Tay and Cao (2001) proposed using C
between 10 and 100 due to over-fitting and under-fitting the
training set.
We try to identify the optimal choices of C and γ in order to
achieve the highest classification accuracy of unseen test exam-
ples. We set the kernel parameter γ heuristically as described
by Karatzoglou et al. (2010) and Caputo et al. (2002) and for the
upper bound we choose between C = 1, 10, 33, 55, 78, 100.
Due to high computational time, we tune hyperparameters
for RBF kernel and parameters for linear kernel on a first
training set (which is from 31 October 2003 to 26 October
2005) for each stock separately and these parameters are the
same throughout the testing period. The experiments show that
the results are not significantly different if we tune parameters
on every training set.
3.2. Classification results
In table 2, ‘train acc’ labels the average hit rate (with ac-
companying standard deviation) on all 96 training Data-sets,
while ‘test acc’ labels the average hit rate (with accompanying
standard deviation) on all 96 test set forecasts; ‘sens’, ‘spec’,
‘prec rise’and ‘prec fall’are averages for sensitivity, specificity,
precision for the class 1 and precision for the class −1 (with
accompanying standard deviations), respectively, on 96 test set
forecasts. Beside the test hit rate, the relevant measure is also
precision for the class 1, which is the number of stocks that are
correctly labelled as belonging to the class 1, divided by the
total number of stocks labelled as belonging to the class 1.
Results in table 2 show that linear SVM classifier has the
highest test hit rate, as well as the highest precision for class 1.
The proposed classifiers are able to correctly predict the direc-
tions of daily high prices in the average of 60% on the test set
period. The initially chosen batch of 370 S&P 500 companies
carries the burden of survival bias, and thus in appendix 3, we
compare the classification results obtained using a batch of 462
companies which consists of all S&P 500 companies with valid
data at a chosen date to the results by chosen 370 companies.
The comparison was conducted on a shorter time interval at
the end of the time interval for the 370 companies batch, i.e.
from 29 February 2008 to 14 June 2013. To test the impact of
the survival bias surprisingly the difference in test accuracy is
approximately 1% point regardless of the classifier.
We studied whether there are certain stocks that are consider-
ably more/less successful than others. Investigation reveals that
on average all stocks perform well and that there are no outliers.
The range of forecasts by stock is from 53.54% to 64.11% (see
appendix 4, figures D1–D4). The test period of 1920 trading
days is a long time period, wherefore we graphically present
how forecasts measured on a testing period are distributed
through time for each classifier separately (see appendix 4,
figures D5–D12).
We will take a look at all mentioned classifiers on some pro-
posed strategies which are described in the following section.
4. Trading strategies
To improve evaluation of proposed classifiers based on daily
high prices from the section 3, a simple trading strategies
(named ‘Guided D-threshold strategies’) are constructed. We
test whether classification results (exposed in table 2) could be
applied for building economically profitable strategies, thus we
formulate a set of simple trading rules guided by the directions
predicted by models. The empirical testing takes the form of a
trading simulation which closely mimics the timely investment
decisions faced by investors in the market place. An investment
horizon of 1920 trading days is used and served as testing
period in the classification task. Daily decisions are made for
one day in advance. The application of proposed strategies
consists of the following two steps:
• we build models with above-mentioned classifiers;
• constructed models are used for deriving a day-ahead
prediction, which then serves as a selection with which
stocks we trade: trading is always done in current time
with current prices.
We would like to show that incorporating classifiers into pro-
posed strategies cause statistically significantly better perfor-
mance. In this section, the Guided D-threshold trading strate-
gies are defined and compared to some benchmarks: Naïve
strategies, the Benchmark strategy, and the S&P 500 index. The
proposed strategies are compared to the S&P 500 index, which
is often used as a benchmark, and to the Benchmark strategy,
where all 370 stocks are used and are equally weighted. To
compare the strategies, some performance measures during
this section are defined. Let us describe the compound annual
growth rate (CAGR) which is the year-over-year growth rate
of an investment over a specified period of time. The CAGR
is calculated by taking the nth root of the total percentage
growth rate, where n is the number of years in the period being
considered.
  1
Ending Value # of years
CAGR = − 1.
Beginning Value
4.1. Guided D-threshold trading strategies
The investor will follow the directions of stock returns pre-
dicted by proposed classification models (from the section
3). The self-financing investment strategy chooses a particular
stock whenever there is a predicted uptrend, provided the gap
between the current open price and previous high price is high
enough.
Strategy for the trading day t and the stock j :
If the model predicts that daily high price for the stock j
will rise in the next day t and if the relative difference between
hight−1 and opent in equation (1) is bigger than threshold D
(optimal D is set experimentally on the training set), we will
 Prediction of stock price movement 797

Table 2. Classification results of different classifiers.

Method train acc test acc sens spec prec rise prec fall

LDA 63.95 ± 2.47 60.66 ± 10.69 57.92 ± 21.74 62.18 ± 20.10 60.41 ± 17.08 61.71 ± 15.58
NB 57.87 ± 2.27 57.28 ± 9.84 60.92 ± 23.24 47.84 ± 23.27 54.01 ± 15.86 56.98 ± 18.77
Linear SVM 63.49 ± 2.32 61.16 ± 10.68 63.36 ± 22.04 56.44 ± 21.37 60.60 ± 15.67 62.08 ± 17.34
RBF SVM 70.79 ± 5.78 59.39 ±10.71 61.30 ± 21.83 55.54 ± 21.46 59.05 ± 15.98 60.15 ± 17.28

Figure 3. Trading strategy illustrated on a sample of IBM stock (we did not include any D thresholds): suppose we woke up in the morning
on 4 January 2007 and decided to use the Guided D-threshold strategy. Today’s open price is lower than yesterday’s high price (on 3 January
2007) and the classification output of our chosen model is that the high price today will be higher than yesterday’s high price. We buy the
IBM stock at the open price and hold the stock until the current price exceeds the yesterday’s high price and then sell it. The figure above
shows the profit for that day. On the other hand, if the model’s output is that the high price will not reach yesterday’s high price, then we will
not trade IBM stock that day. On the next day, on 5 January 2007, the open price is lower than yesterday’s price, but the output of a model
could say that the high price will be lower than yesterday’s high price, so we do not buy the stock and thus we avoid of the possible loss. If
we get a wrong prediction for that day (i.e. the model predicts that the high price will be higher), the scenario will be that we buy the stock
at the open price, and because the current price that day does not reach yesterday’s high price, we close our position at the close price. The
figure above also notes a loss. On the next trading day, the open price is higher than high price on 5 January 2007, so that day we do not trade
the IBM stock. On the next two days suppose that the model’s output is that high price will be higher than yesterday’s, hence we could get
profit for the both days (on 10 January 2007, the close price is higher than open price so despite of wrong prediction we have the profit).

buy the stock j at the open price in the current trading day t, returnt, j = (hight−1, j − opent, j )/opent, j .
otherwise the stock j will not be traded on the current day.
 high  If the current stock price does not reach yesterday’s high
t−1, j
relative difft, j = − 1 · 100 (1) price (wrong prediction by a model), we close our position at
opent, j the end of the trading day with

We close all our open positions in the same trading day, in

particular, if the current stock price during the day t reaches returnt, j = (closet, j − opent, j )/opent, j ,
yesterday’s high price, we close our position. In that case for
day t and stock j, we achieve which can cause returns to be negative.
798 M. Gorenc Novak and D. Velušček

Managing the portfolio: in the next day following the same strategy (the Benchmark
The investor will use the following self-financing strategy: strategy is marked as ‘bench’).
• For every day t, all wealth will be invested in stocks Calculating the returns:
selected by previous strategy.
For each trading day, 370 stocks are available for trading.
• In each of the selected stocks, an equal amount of avail-
We calculate the daily return as:
able funds is invested.  
• For every stock j in our newly created portfolio, we follow 370 (closet −opent )
t=1 opent
the above strategy for trading day t and the stock j. returnt = .
• At the end of the trading day, there are no stocks in the 370
portfolio. After we trade d days, the total return is
 
total return = dt=1 (1 + returnt ) − 1
Calculating the returns and CAGR:
 
