Development of a stock trading system

based on a neural network using highly

volatile stock price patterns
Jangmin Oh
School of AI Convergence, Sungshin Women’s University, Seongbuk-gu, Seoul, South Korea

ABSTRACT
This paper proposes a pattern-based stock trading system using ANN-based deep
learning and utilizing the results to analyze and forecast highly volatile stock price
patterns. Three highly volatile price patterns containing at least a record of the price
hitting the daily ceiling in the recent trading days are defined. The implications of
each pattern are briefly analyzed using chart examples. The training of the neural
network was conducted with stock data filtered in three patterns and trading signals
were generated using the prediction results of those neural networks. Using data from
the KOSPI and KOSDAQ markets, It was found that that the proposed pattern-
based trading system can achieve better trading performances than domestic and
overseas stock indices. The significance of this study is the development of a stock
price prediction model that exceeds the market index to help overcome the continued
freezing of interest rates in Korea. Also, the results of this study can help investors who
fail to invest in stocks due to the information gap.

Subjects Adaptive and Self-Organizing Systems, Artificial Intelligence,

Data Mining and Machine Learning, Data Science
Keywords Stock price prediction, Highly volatile stock price pattern, Technical analysis,
Neural network

Submitted 21 December 2021

Accepted 14 February 2022
INTRODUCTION
Published 2 March 2022 Predicting stock prices has long been of interest to many related fields including economics,
Corresponding author mathematics, physics, and computer science. There is an ongoing debate about whether or
Jangmin Oh, jang-
min.oh@sungshin.ac.kr
not it is possible to predict stock prices and, if it is possible, how much these predictions
can outperform the market. However, the field of AI (artificial intelligence) has recently
Academic editor
Nageswara Rao Moparthi reported price forecasting techniques with the application of various machine learning
Additional Information and techniques that show a significant level of statistical confidence (Hsu, 2011; Hadavandi,
Declarations can be found on Shavandi & Ghanbari, 2010; Armano, Marchesi & Murru, 2005; Ding et al., 2015; Jiang,
page 17
2021). A number of studies building intelligent trading systems have also been conducted
DOI 10.7717/peerj-cs.915 based on the results of these AI price forecasting techniques (Lin, Yang & Song, 2011; O et
Copyright al., 2004; Song, Lee & Lee, 2020).
2022 Oh O et al. (2004) and O et al. (2006) concluded that trading performance can be
Distributed under additionally improved by training and utilizing independent predictors for different
Creative Commons CC-BY 4.0
stock price patterns.
OPEN ACCESS

How to cite this article Oh J. 2022. Development of a stock trading system based on a neural network using highly volatile stock price
patterns. PeerJ Comput. Sci. 8:e915 http://doi.org/10.7717/peerj-cs.915
 Most of the existing stock price prediction technical analyses have based the input
features on the moving average (MA) stock price, which can effectively express the recent
trends of price fluctuations. For example, the MACD (moving average convergence
divergence) utilizes the difference between the long term and short-term moving average
to represent the convergence and divergence of the moving average values.
O et al. (2006) performed pattern-defined predictions using patterns related to a
crossover, reversal into an uptrend, and reversal into a downtrend among 5-day, 10-day
and 20-day moving average lines.
However, all of the MA-based technical indicators, including the MACD, have a
‘time-lag’ limitation because buy and sell signals are mostly generated after price trends
have already been developed. This study will attempt to predict highly volatile stock
price patterns by introducing the concept of the ‘upper limit price’, which is defined
independently from the moving average. This study will also utilize Japanese candlestick
indicators and more short-term technical indicators to complement the time-lag problem.
In the Japanese candlestick indicator, a candlestick summarizes the intraday variations
of a stock price, expressing the differences between the opening price, highest, lowest, and
closing prices, through which the most recent price fluctuations can be summarized more
closely.
According to various empirical analyses of the Korean stock market, the Korean stock
market shows market inefficiency due to information asymmetry (Lee, 2007; Bark, 1991).
Although market inefficiency is lower than that of larger foreign stock markets, there is still
an issue of the information gap. Therefore, this paper suggest that special investment and
analysis information to overcome market inefficiency. However, since technical analysis
indicators are price- and chart-based information that many people already know, a new
chart analysis technique is needed.
The efficient market hypothesis asserted by Fama (1965) is rejected if it exceeds the
market rate of return using specific information. This study proposes a new ‘highly volatile
stock price pattern’ that does not yet exist in technical analysis. Using the pattern proposed
in this paper, it is possible to develop a predictive model that exceeds the market return.
The results of this study are in conflict with the efficient market hypothesis.
In summary, this study assumes market inefficiency in the Korean stock market and
provides new information that is expected to affect price fluctuations. The highly volatile
stock price pattern is defined by the relationship between the ‘upper limit’ and stock price
in the Korean stock market. Through fund simulation it was found that investors can
obtain efficient returns through a deep learning stock price prediction model using highly
volatile patterns.
It was also found that it was difficult to predict stock prices by only analyzing simple
charts such as moving averages, so a definition of a particular pattern of variation is needed.
This pattern can be found when there are stock prices that show an upper limit. This pattern
can also appear over various periods of time even when the chart shows the characteristics
of a random walk.

