Optimizing LSTM Network using Genetic Algorithm for Stock Market Price Prediction

Akash Dangi and Harsh Choudhary

In the stock market, there are a large number of indicators which are used to define the price of a particular stock. Every stock has different indicators which affect their price. Stock market produces a large amount of data everyday, this gives a great opportunity to create useful insights that can be used for Stock market Analysis and Forecasting. This paper proposes a hybrid approach which integrates Genetic Algorithm(GA) and Long Short Term Memory(LSTM) networks for stock price forecasting. We have used the LSTM network for its excellent ability to learn from time-series data like Stock Price. Generally, hyperparameters of the model are determined by trial and error method but here Genetic Algorithm finds optimal hyperparameters for the LSTM network. To evaluate the proposed approach, we have used National Stock Exchange(NSE) data. The results show that LSTM optimized using GA performs better than the benchmark model.

1. INTRODUCTION:

The stock market is a network which provides a platform for almost all major economic transactions in the world at a dynamic rate called the stock value which is based on market equilibrium. Predicting this stock value offers enormous arbitrage profit opportunities which are a huge motivation for research in this area. Knowledge of a stock value beforehand by even a fraction of a second can result in high profits. [1] Stock market predictions have an important role, since they can significantly impact the global economy. Due to its functional importance, analyzing stock market volatility has become a major research issue in various areas, including finance, statistics, and mathematics. [2] Stock market volatility makes it very difficult for a model to capture, therefore it is a difficult task to forecast stock market. In recent decades, several attempts have been made to develop a perfect model for stock market forecasting using statistics, soft computing and AI techniques. Since the stock market was firstly introduced, many have attempted to predict the stock markets using various computational tools such as Linear Regression (LR), Neural Networks (NNs), Genetic Algorithms (GAs), Support Vector Machines (SVMs), Case-based Reasoning (CR) and others. Over the last decade, NNs have been most widely used and shown better performance over other approaches in many cases. [3] In recent years, there have been increasing attempts to apply deep learning techniques to stock market forecasting. Different types of NNs has been employed in the task of Price Forecasting, Artificial Neural Network (ANNs), Recurrent Neural Networks (RNNs) and Convolutional Neural Networks (CNNs), ANNs did not yield significant results in price forecasting, reason being the Conventional ANN does not take past data into consideration which makes it harder to predict on Time-Series data. RNNs is mainly used in Time-Series Forecasting because it has a feedback channel which takes past data into consideration. RNNs temporal representation capabilities makes it suitable to work on sequential data such as Natural Language Processing, Financial Predictions, Speech Translation, Speech Recognition. We adopt long short-term memory (LSTM) units for sequence learning of financial time series. LSTM is a state-of-the-art unit of RNN, and RNN composed of LSTM units is generally referred to as LSTM networks.

In spite of LSTM network being a powerful tool, it has its own drawbacks, LSTM network have numerous parameters that must be defined by the developer, such as number of hidden layer, number of neurons in each layer, and number of time steps, and by varying these parameters of the LSTM network, efficiency of the model significantly varies. However, time and computation limitations makes it impossible for research to go through the parameter space and try each set of parameters. This study proposes an integrated approach of LSTM and GA where GA is used to determine the optimal set of parameters for the LSTM network such as Window size, number of LSTM units in each layer. If the Window Size is too small, significant trends may be missed, If the Window Size is too large, Data may act as noise. We apply GA technique to find optimal Window Size and improve our prediction efficacy. We tested our method on the National Stock Exchange(NSE) for 2019–20.

The remainder of this paper is organized as follows: Section 2 describes the methodologies that are used in this study, and introduces the hybrid model of LSTM network and GA. Section 3 describes data and variables that are used in this study. Section 4 presents the experimental results. Section 5 summarizes the findings and provides suggestions for further research.

2. RESEARCH METHODOLOGY:

2.1 RNN for Time Series Prediction

Recurrent Neural Network (RNN) is a class of ANN in which connections between the neurons form a directed graph, or in simpler words, having a self-loop in the hidden layers. This helps RNNs to utilize the previous state of the hidden neurons to learn the current state. Along with the current input example, RNNs take the information they have learnt previously in time. They use internal state or memory to learn sequential information. This enables them to learn a variety of tasks such as handwriting recognition, speech recognition, etc. In a traditional neural net, all input vector units are assumed to be independent. As a result, sequential information cannot be made use of in the traditional neural network. But whereas in the RNN model, sequential data of the time series generates a hidden state and is added with the output of a network dependent on the hidden state. As the stock trends are an example of a time series data, this use case is a best fit for RNNs. Based on the outcome of the output layer, updates to the weights of hidden layers are propagated back. But in deep neural networks, this change will be vanishingly small to the layers in the beginning, preventing the weights from changing its value and stopping the network from learning further. This is called the vanishing gradient problem[4].