N
j=1 return t, j
returnt = , (2) 4.4. The S&P 500 index
 N 
total return = dt=1 (1 + (returnt ) − 1 (3) As a benchmark, we also use the S&P 500 (marked as ‘SPY’).
1
CAGR = (total return + 1) #of years − 1, (4)
where N is the number of stocks selected by the trading strategy 5. Portfolio measures and performance of the proposed
and d is the number of trading days. We vary the thresholds D strategies
since we would like to minimize the number of transactions,
which would give us too little profit, and to reduce the chance 5.1. Portfolio measures
of loss (probability that closet will be lower than opent ). The All portfolio measures mentioned below are cited from the
relative difference between the open price on day t + 1 and the book Reilly and Brown (2012):
high price on day t indicates the least positive return that we
will obtain in case our prediction proves to be correct.
5.1.1. Sharpe ratio. The Sharpe ratio is a portfolio perfor-
mance measure that combines risk and return performance into
4.2. Naïve strategies a single value and is stated as follows:
Ri − RFR
We want to test if including classifiers make for a significant Si =
increase in performance, which would demonstrate the benefits σi
of integrating classifiers into the strategies. For that purpose, where Ri is the expected portfolio return, RFR is the risk free
we define the Naïve strategies which mimic the Guided D- rate and σi is the standard deviation of the rate of return for
threshold strategies but are forecast free. portfolio i during the time period. The Sharpe ratio character-
If the relative difference between hight−1 and opent in equa- izes how well the portfolio’s returns compensate the investor
tion (1) is bigger than threshold D (the D thresholds are the for the risk taken (Sharpe 1994).
same as for the Guided D-threshold strategies and depend on
chosen classifier), we will buy the stock j at the open price in
trading day t. If the current stock price during the day reaches 5.1.2. Sortino ratio. The Sortino ratio captures the down-
yesterday’s high price (trading day t −1), we close our position. side risk (DR) in the portfolio. Sortino and Price (1994) defined
In that case, we get this measure as follows:
returnt, j = (hight−1, j − opent, j )/opent, j . Ri − τ
STi = ,
DR i
If the current stock price in trading day t does not reach
yesterday’s high price, we close our position at the end of the where τ is the minimum acceptable return threshold specified
trading day with for the time period and DR i is the downside risk coefficient for
portfolio i during the specified time period. In our examination,
returnt, j = (closet−1, j − opent, j )/opent, j we set τ = 0. Like the Sharpe ratio, higher values of the ST
is obtained as in equation (2), total return as in equation (3) measure indicate superior levels of portfolio management.
and CAGR as in equation (4).
5.1.3. Information ratio. This statistic measures the differ-
ence between the portfolio’s and benchmark portfolio’s aver-
4.3. Benchmark strategy age returns divided by the standard deviation of this difference.
Formally, the information ratio (IR) for portfolio j is calculated
As a Benchmark strategy, we propose a self-financing portfolio:
as:
every day we invest an equal proportion of wealth in 370 stocks
at open price and sell them at the end of the same day at close R j − Rb
IR j =
price. The money gained by selling the stocks is reinvested σER
 Prediction of stock price movement 799

Table 3. Frequencies of used D values for D-threshold strategies.

D 1% 2% 2.5% 3%

DLDA 4 21 52 19
DNB 15 15 42 24
DRBF 0 12 48 36
Dlin 5 18 52 21

Table 4. Performance of proposed Guided D-threshold strategies, Naïve strategies, index and benchmark.

Mean(%) Std(%) Sharpe ratio Sortino ratio Info ratio CAGR (%)

Guided DLDA 0.15 0.04 3.74 0.12 3.57 39.31

Guided DNB 0.15 0.04 3.89 0.13 3.74 40.21
Guided DRBF 0.17 0.04 4.29 0.14 4.23 48.07
Guided Dlin 0.15 0.04 3.94 0.13 3.81 41.30
Naive DLDA 0.09 0.03 2.70 0.09 2.48 22.67
Naive NB 0.10 0.04 2.73 0.09 2.59 23.92
Naive DRBF 0.10 0.03 2.85 0.09 2.75 24.46
Naive Dlin 0.10 0.03 2.83 0.09 2.69 24.40
Naive D0 0.02 0.02 0.92 0.03 –0.27 4.03
SPY 0.03 0.03 0.81 0.03 / 4.17
Bench 0.03 0.03 1.03 0.03 0.25 5.78

Table 5. Classification results of ‘Naïve classifiers’.

test acc sens spec prec rise prec fall

Naïve DLDA 36.17 ± 11.57 5.87 ± 7.34 67.85 ± 19.12 9.70 ± 15.55 39.66 ± 12.66
Naïve DNB 34.66 ±11.58 6.66 ± 8.17 63.97 ± 19.84 10.64 ± 15.90 38.32 ± 12.88
Naïve DRBF 37.73 ± 11.71 4.37 ± 6.41 72.55 ± 18.75 8.52 ± 15.86 41.41 ± 12.35
Naïve Dlin 36.33 ± 11.66 5.57 ± 7.27 68.27 ± 19.41 9.63 ± 15.87 39.91 ± 12.60
Naïve D0 35.33 ± 10.63 70.14 ± 14.42 0.04 ± 0.58 41.49 ± 11.57 0.10 ± 1.51

Table 6. Wilcoxon signed-rank test of daily returns. For the input data, we use two vectors of daily returns by proposed strategies using
aforementioned classifiers, Naïve D0 , Naïve DLDA, S&P 500 index and Benchmark strategy on the whole testing set. p-values between 0.01
and 0.05 are shown with one asterisk ∗ and p-values less than 0.01 are shown with two asterisks ∗∗.

Naïve DLDA Guided DLDA Guided DNB Guided DRBF Guided Dlin SPY Bench

Naïve D0 0.0000∗∗ 0.0000∗∗ 0.0000∗∗ 0.0000∗∗ 0.0000∗∗ 0.6912 0.6753

Naïve DLDA 0.0000∗∗ 0.0062∗∗ 0.0000∗∗ 0.0024∗∗ 0.0002∗∗ 0.0000∗∗
Guided DLDA 0.7894 0.2391 0.8910 0.0000∗∗ 0.0000∗∗
Guided DNB 0.1093 0.7083 0.0000∗∗ 0.0000∗∗
Guided DRBF 0.1531 0.0000∗∗ 0.0000∗∗
Guided Dlin 0.0000∗∗ 0.0000∗∗
SPY 0.3131

where Rb is the average return for a benchmark portfolio during
the period and σER is the standard deviation of the excess return
during the period. The higher the information ratio, the higher
the active return of the portfolio, given the amount of risk taken.
5.1.4. Value at Risk. Value at risk is a widely used risk
measure of the risk of loss on a specific portfolio of financial
assets. Given a confidence level α ∈ (0, 1), the Value at Risk
(VaR) of the portfolio at the confidence level α is given by
the smallest number l such that the probability that the loss L
exceeds l is at most (1 − α), i.e.
VaR α (L) = inf {l ∈ R : P(L > l) ≤ 1 − α}
= inf {l ∈ R : FL (l) ≥ α}.
5.1.5. Conditional Value at Risk. This is an alternative to
value at risk that is more sensitive to the shape of the loss
distribution in the tail of the distribution.