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 2/20

 The experiment was conducted based on related research that the Korean stock market
shows more trend changes than random work characteristics (Aggarwal, 2018; Ryoo &
Smith, 2002; Ayadi & Pyun, 1994).
Studies related to stock market analysis from China, India, and Mongolia, which are
similar to Korea, were also unable to prove the random walk theory according to the stock
market (Han, Wang & Xu, 2019; Damdindorj, Rhee & Choi, 2016).
The present study will show that the proposed stock trading system can achieve better
trading performances than domestic and overseas stock indices by performing pattern-
specific training on highly volatile stock price patterns. The experiments were conducted
on the stock variation data extracted from the price data of approximately 2,000 stocks
listed in the KOSPI and KOSDAQ markets. The limitations of existing studies and the
strengths of this study are as follows.

Limitations of existing studies

1. Limitations of Profitability Verification: Existing studies suggest only accuracy or
prediction error using stock price prediction models. However, the actual performance
of the stock price prediction model requires return verification.
2. Limitations of using simple input features: Existing studies have used very simple input
features such as simple price features, volume, price rate of change and so on. Simple
input features are limited and using more advanced input features can greatly influence
the performance of predictive models.
3. Limitations on prediction accuracy: Most of the predictive models in existing studies
have not achieved high accuracy.

Strengths of this study

This study conducted a clear performance verification through yield comparison with
several indices. In addition, although a simple deep neural network was used, advanced
input features improved the performance of the stock price prediction model. Although
there are time series models such as LSTM, this study uses high-volatile pattern filtering
input features. As a result, stock price data of a portion without the corresponding pattern
is partially filtered. Therefore, the continuity of time series data is insignificant. As a result,
deep learning helped us identify the importance of input features such as high volatility
patterns in predicting stock price. The deep neural network we used is a rather simple
structure, but its sufficient performance has been verified. The novelty of this study is
summarized as follows.
• First, an advanced filtering technology that can improve the performance of the stock
price prediction model was proposed. The pattern of stock price fluctuations proposed
in this paper was created based on the results of analyzing domestic stock charts. Since
it is a pattern generated based on the actual chart, it reflects the market well and shows
excellent performance compared to the existing moving average-based pattern.
• Second, it enables investors to make comfortable investments without daily data
analysis. By using the neural network model, a lot of data can be handled at once, and

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 3/20

 the prediction results are reliable results that have been verified through a sufficient
period of fund simulation.
• Third, advanced filtering technology enables sufficient stock price prediction even in
a simple deep learning model. Most of the existing studies focus on the structure of
the model when conducting deep learning stock price prediction studies. For example,
performance is compared using multiple models for the same data. However, in addition
to the issue of selecting the structure of the model, the composition of data and the
importance of filtering algorithms are proposed through this study.
This paper is organized as follows: ‘Related Works’ describes related studies;
‘Background’ describes the knowledge used prior to the main methodology of this study;
in ‘Materials & Methods’, the moving average-based patterns typically utilized in existing
studies will be introduced, the formal definition of the three highly volatile stock price
patterns will be presented, and the meanings of the individual patterns will be described
through chart demonstrations; in ‘Experiments’, the input features and the target value
of the neural network learning system will be described; in ‘Results of experiments’, the
experimental results will be presented; and, finally, future research directions will be
suggested in the ‘Conclusion’.

