Development of a hybrid method for stock trading based on TOPSIS, EMD and ELM

TL;DR

This paper presents a hybrid computational approach combining TOPSIS, EMD, and ELM to improve stock trading decisions by ranking stocks and predicting market trends, demonstrating increased profitability in the Brazilian market.

Contribution

It introduces a novel hybrid model integrating TOPSIS with EMD and ELM for enhanced stock selection and market trend prediction.

Findings

TOPSIS effectively ranks stocks based on technical analysis.

The EMD-ELM hybrid improves prediction accuracy of stock trends.

The method increases trading profitability compared to baseline strategies.

Abstract

Deciding when to buy or sell a stock is not an easy task because the market is hard to predict, being influenced by political and economic factors. Thus, methodologies based on computational intelligence have been applied to this challenging problem. In this work, every day the stocks are ranked by technique for order preference by similarity to ideal solution (TOPSIS) using technical analysis criteria, and the most suitable stock is selected for purchase. Even so, it may occur that the market is not favorable to purchase on certain days, or even, the TOPSIS make an incorrect selection. To improve the selection, another method should be used. So, a hybrid model composed of empirical mode decomposition (EMD) and extreme learning machine (ELM) is proposed. The EMD decomposes the series into several sub-series, and thus the main omponent (trend) is extracted. This component is processed by the ELM, which performs the prediction of the next element of component. If the value predicted by the ELM is greater than the last value, then the purchase of the stock is confirmed. The method was applied in a universe of 50 stocks in the Brazilian market. The selection made by TOPSIS showed promising results when compared to the random selection and the return generated by the Bovespa index. Confirmation with the EMD-ELM hybrid model was able to increase the percentage of profit tradings.