1 α
CVaR α = VaR γ (X )dγ
α 0
5.2. Performance of the proposed strategies
The proper performance measures that can be compared across
the strategies are mean, standard deviation, CAGR (equation
(4)), the Sharpe ratio, information ratio and the Sortino ratio
(cf. section 5.1) on all 1920 trading days. The results in table
2 show that the best performance of included classifiers in
proposed strategies (if we take into account the test hit rate
800 M. Gorenc Novak and D. Velušček

Figure 4. In the Figure, seven trading strategies are exposed: Guided D-threshold strategies, Naïve strategies, the S&P 500 index and the
Benchmark strategy. From the figure, we can see that the best Guided D-threshold strategy is when we use a SVM classifier with RBF
kernel. Also the linear SVM, LDA and NB classifiers seem very close to it. All proposed D-threshold strategies have better results than Naïve
strategies, the S&P 500 index and the Benchmark strategy. After whole seven years, we could reach more than 40% of CAGR.

and precision for the class 1 accuracy) could be for the SVM
classifier with a linear kernel.
In the Guided D-threshold strategy, we include the threshold
D described by equation (1), which indicates the least positive
return that we will obtain in case our prediction proves to be
correct by selected classifier. Changing settings of Guided D-
threshold strategy strongly affects the performance, hence the
threshold D must be carefully chosen before we include it in
trading strategy on a testing set. During the training period, we
vary D between D = 1, 2, 2.5 and 3%. We choose the one with
the highest CAGR performance. In table 3, the frequency of
used D values in the strategies is exposed. As we have 96
testing and training sets, we get 96 different D values for
each classifier. These D thresholds are used in the Guided
D-threshold strategies and in Naïve strategies, i.e. DLDA are
included in Guided D-threshold strategy using LDA classi-
fier and also in Naïve strategy. The performance of different
Guided D-threshold strategies where we take linear discrim-
inant analysis classifier (Guided DLDA), Naïve Bayes classi-
fier (Guided DNB ), SVM classifier based on a Gaussian RBF
kernel (Guided DRBF ) and SVM classifier based on a linear
kernel (Guided Dlin ); Naïve strategies with different D values
(Naïve DLDA, Naïve DNB , Naïve DRBF , Naïve Dlin and Naïve
D0 ), S&P 500 (SPY) and Benchmark strategy (bench) are
given in table 4. D0 represents the vector of zeros. The results
show that SVM with RBF kernel has the highest CAGR, mean,
Sharpe, Sortino and information ratio. All Guided D-threshold
strategies give better results than Naïve strategies, i.e. incor-
porating predictive models in the proposed strategies (Guided
D-threshold strategies) yields higher performance than without
including the model in the strategies (figure 4). To check if there
are any statistical differences between strategies, we use the
Wilcoxon signed-rank test. The classification results of Naïve
strategies are shown in table 5 which indicates that they do not
perform quite well. The hit rate on a test set is much below
50%: the specificity/sensitivity are high.
The performance of Guided D-threshold strategy also de-
pends on the chosen stocks, which can variate differently over
the trading period. The large proportion of stocks involved
in the strategy could cause big losses and also big profits,
whereas small proportion could cause small losses and also
small profits.
In appendix 5 in figures E1–E4, the number of stocks in-
volved in D-threshold trading strategies are presented using
LDA, NB, SVM with linear kernel and SVM with Gaussian
RBF kernel, respectively. From the figures, we can see that
the intensity of traded stocks is higher in the fourth quarter of
2008 (around October 2008) and in the fourth quarter of 2011.
Figures E5–E8 show profits over time on a testing period. The
frequency of positive profits are higher than of negative profits
on a D-threshold strategy for all used classifiers. In the graphs,
there can be also seen the correlation between traded stocks in
a strategy and the range of profits/loss, especially in the fourth
quarter of 2008 (around October 2008) and in the fourth quarter
 Prediction of stock price movement
of 2011. The percentage of days that have non-negative profit
is 59.48, 58.75, 58.85 and 59.79% for LDA, NB, RBF, and
linear SVM, respectively. In figures E9 and F10, the frequency
distribution of the proportion of trades resulting in a loss is
exposed.
5.3. Wilcoxon signed-rank test—statistical analysis
To assess whether two related samples of daily returns’ me-
dian’s ranks differ, the Wilcoxon signed-rank test is used. Table
6 shows the p-values of Wilcoxon tests over two obtained
vectors of daily returns (from the two different strategies) in
which distribution of the differences is symmetric around the
median. Regarding analyses from table 6, Guided D-threshold
strategies with incorporated classifiers like LDA, NB, SVM
with RBF kernel and SVM with linear kernel do not perform
significantly different from each other over the testing daily
returns, so we could not say which of the proposed strategy
performs better. All proposed D-threshold strategies perform
significantly better than all Naïve strategies (we test only Naïve
D0 and Naïve DLDA), the S&P 500 index and the Benchmark
strategy. Naïve D0 strategy, S&P 500 index and Benchmark
strategy do not perform significantly different from each other
as we can also see from figure 4 and table 4. Naïve D0 and
Naïve DLDA are significantly different from each other, which
indicates that including D into strategies contribute to higher
strategy gains.
5.4. Portfolio management
It might seem that using classifier information on daily high
movement for the decision but not for constructing the weights
of the stocks in portfolio, we are not fully utilizing the obtained
information. Hence, we also tried to improve portfolio man-
agement (see appendix 6). Instead of investing equal amount
of money in every stock in which we intend to invest, we make
the weight of that stock:
• proportional to the expected strategy gain (results in table
F2)
• proportional to forecast accuracy on a set length of 20
trading days (results in table F3)
• inversely proportional to the forecast error on a set length
of 20 trading days (results in table F4)
The results in tables F2–F4 show that portfolio manage-
ment has improved only where we use weights proportional to
forecast accuracy (for ‘Guided DNB ’, see table F3), but it is
not statistically significantly better than the basic D-threshold
strategy with equal weights. The weights used proportional
to the forecast accuracy or inversely to the forecast error are
not such good choices because the classification results for all
stocks are similar on average. It seems that there does not exist
a unique optimal strategy for portfolio management, hence it
remains an open problem.
The introduction of thresholds in our trading strategies raised
the gains but on the other hand also raised the risk: the threshold
itself suggests automatically higher volatility, but also higher
VaR and Conditional Value at Risk (CVaR) follow (see figure
F11). On the other hand, the increase in risk is bounded and
more or less constant during 2008–2011 crisis where there was
801
no risk increase at all. Overall, the increased gains more than
justify the risk increase.
6. Conclusions
Daily high prices are less volatile than the popular daily stock
close prices. For this reason, we decided to classify the daily
high prices in order to forecast whether the daily high price will
rise or fall. The successful classification results on the testing
data-set are on average 60%. We constructed simple trading
strategies in which we use the classification predictions for
one day in advance. The achieved classification accuracy was
enough to make economically profitable Guided D-threshold
strategies.
Comparing the Guided D-threshold strategies to the Naïve
strategies counterpart without any use of classifiers showed that
the use of the SVM, LDA and NB classifiers can significantly
increase the performance which demonstrates the benefits of
integrating classifiers in to the strategies. The trading exper-
iments show that the Guided D-threshold trading strategies
also perform generally better than the Benchmark strategy and
the S&P 500. To get the best possible outcome, we varied
different D thresholds, which capture the thresholds between
openi and highi−1 prices and have a big impact on the strategy
performance. The choice of D was based on the comparison
of strategy output on the training set, which leaves a lot of
room for further improvements. The classifier with the highest
classification results and also with the highest performance on
the Guided D-threshold strategy is the support vector machine
classifier with a Gaussian RBF kernel. We keep the set of tech-
nical indicators constant throughout the whole time period. The
changing behaviour of the strategies with classifiers in different
time periods (e.g. in the crisis) suggests that the set of relevant
indicators is time dependent. The inspection and analysis of
how the relevant indicators are changing during the investment
period will be performed in future work. There still remain
a lot of other open problems related to the above research,
e.g. testing the feasibility of using the proposed strategies at
higher frequency, comparing and testing different classifiers
using different attributes, including macro-economic and fun-
damental indicators as input data and portfolio management,
just to name a few. As an extension of this study, the same
study was performed for daily low prices and an appropriate
trading strategy conceived in the same spirit; the results for
the daily low were similar. Combining both the daily low and
daily high approach, a global strategy relying on long positions
in stocks based on high price prediction, and symmetrically
short positions in stocks based on low price prediction can
be constructed. There is no unique way to combine the two
approaches in such a global strategy, so the question of whether
such a strategy can be made market-neutral remains open.
Acknowledgements
The authors would like to thank Daniel Vladušič, Boris Cergol
and Rok Okorn for their help and advice.
Disclosure statement
No potential conflict of interest was reported by the authors.
802 M. Gorenc Novak and D. Velušček
Funding
This study was funded in part by the European Union, European
Social Fund, Operational Programme for Human Resources,
Development for the Period 2007–2013 [P-MR-10/134] and
Slovenian Research Agency [programme number P1-0222]
and [programme number L1-4292].
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 Prediction of stock price movement 803

Table 1. Technical indicators and formulas.