RELATED WORKS
Researches related to stock price prediction have traditionally been conducted using ARIMA
(Benvenuto et al., 2019; Ariyo, Adewumi & Ayo, 2014), Regression (Refenes, Zapranis &
Francis, 1994; Yang, Chan & King, 2002), and Bayesian (Pella & Masuda, 2001) to reflect
the characteristics of time series data.
ARIMA is a statistical model widely used in the financial sector. However, it is a model
that is used exclusively for short-term predictions, and has the disadvantage that it is
difficult to confirm long-term investment performance. Since stock price prediction is
closely related to profits, direct investment in a short-term verified model can lead to risks.
In addition, for the reason that the amount of stock data accumulated from the past is very
vast, a model that can handle large amounts of data is needed. In this regard, there is also a
study result that predicts the index using the ARIMA model has an accuracy of up to 38%
(Devi, Sundar & Alli, 2013). However, the prediction accuracy was very low to carry out
actual investments using this model.
Baysian is a model that can perform classification based on probabilistic theory and used
to predict stock prices in the past. However, with the recent development of artificial neural
networks, it is widely used as a comparative model. Baysian is also evaluated as not suitable
for mid or long-term prediction, such as the ARIMA model. In related studies using the
Bayesian model, predictions were performed with up to 78% accuracy (Malagrino, Roman
& Monteiro, 2018). This was better performance than the ARIMA model, but it showed
lower values than the neural network model to be described below.
Above all, these existing predictive models often misinterpret information due to
underfitting and overfitting problems, so they often do not help much in decision-making
activities for stock price prediction. In addition, it has already been proven that neural

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 4/20

 networks perform better than traditional methods (Bustos & Pomares-Quimbaya, 2020).
For the above reasons, neural network-based technique has been used a lot in recent stock
price prediction.
Representatively, there is a study using Elliott Wave Indicator as a stock price prediction
study using neural networks (Lakshminarayanan et al., 2006). This study used data based
on technical analysis, and the model accuracy was 93.83%. This study used its own technical
indicators and made predictions for five stocks. Based on these findings, it is possible to
assume that more advanced input features can lead to improved model performance.
Several other papers similar to this paper used machine learning techniques such as
regression and SVM, models such as CNN and LSTM, or ensemble techniques to predict
stock prices (Oncharoen & Vateekul, 2018; Liu & Wang, 2018; Jiang, 2021).
Cao & Wang (2019) attempted to predict the stock index of various countries using the
CNN application model. Only historical data was used as input features, and the down-
sampling and convolution techniques belonging to CNN were mainly used to improve
stock price prediction performance. As a result, they suggested that the CNN-SVM mixed
model had the best performance. However, simple input features were used, and the exact
performance and return of the model were not verified, so it was difficult to confirm the
actual performance of the CNN-SVM model.
Another study (Guang, Xiaojie & Ruifan, 2019) looked at the rate of the return of the
stock price forecast model. This model is not a period-specific return, but an absolute
return that does not take into account investments and assets that may vary from person
to person. In addition, the profits earned have no comparison with the stock index, which
can be regarded as a rate of return due to market rise.
A similar study (Pang et al., 2020) included word-embedding techniques such as LSTM
(Long Short-Term Memory). Here stock data, which is a time series characteristic, is
referred to as a stock vector, and is used as an input feature. The model they developed
tried to predict the Shanghai Stock Index and showed an accuracy of about 57%, but
the study did not have a comparison of returns through prediction. High volatile stock
price prediction model derived higher accuracy than the model presented by Pang et al. In
addition, only a few studies (Feng et al., 2018; Araújo et al., 2019) using various in-depth
models have both derived returns and evaluated their performance, and most studies
cannot guarantee a clear return because they provide no comparison with the stock index.
Recent evidence suggests that input feature selection is very important in model learning.
The selection of key input features can lead to improved (Hooshmand & Gad, 2020).
Accordingly, in this paper, the study was conducted with a focus on data composition and
novelty rather than the structure of the model.