The following figure shows an RNN model expanded into a complete network.

2.2 Long-short term memory

Long short-term memory (LSTM) is a type of recurrent neural-network architecture in which the vanishing gradient problem is solved. LSTMs are capable of learning very long-term dependencies and they work tremendously well on a large variety of problems. LSTMs were first introduced by Hochreiter et al. in 1997[6] . In addition to the original authors, many researchers contributed to the architecture of modern LSTM cells. Recurrent neural networks are generally designed in a chain-like structure, looping back to the previous layers. In standard RNNs, this looping module will have a very simple structure. This structure can be a simple tanh layer controlling the flow.

Whereas in LSTMs, instead of this simple structure, they have four network layers interacting in a special way. General architecture of LSTMs is shown in following Figure. Normally LSTM’s are augmented by gates called “forget” gates. By controlling these gates, errors can be backpropagated through any number of virtual layers. This mechanism enables the network to learn tasks that depend on events that occurred millions of time steps ago.

2.3 Genetic Algorithm (GA)

GA is a metaheuristic and stochastic optimization algorithm inspired by the process of natural evolution[8]. They are widely used to find near-optimal solutions to optimization problems with large search spaces. The process of GA includes operators that imitate natural genetic and evolutionary principles, such as crossover and mutation. The major feature of GA is the population of “chromosomes”. Each chromosome acts as a potential solution to a target problem, and is usually expressed in the form of binary strings. These chromosomes are generated randomly, and the one that provides the better solution gets more chances to reproduce[9].

Processing the GA can be divided into six stages: initialization, fitness calculation, termination condition check, selection, crossover, and mutation,[10] as shown in following Figure

In the initialization stage, a chromosome in the search space is arbitrarily selected, and then the fitness of each selected chromosome is calculated in accordance with the predefined fitness function. The fitness function is a concept used to numerically encode a chromosome’s performance. In optimization algorithms, such as GA, the definition of a fitness function is a crucial factor that affects the performance. Through the process of calculating the fitness for the fitness function, only solutions with excellent performance are preserved for further reproduction processes. Some chromosomes are selected several times through the selection process, and chromosomes that disappear without selection are generated because they are chosen stochastically according to the adaptability of fitness function. That is, the chromosomes with prominent performance have a higher probability of being inherited by the next generation. Selected superior chromosomes produce offspring by interchanging corresponding parts of the string and changing gene combinations. The crossover process leads to new solutions being created from existing ones. In the mutation process, one of the chromosomes is selected to change one randomly chosen bit. The aim of this process is to introduce diversity and novelty into the solution pool by arbitrarily swapping or turning off solution bits. The crossover process has the limitation that completely new information cannot be generated. However, these limitations can be overcome by the mutation operation by changing corresponding bits to completely new values.The crossover process has the limitation that completely new information cannot be generated. However, these limitations can be overcome by the mutation operation by changing corresponding bits to completely new values. The newly generated chromosome through selection, crossover, and mutation processes calculates the fitness to the model, and verifies the termination criteria. The standard procedure of GA is over when the termination criteria have been satisfied. If some termination criteria are not satisfied, the selection, crossover, and mutation processes are repeated, to generate a superior chromosome with higher performance. In this study, chromosomes are represented as binary arrays and the mean squared error (MSE) of the prediction model is acting as the fitness value.

3. GA-LSTM HYBRID MODEL

In this study, we propose an integrated approach of LSTM and GA to find the optimized time window and number of LSTM units for stock time series prediction. LSTM uses past information during the training process so a suitable size window plays an important role in desirable results. If the window size is large, the model will learn too much from the training data which will result in overfitting. If the window size is too small, the model will not consider important information which will result in underfitting.

This method consists of two stages, which are as follows.

The first stage is to design a LSTM network with appropriate network parameters.

We use a Sequential Layer LSTM network with two hidden layers, the number of neurons in the hidden layer is determined by GA. In the LSTM model, the Rectified Linear Unit(ReLU) is used as an activation function for the input nodes and the hidden nodes. The ReLu function returns the input value as it is if it’s positive, and returns 0 if the input value is negative. ReLU is also used as an activation function for the output nodes because determining the price of stocks after 10 minutes is a problem of regression. Random values are assigned as initial weights of the network, the weight is adjusted by “Adam” optimizer, which is gradient-based optimizer, popular for its computational efficiency, so it is appropriate for problems which have big data and parameters, and also deals with problem with noisy and sparse gradients [14].

In the second stage of the method, we apply GA, to find the optimal size of the time window and number of hidden units in each hidden layer of the LSTM network. Different window sizes and different numbers of hidden units are used to evaluate fitness of GA. GA is applied through following steps:

(i) Population space is initialized with random values which contain possible solutions.