Name of indicators Formulas

1
Mt −S Mt Ht +L t +Ct i=1 0Mt−i+1
CCI (Commodity) Channel Index, 10 days 0.015Dt , where M t : 3 , S M t : 10
1
and Dt = ( i=1 0|Mt−i+1 − S Mt |)/10

SMA (Simple )
Ct +Ct−1 + ... +Ct−10
10-day moving average 10

EMAt−1 + 11 2 · (C − EMA
EMA (Exponential 10-day moving average) t t−1 )
EMAt−1 + 21 2 · (C − EMA
EMA (Exponential 20-day moving average) t t−1 )
2 · (2 · C − C ) + (1 − 2
ZLEMA (Zero lag exponential 11 t t− 9
2 11 · Z L E M At−1 )
10-day moving average)
10 · Ct +9 · Ct−1 + ... +Ct−10
WMA (Weighted 10-day moving average) 10+9+...+1
RSI (Relative Strength Index), 10 days 100 − 
100 
9 9
1+ i=0 U pt−i / i=0 Dwt−i
10 10
Momentum, 10 days Ct − Ct−10
Ct −Ct−10
ROC (Rate of change), 10 days Ct−10 · 100
SAR (Stop and reverse) S A Rt−1 + 0.02 · (E P − S A Rt−1 )
Volume Obtained from the ‘Yahoo! Finance’
Notes: Ct is the adjusted closing price, L t is the adjusted low price, Ht is the adjusted high price at time t, we use the time period of 10 or 20 days.
 
U p = ii−10 U pt ; Dw = ii−10 Dwt where
U pt = Ct − Ct−1 and Dwt = 0 if Ct > Ct−1
Dwt = Ct−1 − Ct and U pt = 0 if Ct < Ct−1 ;
EP (the extreme point) is the highest value reached by the price during the current uptrend or lowest value during a downtrend. During each period, if a new
maximum (or minimum) is observed, the EP is updated with that value. For indicators CCI, SMA, ZLEMA, WMA, RSI, momentum and ROC, we use 10 and
for EMA, we use 10 days and 20 days.

Appendix 1. The descriptions and definitions of input
attributes
Brief description of the used technical indicators:
• EMA, Exponential moving average calculates an exponentially-
weighted mean, giving more weight to recent observations. The
longer the period of the exponential moving average, the less
total weight is applied to the most recent price. The advantage of
the exponential average is its ability to pick up on price changes
more.
• SMA, Simple moving average calculates the arithmetic mean of
the series over the past n observations. The shorter the time pe-
riod, the more responsive a moving average becomes. A typical
short-term moving average ranges from 5 to 25 days.
• ZLEMA, Zero lag exponential moving average is similar to
the EMA, as it gives more weight to recent observations, but
attempts to remove lag by subtracting data prior to (n − 1)/2
periods (default) to minimize the cumulative effect.
• WMA, Weighted moving average is similar to the EMA but with
linear weighting.
• SAR, the Parabolic Stop-and-Reverse provides excellent exit
points. You should close long positions when the price falls
below the SAR and close short positions when the price rises
above the SAR.
• ROC, calculates the rate of change of a series over n periods.
The time period used to calculate the ROC may range from 1-
day (which results in a volatile chart showing the daily price
change) to 200-days (or longer).
• mom, the momentum calculates the change of a series over n
periods.
• RSI, the Relative Strength Index is one of the most popular mo-
mentum oscillators. RSI calculates a ratio of the recent upward
price movements to the absolute price movement and generates
a number that ranges from 0 to 100. The technicians say that
generally when the RSI rises above 30, it is considered a bullish
signal, i.e. it is considered a signal that prices tend to rise.
Conversely, when it falls below 70, it is considered a bearish
signal, i.e. a signal that prices are likely to fall.
• Volume is simply the number of shares or contracts that trade
over a day. The higher the volume, the more active the security.
Volume is an important aspect of technical analysis because it
is used to confirm trends and chart patterns. Any price move-
ment up or down with relatively high volume is seen as a
stronger, more relevant move than a similar move with weak
volume.
In our experiment, we use four types of moving averages (SMA,
EMA, WMA, ZLEMA), the advantage of moving averages is its
tendency to smooth out some of the irregularities that exists between
market days (Yao and Tan 2000). Moving averages are one of the
oldest and most popular technical analysis tools. An in-depth analysis
of the chosen indicators can be found in Achelis (2013).
Appendix 2. Classification results, length of testing period
The length of the testing period and the frequency of the updating
model could also have an impact on the forecasts, hence we test
different lengths of the testing period h. Due to higher computational
costs, we begin the procedure of building classifiers with h = 5 and
finish with h = 160. In tables B1–B4, the results of LDA, NB, linear
SVM and SVM with Gaussian RBF kernel classifiers using different
lengths of testing period, respectively, are shown. The highest average
hit rate on all test sets occurs at h = 20 (for NB, linear SVM and
SVM with Gaussian RBF kernel) and for the LDA classifiers, the
highest performance occurs at h = 10. For building classifiers in our
experimental work, we use h = 20.
804 M. Gorenc Novak and D. Velušček

Table B1. Classification results of LDA classifiers.

h train acc test acc sens spec prec rise prec fall

160 63.54 ± 2.33 59.93 ± 4.32 60.42 ± 14.01 59.11 ± 12.92 60.34 ± 6.29 60.64 ± 6.28
80 63.53 ± 2.30 60.26 ± 5.65 61.32 ± 15.20 58.68 ± 14.21 60.55 ± 8.09 61.08 ± 8.26
40 63.53 ± 2.29 60.40 ± 7.64 61.30 ± 17.80 58.40 ± 16.97 60.55 ±11.12 61.13 ± 11.59
20 63.95 ± 2.47 60.66 ± 10.69 57.92 ± 21.74 62.18 ± 20.10 60.41 ± 17.08 61.71 ± 15.58
10 64.10 ± 2.62 61.07 ± 15.03 59.11 ±28.23 59.24 ± 27.28 60.53 ± 23.97 60.41 ± 23.68
5 64.20 ± 2.69 60.99 ± 21.37 56.33 ± 36.96 58.29 ± 36.55 59.43 ± 32.54 58.39 ± 31.84

Table B2. Classification results of NB classifiers.

h train acc test acc sens spec prec rise prec fall

160 57.62 ± 2.09 56.94 ± 6.92 68.03 ± 17.39 41.82 ± 18.37 54.86 ± 9.72 57.77 ± 14.12
80 57.62 ± 2.09 56.95 ± 6.95 68.05 ± 17.39 41.80 ± 18.40 54.86 ± 9.75 57.77 ± 14.18
40 57.63 ± 2.09 56.92 ± 6.98 67.83 ±17.48 41.95 ± 18.46 54.81 ± 9.81 57.72± 14.26
20 57.87 ± 2.27 57.28 ± 9.84 60.92 ± 23.24 47.84 ± 23.27 54.01 ± 15.86 56.98 ± 18.77
10 58.15 ± 2.29 57.13 ± 14.24 63.32 ± 30.93 42.18 ± 30.93 53.85 ± 22.34 55.39 ± 26.98
5 58.25 ± 2.42 57.05 ± 20.71 62.09 ± 38.36 40.71 ± 38.23 52.90 ± 28.80 54.36 ± 32.85

