2.

Introduction
The last few years have seen the broadening use of computational modelling in financial markets. Being information driven trading environments, the inherent mathematical nature of financial markets (Chen, Jain, & Tai, 2006) lend itself well to computerized modelling algorithms to make quantitative analyses and explain informational patterns that would predict the dynamics of markets. Stock market is a subset of financial markets where agents participate by trading company shares (stocks) to generate monetary returns. The informational patterns of the stock market lie in the price movements of the traded assets (Becker & O'Reilly, 2009) and thus, the participants (traders) of the market have historically been analyzing the market trends and construct profitable investment strategies to exploit the future direction of prices. (Holden, Peel, & Thompson, 1990) In this context, machine learning and computational intelligence are effective tools in exploring non-linear and complex relationships that may exist in stock markets which is not easily apparent to humans. The learning technique that is of interest to this project is genetic programming. Researched under the subject of evolutionary computation, genetic programming is a biologically inspired modelling algorithm that evolves populations of computer programs by repeatedly assessing them over generations. (Poli, Langdon, & McPhee, 2008) These programs provide an agent-based simulation of real world phenomena by imitating the behaviours of agents in solving a defined problem setting. By passing the better performing (strong) solutions to next generations and eliminating the weaker ones, genetic programming applies a survival of the fittest methodology on optimizing solutions for uncertain and dynamic environments. There has been much work involving the application of genetic programming on the stock market context. Attempts have been made to predict future price movements of stocks and develop optimal investment strategies by imitating the operational patterns of traders on artificially simulated trading environments. With its exhaustive searching capability, parallelism and the quickness of generating optimal solutions, (Seshadri, 2003) the primary objective of genetic programming in this context is to create a computational intelligence mechanism that can learn about the historical price movements of stocks and generate strategies that can exploit the trends spotted in the data over future periods. This is in essence, a computer science take on the technical trading concept, in which traders try to detect price patterns and buy assets when they are low priced and sell when they are high. So far, the previous studies done on this area were mostly investigative. Different genetic programming structures were proposed to model stock market behaviour and a variety of both successful and unsuccessful empirical results have been obtained. There are also few commercial products that offer genetic programming simulation software to the end users, investors. They will be evaluated in the literature review section. In this project we try to implement a software that provides a genetic programming simulation model for the end user. In designing the software, we rely on the strong aspects of previously designed genetic programming models to provide an efficient learning mechanism that can analyze historical price datasets of different stocks and generate trade rules that can predict the future market directions. We also aim towards developing a user-friendly and flexible software interface that can scan user-requested datasets

belonging to desired companies and produce explanatory informational output of simulation results to aid the user in his/her prospective investment decisions. The remainder of the report consists of the following sections: Section 3 elaborates the overall aims and objectives of the project. Section 4 sheds light on the background review of the project, describing the dynamics of the stock market setting we work in, explaining the methodology of genetic programming and critically assessing the existing literature on utilization of this technique in the stock market context. Section 5 introduces the choice and justification of the design process we implemented in building the software. The proposed algorithm of the program and our programming decisions are given afterwards. Section 6 then explain the software implementation process, pointing out how the major components of the software has been built. Section 7 gives details about the testing methodology we adopted for debugging each component of the software. The detected bugs and how they were overcome are mentioned. Section 8 reveals the results and empirical findings we obtained from the running of our genetic programming simulation software. Finally in section 9, we discuss the conclusive remarks learned from the project and mention possible future developments to the implemented software.

3. Aims and Objectives

The overall aim of this MSc project is to implement a piece of software that can allow the utilization of genetic programming on finding technical trading rules in stock markets. The first and foremost objective will be to create a genetic programming algorithm that will be implemented on the historical price data input of chosen company stocks and discover optimized solutions on finding trade rules/strategies that can generate profitable returns for the user. Thus, the criteria to assess the program here will be on how efficiently the created genetic algorithm learns and explores the stock price trends in the training phase while evolving a potential set of solutions. The second objective will be to test the algorithm on how well the generated trade rules perform over the future datasets of the analyzed stocks. For this a tester component for the software will be developed to parse the solutions obtained from the algorithm and apply them over unseen future prices. Measures will be taken to improve the algorithm for creating predictable solutions that can forecast future periods. The third and last objective of the project is to design the frontend of the software for the end user so that the it can provide an automated and user-friendly input handling and output generation for the whole simulation. All attempts will be made to make the software as efficient as possible by providing convenient ways for the user to interact with the graphical interface that will be built.

4. Background Review
4.1. Introduction to Background Review

This section of the report first explains the dynamics of trading in stock markets. It also touches upon the reasons to why genetic programming simulations might prove useful for the investors of the market. Then we explain the major structural aspects of genetic programming and discuss the existing literature on its application to the stock market trading concept.

4.2.

Dynamics of Trading in Stock Markets

Stock market is a subset of capital financial markets, in which companies that require additional funds seek out investors who would be willing to invest their money on their business. (Chisholm, 2002) The market acts a platform that connects sellers (companies) with buyers (investors). The trading in stock markets are done through issuance of financial instruments called stocks. By holding these stocks, buyers own a legal claim on the companies earnings, so as companies engage in profitable investments, stockholders also claim a share from their revenues and profits. (Drake & Fabozzi, 2010) The issued stocks are open to availability of public purchase, so any individual or entity can become a buyer in the market. (Becket & Essen, 2010) Some examples of stock markets include the New York Stock Exchange (NYSE), London Stock Exchange (LSE) and the Toronto Stock Exchange (TSE). The buyer in this environment is mostly concerned with the value of his/her stocks. The stock values are reflected in the prices they are sold for in the stock market. Thus, as the price of a stock go up, so does the value of the buyers investment. Therefore, the intuitive goal of the buyer is to buy and keep the stocks whose price is in an increasing movement. Oppositely, the buyer also should get rid of or not buy any stocks that has a decreasing price movement. There are many factors that affect the value of stocks in the real time trading environment. There may be internal factors such as, the company might be making profitable investments that generate positive returns on its revenue and hence, their stocks. There are also external factors such as, the stock investors might be aggressively buying the stocks company issues and therefore generate additional revenue for them, which in turn rises the value of the stocks for their buyers. (CITE!) As a consequence, the price movements of stocks might be exposed to rapid and non-linear changes at any given time period. Figure 4.1 illustrates this condition for a 6-month stock price chart of a randomly selected company.

As seen in the diagram, the price of a stock undergoes through many changes in time, all of which are not easy to explain and categorize. So the intuitive trading goal set for the buyer becomes very complex to achieve in a real time trading environment. Hence, the investment problem demands a complex analysis of the price trends that occur at such uncertain frequencies. The concept of technical forecasting enters the problem at this point. Technical forecasting provides investors with certain functions and model mathematical equations that would be applied to stock prices to analyze the trends in stock price movements and aid the buying/selling decisions in the market. As Becker et. al. (2007) describe, technical forecasting makes a quantitative analysis of stock markets to seek signals of assets return on investment (price/value) and generate model variables for the stockholders to evaluate in deciding their trading actions.