BACKGROUND
MA (Moving average)-based patterns
Before examining the high volatile stock price pattern using the Japanese candlestick
indicator, which is the focus in this study, the meaning and limitations of the four MA-
based patterns presented in related studies are examined, taking the ‘divergence’ pattern

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 5/20

 and ‘reversal’ pattern of MA (Moving Average) as examples. O et al. (2006) that defined
and used the patterns based on the moving average. The moving average is the average
stock price over a period of time and is used to summarize stock price trends. Moving
average is also denoted by MA in which 5, 10, 20 days and so on are used as the window of
time; as an example, the 5-day moving average of stock s at trading day t can be calculated
as follows:
4
1X
MA5st = closest −k . (1)
5
k=0

In the same way as above, the volume can also be calculated as the moving average of
the volume, and the 5-day volume moving average of stock trading day can be counted as
follows:
4
1X
VMA5st = volumest −k (2)
5
k=0

where closest is the closing price of the trading day t . The slope of the line connecting a
moving average to another moving average is denoted as Grad and can be calculated using
the following Eq. (3):
MA5st − MA5st −1
Grad5st = . (3)
MA5st
Equation (4) defines the training target set Dbear that corresponds to the divergence
pattern. Divergence refers to when the short-term moving average is located relatively
below the longer-term moving averages, resulting from the continuation of the downward
trend of the stock price for a considerable period of time. Equation (4) represents that the
5-day moving average is smaller than the 10-day moving average and the 10-day moving
average is smaller than the 20-day moving average:

Dbear = xs,t ,os,t |MA5st < MA10st < MA20st ,s ∈ α,t ∈ β



(4)

where xs,t is a vector of the input feature, and os,t is the target value representing the price
fluctuation after the occurrence of the pattern; α and β are the entire stock set and the
entire trading day set, respectively. Figure 1 is an example of the charts corresponding to
a divergence pattern. The description of the graph in Fig. 1 is as follows. Sixteen trading
days from A to B correspond to the divergence pattern. In this case, relatively steep price
rises were shown around point B; but, in general, even if a rebound was to appear, the rise
would not be that large.
Equation (5) defines the training target set DTU that corresponds to the reversal to
uptrend pattern. Reversal to uptrend means that one of the moving average lines reverses
from a downtrend to an uptrend; trading day A, B, C in Fig. 2 show reversal to uptrend
patterns. Among these, A shows the case where the 5-day MA line reversed to an uptrend
due to the sharp rise of the stock price.
This case shows the weakness of MA as a prediction indicator because the price had
already risen before the trading signal was issued; the phenomenon of generating the signals

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 6/20

 Figure 1 MA divergence pattern.
Full-size DOI: 10.7717/peerjcs.915/fig-1

after the price movement has already occurred is called ‘time-lag’. This MA-based pattern
arises very frequently so it has the strength of using a large amount of training data, but
time lag decreases this pattern’s predictive ability.

DTU = xs,t ,os,t |(Grad5st −1 < 0&&Grad5st > 0)||(Grad10st −1 < 0&&Grad10st > 0),


|| Grad20st −1 < 0&&Grad20st > 0 ,s ∈ α,t ∈ β .

(5)

MATERIALS & METHODS

Highly volatile stock price patterns
This section describes a technique for filtering data showing a high volatile stock price
pattern on a stock chart. There are a total of three filtering algorithms, and using them,
data with high fluctuation patterns form a cluster. Machine learning-based algorithms such
as k-means were not necessarily used when creating clusters. This is because the time it
takes to create a cluster is very short compared to similar studies (Alguliyev, Aliguliyev &
Sukhostat, 2019).
In the pattern-based stock trading system, multiple independent predictors are trained
on the data clustered in line with the stock price patterns and employed in the final trading.
In this paper, the highly volatile stock price patterns will be defined and employed as a

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 7/20

 Figure 2 MA reversal to uptrend pattern.
Full-size DOI: 10.7717/peerjcs.915/fig-2

way to achieve more predictability as an extension of pattern-based prediction techniques.

Korean stock markets set the legal limits of price fluctuations in a day; both the KOSPI and
KOSDAQ markets apply ±15% of the previous day’s closing price to the price fluctuation
limits. In general, the ‘upper limit’ refers to when the closing price of a particular trading
day is closest to a 15% rise from the previous day’s closing price, or about a 14% rise in the
price depending on the price band of the item. In Eq. (6), Sanghanst represents the closing
price at the upper limit of stock s on trading day t and is defined as follows:
(
true if (closest ≥ 1.14 × closest −1 )
Sanghanst = (6)
fasle otherwise
where closest refers to the closing price. The three highly volatile stock price patterns are
defined based on the definition of the upper limit. If the price of a particular stock has
risen to the upper limit, the price volatility of the subsequent trading days is bound to
be expanded. The rise of the price to the upper limit should be accompanied by large
transaction volume because a short-term surge and plunge may occur due to the collective
psychology of the trading public. The highly volatile stock price patterns in this paper
deal only with the case where price adjustments were made 1 to 2 trading days after
the upper limit price appeared. The time target used for predictions was when both the
first rising wave, represented by the rising to the upper limit price, and the first falling
wave, represented by the adjustment, have been completed so extreme volatilities have
been relaxed. High volatile stock price patterns were found by chart analysis experts who