Table B3. Classification results of linear SVM classifiers.

h train acc test acc sens spec prec rise prec fall

160 63.52 ± 2.33 60.09 ± 4.35 62.72 ± 15.09 56.83 ± 14.03 60.02 ± 6.38 61.45 ± 6.56
80 63.49 ± 2.33 60.36 ± 5.64 63.51 ± 16.04 56.34 ± 15.15 60.13 ± 8.06 61.80 ± 8.58
40 63.49 ± 2.32 60.49 ± 7.60 63.47 ± 18.41 56.01 ± 17.69 60.11 ± 10.96 61.82 ± 12.09
20 63.49 ± 2.32 61.16 ± 10.68 63.36 ± 22.04 56.44 ± 21.37 60.60 ± 15.67 62.08 ± 17.34
10 63.51 ± 2.31 60.57 ± 14.81 62.32 ± 27.55 54.53 ± 27.47 59.13 ± 22.52 61.10 ± 24.28
5 63.51 ± 2.31 60.57 ± 20.98 60.21 ± 35.51 52.75 ± 35.66 57.66 ± 30.06 59.26 ± 31.71

Table B4. Classification results of RBF SVM classifiers.

h train acc test acc sens spec prec rise prec fall

160 70.80 ± 5.78 58.82 ±4.37 60.20 ± 15.30 56.72 ± 14.30 58.93 ± 6.29 59.73 ± 6.53
80 70.80 ± 5.79 59.10 ± 5.69 61.16 ± 16.04 56.16 ± 15.22 59.06 ± 8.19 60.09 ± 8.52
40 70.78 ± 5.78 59.30 ± 7.76 61.34 ± 18.10 55.97 ± 17.52 59.16 ± 11.20 60.24 ± 11.86
20 70.79 ± 5.78 59.39 ±10.71 61.30 ± 21.83 55.54 ± 21.46 59.05 ± 15.98 60.15 ± 17.28
10 70.78 ± 5.77 59.34 ± 7.73 61.48 ± 18.08 55.87 ± 17.46 59.16 ± 11.19 60.31 ± 11.91
5 70.79 ± 5.77 59.33 ± 21.16 58.79 ± 36.21 53.10± 36.21 56.97 ± 30.47 58.22 ± 31.82

Appendix 3. Comparison of classification results between
2 chosen data-sets
In this section, we compare the results obtained using a batch of
462 companies comprised of S&P 500 members on 2 January 2008
to the results by 370 previously chosen companies which had sur-
vived in the S&P 500 until 1 August 2013. The missing 38 stocks
(a difference to all 500 members) in the new batch were not freely
available for access because they either have missing values on the
first possible trading day or it was not possible to download the
data from any of the free data sources. The way we have chosen
our data in our research (370 companies) suffers from survival bias.
The aim of this section is to compare some classification results.
The construction of the models begins on the first trading day, on
29 February 2008 and ends on 14 June 2013, total 1332 trading days.
In the first batch, all 370 companies survive throughout the new time
period, while the chosen 462 companies from the second batch, 21
companies do not survive as a part of the S&P 500 index until the end
of 14 June 2013.
If we compare the results obtained in the same period for 462
stocks (tables C1, C3, C5, and C7) to the results obtained for 370
stocks (tables C2, C4, C6, and C8), we can see that results on the
testing period are on average higher for the later data-sets, but there
are no drastic differences in both results (on average ≤ 1% point).
Compared sensitivity and specificity show higher differences be-
tween two different data-sets (for LDA classifiers, and both SVM
classifiers), while other classification measures do not change dras-
tically. Also the lengths of the testing periods are the same as in
prior section, h = 20 which gave the highest classification results.
In figures C1 and C2, we compared the trading strategies (Guided
D-threshold strategies) using a batch of 370 and batch of 462 com-
panies. The figures show that using a batch of 462 companies, the
trading strategies reach higher results than using a batch of 370
companies.
 Prediction of stock price movement 805

Figure C1. The figure shows four trading strategies: Guided D-threshold strategies (using LDA and NB classifier). From the figure, we can
see that trading strategies reach higher CAGR on a batch of 462 companies compared to a batch of 370 companies.

Table C1. Classification results of LDA classifiers, data used are 462 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 62.62 ± 2.29 59.37 ± 4.13 57.30 ± 15.08 60.78 ± 12.96 58.91 ± 6.33 60.54 ± 6.00
80 62.54 ± 2.30 59.54 ± 5.42 57.47 ± 16.77 60.70 ± 14.54 58.65 ± 8.60 61.00 ± 7.77
40 62.55 ± 2.31 59.62 ± 7.54 57.30 ± 19.37 60.31 ± 17.43 58.74 ± 11.98 60.91 ± 11.17
20 62.59 ± 2.33 59.63 ± 10.55 56.97 ± 23.27 59.50 ± 21.67 58.56 ± 17.12 60.63 ± 16.32
10 62.59 ± 2.33 59.58 ± 14.91 56.15 ± 29.11 58.81 ± 27.31 57.81 ± 23.89 60.56 ± 23.01
5 62.59 ± 2.33 59.60 ± 20.96 53.88 ± 36.54 57.28 ± 35.12 55.46 ± 30.78 59.02 ± 30.31

Table C2. Classification results of LDA classifiers, data used are 370 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 63.19 ± 2.13 59.96 ± 3.84 65.63 ± 13.75 53.53 ± 13.39 60.02 ± 5.17 61.08 ± 6.37
80 63.08 ± 2.13 60.23 ± 5.31 65.67 ± 15.08 53.99 ± 14.90 60.21 ± 7.28 61.55 ± 8.59
40 63.09 ± 2.12 60.29 ± 7.47 65.29 ± 17.79 53.52 ± 17.77 60.18 ± 10.39 61.29 ± 12.39
20 63.19 ± 2.12 60.51 ± 10.22 66.66 ± 21.38 50.81 ± 21.95 59.62 ± 14.85 61.66 ± 18.97
10 63.13 ± 2.07 60.34 ± 14.46 63.13 ± 27.03 51.97 ± 27.79 60.11 ± 21.42 59.49 ± 24.96
5 63.00 ± 2.06 62.92 ± 20.11 61.18 ± 33.86 55.01 ± 34.42 61.00 ± 28.48 60.36 ± 30.03
806 M. Gorenc Novak and D. Velušček

Figure C2. The figure shows four trading strategies: Guided D-threshold strategies (using SVM classifier with linear and RBF kernel). From
the figure, we can see that trading strategies reach higher CAGR on a batch of 462 companies compared to a batch of 370 companies.

Table C3. Classification results of NB classifiers, data used are 462 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 56.88 ± 2.38 55.42 ± 3.95 70.73 ± 14.23 39.49 ± 14.92 53.25 ± 5.44 59.70 ± 7.20
80 56.73 ± 2.37 55.44 ± 5.11 70.51 ± 15.86 39.31 ± 16.65 52.94 ± 6.86 59.50 ± 9.76
40 56.69 ± 2.38 55.39 ± 7.07 69.88 ± 18.37 38.50 ± 19.47 52.56 ± 9.58 58.13 ± 15.37
20 56.67 ± 2.40 55.47 ± 9.85 69.42 ± 22.16 37.25 ± 23.25 52.40 ± 13.84 56.81 ± 21.85
10 56.66 ± 2.39 55.44 ± 14.21 67.05 ± 28.11 35.51 ± 28.04 50.39 ± 19.81 55.26 ± 27.99
5 56.67 ± 2.39 55.46 ± 20.18 66.02 ± 34.27 35.00 ± 33.53 49.82 ± 25.79 55.44 ± 32.47