(ii) After the Population is initialized, genetic operators explore the search space. Each chromosome is encoded with Binary bits. Length of each chromosome is 12 bits, where bits 1–6 represent the window size and bits 7–12 represent the number of LSTM units in each hidden layer.

(iii) Roulette method was used for selection operation. We calculate the fitness of each chromosome in the population.

(iv) Ordered crossover method was used for the crossover operation, In the crossover operation chromosomes between two individuals will be exchanged, crossover probability is set as 0.7.

(v) Basic bit mutation method is used for mutation operation. For diversity in the population, a gene in the chromosome is altered with small probability, Mutation probability is set as 0.1.

(vi) Above steps are repeated for 10 generations of offspring as a stopping condition.

Fitness Function plays a crucial role in GA, and should be chosen carefully. In this research, we use the RMSE to calculate the fitness of each chromosome, and the chromosome which returns the smallest RMSE value is selected as the optimal solution for the LSTM network.

After the optimal time window size and number of hidden LSTM units is determined by the GA, the LSTM-RNN model is trained on the optimal network architecture. The number of neurons in the hidden layer determined by the GA are 63 , and the dropout parameter is set as 0.2 to avoid overfitting, time window size determined by the GA is 11,i.e., this paper takes data of last 11 minutes as input to predict the stock price after 10 minutes. Model optimizer is Adam, and the number of epochs is 50. Data is divided on 80:20 split,i.e., 80% of data is used for training and remaining 20% data is used for testing of the model.

The model is evaluated using Mean Square Error(MSE) as model evaluation index.

4. Research Data and Experiment:

4.1 Data Description

Research data in this study comes from the National Stock Exchange(NSE) for January 2020 — April 2020. The total number of data comprises 90,000 trading minutes. Each record contains price information, including low price, high price, open price, close price, previous close price, and trading volume.

4.2 Data collection

The historical stock price data was collected from NSE India [12].The period of the data was from January, 2020 to April, 2020. The Python pandas library was used to get the data from csv file [13]. Then the collected data was used to train the model.

4.3 Feature Selection

In this study, six historical values (open price, day high,day low, Previous Close, current price, and trading volume) are used as input variables. The output of the model is the price of stock after 10 minutes.

To standardize the range of independent variables or features of data, a feature scaling method was used for data processing. This is also known as data normalization, and is generally performed during the data pre-processing step. Here, MinMaxScaler was used to scale the data as a part of pre-processing. To normalize the data set, fit and transform were both used for training data, and only transform was used for testing data, because the scale of the testing data is already known. Normalizing or transforming the data means that the new scale variable will be in range of [0,1].

5. RESULT AND ANALYSIS

As discussed in the previous sections, this paper applies GA to determine the optimal network architecture for the LSTM model, which includes window size and total number of LSTM units in each hidden layer. The best time window size for stock price prediction has been chosen as 11 by GA. So, the most effective way to predict the stock price is by using the information of the past 11 minutes in the stock price prediction model, the best number of LSTM units, has been chosen 63 by the GA.

We embedded the last 11 time-steps, changed the architecture of the model as determined by GA to verify the effectiveness of the Integrated GA-LSTM model on test data. The result of the model is measured by mean squared error(MSE) value of the actual price of the stock.

MSE has been widely used in various studies, and it provides a means to determine the effectiveness of the model for predicting the daily stock market.

The results are compared to a LSTM network without GA, window size and number of LSTM units is determined by the developer, in this case 5 and 32 respectively. Both models are tested against the same dataset used in this study. Table 3 presents the experimental result of the approach in this study.

As shown in the above Table, GA-LSTM network shows better performance than the benchmark model in Performance measure. The MSE of the benchmark model is 0.01435094, while the MSE of the GA-LSTM model is 0.01259757 , and the prediction efficacy is enhanced by 12.21% compared to the benchmark model.

The results show that the tuning of hyperparameters of the model plays a crucial role to achieve desirable results. It is a difficult task to find an optimal set of parameters of model architecture because every model is data sensitive and learns at different rates for different data. However, the results shows that the method used in this study can be an useful tool to determine near-optimal, if not optimal parameters for network architectures.

6. CONCLUSION

In this study, we proposed an integrated approach for determining the network architecture for the LSTM model with the help of Genetic Algorithm. Determining the network architecture is done mostly by trial and error method by the developer, but selecting the optimal set of parameters is still a huge challenge because of the large search space.

The experimental result as shown earlier shows that optimizing the parameters of the LSTM model can effectively improve the prediction accuracy in stock forecasting, The proposed model shows lower MSE value than the benchmark model without GA.

Although this approach can effectively improve prediction accuracy, it still has some shortcomings as follows. Firstly, we trained and tested our model only on The National Stock Exchange(NSE) data, we can try our approach on different markets around the world. Secondly, various parameters of the GA model such as mutation rate, crossover rate and selection method can be varied to form suitable combinations which can improve the performance of the model in our research.

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