Home // International Journal On Advances in Software, volume 16, numbers 1 and 2, 2023 // View article

An Optimal PID Based Trading Strategy under the log-Normal Stock Market Characterization

Authors:
Vadim Azhmyakov
Ilya Shirokov
Yuri Dernov
Luz Adriana Guzman Trujillo

Keywords: financial engineering; feedback algorithmic trading; model-free PID control; PID gains tuning; data driven optimization; forward testing; stochastic optimization; prototype software

Abstract:
Our paper proposes an optimal trading algorithm based on a novel application of the conventional Control Engineering (CE) to Algorithmic Trading (AT). We consider a fundamental CE concept, namely, the feedback control and apply it to the algorithmic trading (algo trading). The concrete feedback control strategy is designed here in a form of the celebrated Proportional-Integral-Derivative (PID) model. The highly frequent nature of the modern financial markets motivates the using of a model-free realisation of the generic PID framework. The control theoretical methodology we propose is additionally combined with some advanced statistical results for the historical market data. We obtain a specific log-normal probability distribution function (pdf) associated with the specific relative characteristics of the available stock data. This empirical pdf mentioned above provides a novel computational technique for the necessary PID gains optimization. For this aim we apply a suitable data driven optimization problem and also consider an alternative stochastic programming framework. The stochastic optimization naturally involves the Monte Carlo solution procedure. The optimized PID trading algorithm we propose is next represented in the frequency domain. This equivalent representation makes it possible to introduce a new concept in the financial engineering, namely, the ”stock market energy” concept. Finally, we implement the resulting PID optimal trading algorithm and develop a Python based prototype software. We apply the corresponding prototype software to the Binance stock market. This practical example illustrates the proposed optimal PID trading scheme and also shows the effectiveness of the CE methods in the modern AT.

Pages: 122 to 131

Copyright: Copyright (c) to authors, 2023. Used with permission.

Publication date: June 30, 2023

Published in: journal

ISSN: 1942-2628