Table C4. Classification results of NB classifiers, data used are 370 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 57.65 ± 1.90 56.24 ± 3.63 73.66 ± 11.73 37.20 ± 13.03 55.23 ± 4.86 58.72 ± 6.86
80 57.49 ± 1.90 56.36 ± 4.80 73.06 ± 13.64 37.32 ± 15.07 55.13 ± 6.35 58.28 ± 9.67
40 57.46 ± 1.89 56.41 ± 6.83 72.50 ± 16.19 36.41 ± 18.05 54.87 ± 8.89 56.84 ± 15.75
20 57.45 ± 1.89 56.52 ± 9.63 71.95 ± 20.27 35.06 ± 22.07 54.61 ± 13.20 55.60 ± 22.61
10 57.45 ± 1.89 56.48 ± 14.01 69.64 ± 26.34 33.22 ± 27.03 52.83 ± 19.29 53.86 ± 28.59
5 57.45 ± 1.89 56.46 ± 20.08 68.46 ± 32.66 32.76 ± 32.58 51.90 ± 25.50 54.05 ± 32.99

Appendix 4. The forecasts distributed through time
In each figures D1–D4, there are four barplots, each with a quarter
of 370 stocks. Stocks are ordered by test accuracy. Bar in the barplot
represents the average over 1920 trading days (testing set) for a stock.
The range of forecasts by stock is from 53.54% to 64.11%.
We graphically present how forecasts measured on a testing period
are distributed through time for each classifier separately figures D5,
D7, D9 and D11. A bar in the bar graph represents the forecasts
averaged over all 370 stocks form our original batch on a daily
test hit rate. For better insight, these forecasts are also presented by
frequency distribution, which can be seen in figures D6, D8, D10 and
 Prediction of stock price movement 807
Table C5. Classification results of linear SVM classifiers, data used are 462 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 62.53 ± 2.30 59.06 ± 4.32 58.44 ± 17.68 58.87 ±15.32 58.65 ± 6.28 60.76 ± 6.15
80 62.44 ± 2.32 59.26 ± 5.58 58.51 ± 19.06 58.82 ± 16.72 58.37 ± 8.34 61.12 ± 8.14
40 62.45 ± 2.32 59.30 ± 7.58 58.32 ± 20.99 58.25 ± 19.08 58.41 ± 11.71 60.88 ± 11.47
20 62.48 ± 2.35 59.31 ± 10.54 58.12 ± 24.78 57.33 ± 23.16 58.13 ± 16.70 60.60 ± 17.01
10 62.48 ± 2.35 59.30 ± 14.89 57.09 ± 30.06 56.56 ± 28.40 57.20 ± 23.31 60.28 ± 23.64
5 62.48 ± 2.35 59.33 ± 20.93 54.97 ± 37.08 55.02 ± 35.74 55.00 ± 30.02 58.82 ± 30.53

Table C6. Classification results of linear SVM classifiers, data used are 370 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 63.20 ± 2.17 59.88 ± 3.91 68.49 ± 14.61 50.26 ± 14.85 59.48 ± 5.15 62.05 ± 7.02
80 63.08 ± 2.16 60.09 ± 5.30 68.51 ± 15.75 50.55 ± 16.06 59.59 ± 7.15 62.43 ± 9.29
40 63.11 ± 2.12 60.20 ± 7.44 68.04 ± 17.98 50.21 ± 18.73 59.68 ± 10.18 61.98 ± 13.34
20 63.11 ± 2.11 60.30 ± 10.41 67.88 ± 21.49 49.36 ± 22.70 59.59 ± 14.60 61.70 ± 19.46
10 63.10 ± 2.11 60.25 ± 14.69 66.66 ± 26.93 48.64 ± 28.27 58.68 ± 21.03 61.12 ± 25.94
5 63.11 ± 2.11 60.24 ± 20.81 64.26 ± 34.55 46.76 ± 35.71 56.61 ± 28.43 59.14 ± 32.60

Table C7. Classification results of RBF SVM classifiers, data used are 462 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 71.45 ± 6.78 57.91 ± 4.54 58.07 ± 15.88 57.13 ± 14.48 57.20 ± 6.06 59.47 ± 6.41
80 71.27 ± 6.81 58.15 ± 5.78 58.18 ± 17.19 57.33 ± 15.88 57.14 ± 8.32 59.91 ± 8.27
40 71.26 ± 6.83 58.19 ± 7.75 57.86 ± 19.52 57.31 ± 18.37 57.32 ± 11.52 59.71 ± 11.46
20 71.27 ± 6.82 58.26 ± 10.71 58.05 ± 23.25 56.56 ± 22.33 57.28 ± 16.30 59.61 ± 16.78
10 71.27 ± 6.82 58.21 ± 15.09 56.99 ± 29.29 55.73 ± 28.34 56.38 ± 23.31 59.05 ± 23.83
5 71.27 ± 6.82 58.21 ± 21.26 55.45 ± 37.39 54.28 ± 36.36 54.75 ± 30.33 57.83 ± 31.20

Table C8. Classification results of RBF SVM classifiers, data used are 370 stocks starting on 29 February 2008.

h train acc test acc sens spec prec rise prec fall

160 71.75 ± 6.39 58.63 ± 4.09 66.54 ± 14.18 49.98 ± 14.09 58.39 ± 5.28 60.12 ± 6.80
80 71.53 ± 6.40 58.84 ± 5.40 66.12 ± 15.14 50.83 ± 15.28 58.63 ± 7.17 60.27 ± 8.87
40 71.53 ± 6.42 59.00 ± 7.51 65.87 ± 17.40 50.75 ± 17.90 58.92 ± 10.01 60.09 ± 12.77
20 71.51 ± 6.42 59.20 ± 10.58 65.88 ± 21.03 50.32 ± 22.18 59.04 ± 14.63 59.91 ± 18.71
10 71.51 ± 6.42 59.15 ± 14.99 64.69 ± 27.16 49.65 ± 28.56 58.26 ± 21.47 59.26 ± 25.76
5 71.50 ± 6.42 59.07 ± 21.26 62.96 ± 35.50 47.91 ± 36.56 56.63 ± 28.99 57.60 ± 32.85

D12, into which we added mean (labelled by red) and is in all cases
around 60%.
Appendix 5. Some details of Guided D-threshold strategies
In figures E5–E8, profits over time on a testing period are exposed.
In each figure, three graphs are presented, on the first daily profits
over time, on the second monthly profits over time, and on the third
the frequency distribution of profits are shown. In the last graph, we
include the mean of all daily profits.
Appendix 6. Managing the portfolio
We also try to improve portfolio management. Instead of investing an
equal amount of money in every stock in which we intend to invest, we
make the weight of that stock (results are presented in tables F1-F4).
Appendix 7. Testing of indicator usefulness
There are many algorithms for feature selection, but for the sake of
argument we have taken out just one technical indicator from the
chosen subset, to test and compare if the results dramatically change.
Without loss of generality, we have chosen the length of testing
periods, h = 160, because the performance of the experiment is the
fastest, and the test results are still comparable between each other.
The results are presented in tables G1–G4. We highlighted average
test results, which are higher with omitted technical indicator. From
table G1 we can see, there are four indicators, which we should omit
from the chosen attribute set: SMA10, SAR, mom10 and ROC10. In
table G2, there are also four indicators, namely SAR, mom10, ROC10
and CCI10, which should be omitted and without them we could
reach higher results. Three technical indicators (SMA10, mom10
and ROC10) should be omitted when we use linear SVM classifier
(table G3) and none of the indicators if we use SVM with RBF
kernel (table G4). Apparently, the results do not change dramatically
if one of the indicators is omitted. In the last table G4, the highest
808 M. Gorenc Novak and D. Velušček

Figure D1. Stock forecasts, each column represents average test rate on the whole testing period for one particular stock, LDA is used as a
classifier.

classification accuracy is achieved if we use all of the mentioned choose the relevant indicators). Hence, a profound investigation is
technical indicators. needed and is left for the further work.
The relevancy of the indicator depends on used classifiers and data To determine if the differences using various attribute sets were
(for every stock and data frame (see figure G2), we should separately statistically significant, the Wilcoxon signed-rank test is used. We
 Prediction of stock price movement 809

Figure D2. Stock forecasts, each column represents average test rate on the whole testing period, NB is used as a classifier.