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 8/20

 Figure 3 (A–B) A normal example and counter example of the p1 pattern.
Full-size DOI: 10.7717/peerjcs.915/fig-3

analyzed charts over the years. This pattern is actually mainly seen in mid- to low-priced
stocks in the Korean stock market. Investors have to look directly at a vast amount of data
to utilize this pattern for real investment. However, if the prediction model using deep
learning is properly defined, it is easy to predict when the price rises after a certain pattern,
and even check whether it can actually make profits.

Adjustment pattern with one candlestick after consecutive upper

limits (p1)
An adjustment pattern with 1 candlestick after consecutive upper limits is when the first
rising wave is so strong that the upper limit prices appear consecutively; it can be calculated
using the equation below (7). openst represents the open price of stock s on trading day
t. Figure 3 shows an example of p1 where (a) is a normal example in which a p1pattern
occurs and the upper limit price appears next day, and (b) is a counter example where
the empty rectangular, called a negative candlestick, represents when the closing price is
lower than the opening price, meaning that the price became lower after intraday trading.
The positive candlestick filled with the grey color is the opposite. The last condition of
the condition statement means that the candlestick in the pattern formation for the day
should be a negative candlestick or should be a positive candlestick of less than 5% of the
difference between the opening price and the closing price. If the positive candlestick is
larger by a difference of more than 5%, the price is considered adjusted.
 !
closest − openst


 s s
true if Sanghant −2 = true and Sanghant −1 = true and < 0.05

p1st = closest (7)

false otherwise.


Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 9/20

 Figure 4 (A–B) A normal example and counter example of the p2 pattern.
Full-size DOI: 10.7717/peerjcs.915/fig-4

Adjustment pattern with one candlestick after single upper limit (p2)
An adjustment pattern with one candlestick after a single upper limit is when the upper
limit price condition is replaced by the single upper limit price; Fig. 4 shows a normal
example and a counter example of the case. Due to the relatively weaker rising intensity, it
is estimated that the ratio of normal examples is likely to be rather lower than p1 patterns.
 !
closest − openst



true if Sanghanst −2 = false and Sanghanst −1 = true and < 0.05

p2st = closest (8)

false otherwise.


Adjustment pattern with two candlesticks after upper limits (p3)

An adjustment pattern with two candlesticks after the upper limits is the case in which
the price has been adjusted over two trading days after the upper limit price, or when a
negative candlestick or a small positive candlestick (less than 5% in size) forms after p1 or
p2 is formed. Figure 5 shows the examples of p3. The last candlestick on each chart of (a)
and (b) is the price fluctuation immediately after the pattern occurs.
 !
closest −1 − openst −1


closest − openst



true if Sanghanst −1 = true and < 0.05 and < 0.05

p3st = closest −1 closest (9)

false otherwise.


These examples of the three patterns examined above imply that price fluctuations after
the pattern occurs can vary depending on the slope of the moving average and the form
of the candlestick. As an example, the under tail is attached to the last candlestick in all
the patterns shown in the three normal examples. This means that the stock ended with

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 10/20

 Figure 5 (A-B) A normal example and counter example of the p3 pattern.
Full-size DOI: 10.7717/peerjcs.915/fig-5

the emergence of buying powers leading the rebound in price after trading hours and is
more likely to be bullish the next day. Since the various factors act in combination on the
direction of the stock price after the appearance of the pattern, the neural network training
that will be described in the next section is needed to utilize these patterns in the trading
system.