Table F1. Performance of proposed Guided D-threshold strategies (included in the article).

Mean Std Sharpe ratio Sortino ratio Info ratio CAGR

Guided DLDA 0.15 0.04 3.74 0.12 3.57 39.31

Guided DNB 0.15 0.04 3.89 0.13 3.74 40.21
Guided DRBF 0.17 0.04 4.29 0.14 4.23 48.07
Guided Dlin 0.15 0.04 3.94 0.13 3.81 41.30
810 M. Gorenc Novak and D. Velušček

Figure D3. Stock forecasts, each column represents average test rate on the whole testing period for one particular stock, SVM with RBF
kernel is used as a classifier.

want to determine the attributes (technical indicators), which give
higher performance than when we use all technical indicators (for
each classifier separately). We used the one-tailed version of the test.
The null hypothesis states that classification results’ median’s rank
obtained by the technical indicators with omitted mentioned attribute
is equal or better than the classification results’median’s rank obtained
by the all technical indicators. We reject the null hypothesis and accept
the alternative: the attribute set with omitted technical indicator shows
worse classification results’ median’s rank than the attribute set with
all 12 technical indicators at a 0.05 significance level (see table G5).
 Prediction of stock price movement 811

Figure D4. Stock forecasts, each column represents average test rate on the whole testing period for one particular stock, SVM with linear
kernel is used as a classifier.
812 M. Gorenc Novak and D. Velušček

Figure D5. Daily forecasts, LDA classifier.

Figure D6. Frequency distribution of daily forecasts obtained by LDA classifier.

Table F2. Performance of proposed Guided D-threshold strategies. Weights are proportional to the expected strategy gains.

Mean Std Sharpe ratio Sortino ratio Info ratio CAGR

Guided DLDA 0.14 0.04 3.05 0.10 2.84 34.35

Guided DNB 0.14 0.04 3.23 0.11 3.01 36.07
Guided DRBF 0.17 0.05 3.59 0.12 3.48 44.02
Guided Dlin 0.12 0.04 2.70 0.09 2.42 29.00
 Prediction of stock price movement 813

Figure D7. Daily forecasts, NB classifier.

Figure D8. Frequency distribution of daily forecasts obtained by NB classifier.

Table F3. Performance of proposed Guided D-threshold strategies. Weights are proportional to the forecast accuracy.

Mean Std Sharpe ratio Sortino ratio Info ratio CAGR

Guided DLDA 0.15 0.04 3.69 0.12 3.52 38.87

Guided DNB 0.15 0.04 3.89 0.13 3.74 40.30
Guided DRBF 0.17 0.04 4.19 0.14 4.11 46.79
Guided Dlin 0.15 0.04 3.85 0.13 3.71 40.38
814 M. Gorenc Novak and D. Velušček

Figure D9. Daily forecasts, SVM with RBF kernel.

Figure D10. Frequency distribution of daily forecasts obtained by SVM with RBF kernel.
 Prediction of stock price movement 815

Figure D11. Daily forecasts, SVM with linear kernel.

Figure D12. Frequency distribution of daily forecasts obtained by SVM with linear kernel.
816 M. Gorenc Novak and D. Velušček

Figure E1. Percentage of the number of stocks involved in ‘Guided DLDA’ strategy.

Figure E2. Percentage of the number of stocks involved in ‘Guided DNB ’ strategy.

Table F4. Performance of proposed Guided D-threshold strategies. Weights are inversely proportional to the forecast error.

Mean Std Sharpe ratio Sortino ratio Info ratio CAGR

Guided DLDA 0.14 0.04 3.64 0.12 3.46 38.40

Guided DNB 0.15 0.04 3.85 0.13 3.68 39.89
Guided DRBF 0.16 0.04 3.95 0.13 3.82 43.75
Guided Dlin 0.14 0.04 3.65 0.12 3.49 38.32
 Prediction of stock price movement 817

Figure E3. Percentage of the number of stocks involved in ‘Guided DRBF ’ strategy.

Figure E4. Percentage of the number of stocks involved in ‘Guided Dlin ’ strategy.
818 M. Gorenc Novak and D. Velušček

Figure E5. Profits distributed over the time of ‘Guided DLDA’-strategy. Each bar represents daily (the first graph) or monthly (the second
graph) average profits on all possible 370 stocks. The last graph represents frequency distribution of losses and profits.
 Prediction of stock price movement 819

Figure E6. Profits distributed over the time of ‘Guided DNB ’-strategy. Each bar represents daily (the first graph) or monthly (the second
graph) average profits on all possible 370 stocks. The last graph represents frequency distribution of losses and profits.
820 M. Gorenc Novak and D. Velušček

Figure E7. Profits distributed over the time of ‘Guided DRBF ’-strategy. Each bar represents daily (the first graph) or monthly (the second
graph) average profits on all possible 370 stocks. The last graph represents frequency distribution of losses and profits.
 Prediction of stock price movement 821

Figure E8. Profits distributed over the time of ‘Guided Dlin ’-strategy. Each bar represents daily (the first graph) or monthly (the second
graph) average profits on all possible 370 stocks. The last graph represents frequency distribution of losses and profits.
822 M. Gorenc Novak and D. Velušček

Figure E9. In the above graphs, the frequency distribution of trades resulting in a loss is shown. The ‘Guided DLDA’, ‘Guided DNB ’ and
‘Guided DRBF ’ strategies are used. The red line represents mean. The y axis represents the frequency of days on all 1920 trading days.
 Prediction of stock price movement 823

Figure F10. The ‘Guided Dlin ’ strategy is used. The red line represents mean.

Table G1. Classification results of LDA classifiers, h = 160.

Without indicator train acc test acc sens spec prec rise prec fall

/ 63.54 ± 2.33 59.93 ± 4.32 60.42 ± 14.01 59.11 ± 12.92 60.34 ± 6.29 60.64 ± 6.28
Volume 63.24 ± 2.37 59.73 ± 4.36 59.37 ± 13.48 59.92 ± 12.45 60.32 ± 6.24 60.12 ± 6.09
EMA10 63.23 ± 2.30 59.81 ± 4.35 60.30 ± 13.84 58.82 ± 12.85 60.10 ±6.21 60.41 ± 6.15
EMA20 63.05 ± 2.32 59.88 ± 4.34 61.01 ± 13.80 58.10 ± 12.93 60.01 ± 6.19 60.59 ± 6.22
SMA10 63.44 ± 2.32 60.02 ± 4.31 60.53 ± 14.10 59.19 ± 13.02 60.45 ± 6.27 60.77 ± 6.32
ZLEMA10 63.26 ± 2.32 59.75 ± 4.34 59.70 ± 14.39 59.54 ± 13.12 60.30± 6.42 60.40 ± 6.37
WMA10 63.38 ± 2.30 59.91 ± 4.34 60.22 ± 14.14 59.27 ± 13.01 60.37 ± 6.26 60.58 ± 6.31
SAR 63.43 ± 2.32 60.24 ± 4.19 61.89 ± 12.24 58.14 ± 10.92 60.19 ± 5.88 60.99 ± 5.99
mom10 63.41 ± 2.30 60.12 ± 4.24 61.36 ± 14.09 58.45 ± 12.93 60.32 ± 6.24 61.06 ± 6.19
ROC10 63.43 ± 2.31 60.10 ± 4.22 61.15 ± 14.03 58.65 ± 12.93 60.38 ± 6.20 60.98 ± 6.22
CCI10 62.19 ± 2.28 58.98 ± 4.26 57.30 ± 14.54 60.37 ± 13.02 59.82 ± 6.34 59.23 ± 6.03
RSI10 62.98 ± 2.35 59.26 ± 4.43 58.60 ± 15.49 59.73 ± 13.99 60.10 ± 6.66 60.09 ± 6.74

Table G2. Classification results of NB classifiers, h = 160.

Without indicator train acc test acc sens spec prec rise prec fall

/ 57.62 ± 2.09 56.94 ± 6.92 68.03 ± 17.39 41.82 ± 18.37 54.86 ± 9.72 57.77 ± 14.12
Volume 57.68 ± 2.02 56.91 ± 3.77 67.74 ± 12.54 44.51 ± 12.98 55.64 ± 5.26 58.83 ± 5.84
EMA10 57.81 ± 2.07 56.77 ± 3.80 67.34 ± 13.69 44.61 ± 13.93 55.56 ± 5.46 58.80 ± 6.19
EMA20 57.89 ± 2.11 56.90 ± 3.79 67.71 ± 13.37 44.57 ± 13.59 55.65 ± 5.38 59.01 ± 6.17
SMA10 57.86 ± 2.10 56.87 ± 3.78 67.64 ± 13.65 44.51 ± 13.92 55.63 ± 5.42 59.01 ± 6.22
ZLEMA10 56.31 ± 2.07 55.58 ± 3.68 67.22 ± 13.88 42.27 ± 14.12 54.38 ± 5.17 57.30 ± 6.26
WMA10 57.62 ± 2.06 56.61 ± 3.77 67.28 ± 13.90 44.32 ± 14.15 55.44 ± 5.41 58.62 ± 6.17
SAR 57.83 ± 2.11 57.07 ± 3.66 68.05 ± 12.07 44.49 ± 12.79 55.74 ± 5.05 59.11 ± 6.02
mom10 57.82 ± 2.13 56.95 ± 3.79 68.20 ± 13.47 44.12 ± 13.78 55.66 ± 5.29 59.27 ± 6.34
ROC10 57.83 ± 2.12 56.95 ± 3.77 68.15 ± 13.31 44.17 ± 13.60 55.67 ± 5.28 59.21 ± 6.20
CCI10 58.00 ± 2.21 57.00 ± 3.83 68.72 ± 13.78 43.70 ± 14.21 55.71 ± 5.32 59.55 ± 6.40
RSI10 57.79 ± 2.15 56.81 ± 3.83 68.62 ± 13.77 43.46 ± 14.11 55.54 ± 5.37 59.38 ± 6.58
824 M. Gorenc Novak and D. Velušček

Figure F11. VaR and CVaR calculated over 500 trading days. Confidence level is 0.05.
 Prediction of stock price movement 825

Table G3. Classification results of linear SVM classifiers, h = 160.

Without indicator train acc test acc sens spec prec rise prec fall

/ 63.52 ± 2.33 60.09 ± 4.35 62.72 ± 15.09 56.83 ± 14.03 60.02 ± 6.38 61.45 ± 6.56
Volume 63.24 ± 2.40 59.97 ± 4.37 61.11 ± 14.83 58.35 ± 13.45 60.14 ± 6.29 60.79 ± 6.28
EMA10 63.25 ± 2.34 59.98 ± 4.34 62.67 ± 15.07 56.60 ± 14.07 59.88 ± 6.23 61.31 ± 6.48
EMA20 63.08 ± 2.36 60.00 ± 4.35 63.32 ± 15.05 55.83 ± 14.17 59.72 ± 6.24 61.47 ± 6.56
SMA10 63.46 ± 2.33 60.13 ± 4.33 62.70 ± 15.15 56.94 ± 14.11 60.09 ± 6.32 61.47 ± 6.56
ZLEMA10 63.30 ± 2.36 59.71 ± 4.34 61.35 ± 15.76 57.54 ± 14.43 59.95 ± 6.39 60.88 ± 6.62
WMA10 63.45 ± 2.34 60.08 ± 4.34 62.56 ± 15.07 56.97 ± 14.00 60.04 ± 6.30 61.36 ± 6.56
SAR 63.23 ± 2.39 59.99 ± 4.35 61.15 ± 14.84 58.37 ± 13.56 60.22 ± 6.24 60.84 ± 6.27
mom10 63.42 ± 2.33 60.17 ± 4.27 63.27 ± 15.19 56.39 ± 14.05 59.95 ± 6.28 61.71 ± 6.47
ROC10 63.40 ± 2.36 60.12 ± 4.29 63.40 ± 15.04 56.15 ± 14.07 59.90 ± 6.25 61.68 ± 6.40
CCI10 61.94 ± 2.30 59.17 ± 4.25 59.77 ± 15.85 57.93 ± 14.27 59.45 ± 6.28 59.98 ± 6.15
RSI10 62.88 ± 2.44 59.30 ± 4.48 60.65 ± 17.33 57.50 ± 15.78 59.86 ± 6.83 60.98 ± 7.22

Table G4. Classification results of SVM with RBF kernel, h = 160.

Without indicator train acc test acc sens spec prec rise prec fall

/ 63.55 ± 2.33 60.09 ± 4.35 62.71 ± 15.07 56.85 ± 14.01 60.01 ± 6.37 61.44 ± 6.54
Volume 69.65 ± 5.12 59.05 ± 4.38 60.62 ± 15.04 56.88 ± 14.07 59.15 ± 6.18 59.93 ± 6.42
EMA10 70.78 ± 5.71 58.84 ± 4.37 60.43 ± 15.28 56.52 ± 14.28 58.91 ± 6.28 59.76 ± 6.55
EMA20 70.45 ± 5.70 58.95 ± 4.41 60.65 ± 15.25 56.54 ± 14.14 58.98 ± 6.28 59.92 ± 6.57
SMA10 70.57 ± 5.58 58.93 ± 4.41 60.57 ± 15.39 56.57 ± 14.35 59.01 ± 6.20 59.91 ± 6.60
ZLEMA10 70.27 ± 5.51 58.03 ± 4.37 58.09 ± 16.05 57.33 ± 14.72 58.36 ± 6.43 58.60 ± 6.43
WMA10 70.77 ± 5.67 58.90 ± 4.39 60.47 ± 15.21 56.61 ± 14.07 58.97 ± 6.22 59.88 ± 6.57
SAR 70.55 ± 5.26 59.38 ± 4.18 61.86 ± 13.46 56.19 ± 12.38 59.14 ± 5.87 60.36 ± 6.28
mom10 70.43 ± 5.45 59.00 ± 4.43 60.90 ± 15.29 56.31 ± 14.16 58.97 ± 6.22 60.08 ± 6.70
ROC10 69.96 ± 5.32 59.00 ± 4.37 60.83 ± 15.24 56.41 ± 14.15 59.03 ± 6.20 60.03 ± 6.55
CCI10 65.61 ± 4.00 58.25 ± 4.24 59.56 ± 16.00 56.06 ± 14.88 58.30 ± 6.28 59.11 ± 6.33
RSI10 70.46 ± 5.43 58.88 ± 4.42 60.40 ± 15.45 56.71 ± 14.32 59.02 ± 6.36 59.88 ± 6.66

Table G5. The Wilcoxon signed-rank test of classification results. For the input data, we use two vectors of average classification results on
the testing set, which are obtained by omitting some technical indicators that yielded higher results than when we use all technical indicators.
p-values between 0.01 and 0.05 are shown with one asterisk ∗ and p-values less than 0.01 are shown with two asterisks ∗∗. Only highlighted
technical indicators from tables G1–G3 are exposed in the table.

LDA NB lin SVM

All TI vs. omitted SMA 10 0.014∗ / 0.059

All TI vs. omitted SAR 0.001∗∗ 0.001∗∗ /
All TI vs. omitted mom 10 0.068 0.002∗∗ 0.105
All TI vs. omitted ROC 10 0.030∗ 0.001∗∗ 0.252
All TI vs. omitted CCI 10 / 0.001∗∗ /
826 M. Gorenc Novak and D. Velušček

Figure G2. Comparison between two different sets of technical indicators. The first set contains all 12 technical indicators that are used in
experimental work, and in another set, we omit the technical indicator ‘momentum’. The figure above illustrates that through the time period
the relevance of the chosen technical indicators is not constant.