EXPERIMENTS
Input features configuration for neural network
In order to train the neural networks for future price predictions for each pattern presented
in the previous sections, the input feature set constructing an input vector xs,t was used for
the input to the neural network from the training data and the target value corresponding
to the desired output was defined. Disparity, representing the distance between MA and the
current price, is denoted as Disp and the Disp from the 5-day MA line can be calculated
using the following equation:
closest − MA5st −1
Disp5st = . (10)
MA5st
Apart from the moving average line, the input features relating to Japanese candlesticks
include: RC (rate of change) in the trading day price compared to the previous day, Body,
US (upper shadow), and LS (lower shadow). These are defined in Eqs. (11) through (14),
respectively:
closest − closest −1
RCst = 100 × (11)
closest

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 11/20

 openst − closest −1
Bodyst = 100 × (12)
min(openst ,closest )
highst − max(openst ,closest )
USst = 100 × (13)
max(openst ,closest )
min openst ,closest − lowst


s
LSt = 100 × (14)
min(openst ,closest )
where openst ,highst andlowst are the opening, highest, and lowest price of the trading day t.
The input vector xs,t of each predictor, including these indicators, is as follows:

xs,t = (RCst ,RCst −1 ,RCst −2 ,Bodyst ,Bodyst −1 ,Bodyst −2 ,USst ,LSst ,Grad5st ,Grad10st ,
Grad20st ,Disp5st ,Disp10st ,Disp20st ,VGrad5st ,
VGrad10st ,VGrad20st ,VDisp5st ,VDisp10st ,VDisp20st ) (15)

where VGrad is the slope of the volume moving average line. VDisp is the difference
between the volume moving average and the total volume; these two indicators can be
calculated by entering the total volume instead of the close price in the equations of the
Grad and Disp. Each input feature should be normalized as a value between 0 and 1 before
used.

Experimental process and environment

The first of the stock price prediction process takes data from the stock database for a
certain period of time. Thereafter, the data of the part showing the high volatile pattern is
filtered and the input feature is calculated. The calculated result is saved as a text file and
is used for deep learning. The text file consists of training, validation, testing, and fund
simulation files, and finally the model outputs dates and stocks that are expected to rise by
more than 10%.
The stock database stores daily KOSPI/KOSDAQ data from October 1990 and it updates
data every day. Therefore, even if the composition of the stock index changes, the changed
information is newly added to the database, so it is possible to predict the changed index.
A prediction model using the neural network structures as shown in Fig. 6 below was
trained using 20 input features and binary classified target vectors. The target vector uses
a binary classification format, and if the price rises by more than 10% within 5 days, it will
be marked [0,1] otherwise [1,0].
Experiments will be conducted on a desktop with 18.04 versions of Ubuntu with RTX
3070 9GB graphics card. The model was constructed using Keras in Tensorflow 2.0 (Abadi
et al., 2016) and the hidden layer was composed of three hidden layers. In addition, the use
of detailed parameters is as follows. Tanh was used as an activation function for each layer,
and the learning rate was set to 0.01. In addition, the dropout ratio was set to 0.5.

EXPERIMENT RESULTS
Performance evaluation of prediction model
This section will present the experiment results of applying the proposed trading system to
the prices of 2,268 stocks listed on the KOSDAQ and KOSPI markets of the Korean Stock

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 12/20

 Figure 6 Neural network structure and target vector configuration.
Full-size DOI: 10.7717/peerjcs.915/fig-6

Table 1 Data set for building the trading system.

Name of dataset Period

Training set October 2017–June 2019
Validation set July 2019–December 2019
Test set January 2020–April 2020
Fund simulation set May 2020–December 2020

Exchange. The entire dataset used in the experiment is divided into 4 sub-sets; the details
are shown in Table 1. In other related studies, there are no results of measuring returns
through the prediction model. In studies related to stock price prediction, not only the
accuracy of the prediction model but also the measurement of the rate of profit should
be conducted at the same time. In this paper, a fund simulation dataset is additionally
configured for this purpose. Training, verification, and test data are used exclusively for
determining prediction models. Only the data that was not used to generate the prediction
model was used for fund simulation. This process is for cross-validation and accurate rate
of profit measurement.
This study was aimed only at predicting the domestic stock market, so only data from
the KOSPI and KOSDAQ were used. . The total number of KOSPI and KOSDAQ stocks
in Korea is about 2,436. In this study, data were collected from October 2017 to December
2020 based on KOSPI and KOSDAQ stocks, the total number of data used for training,
verification, and testing, and additional fund simulations exceeded 2 million. Because of
the large amount of data, other analytical techniques and theories were needed to add data
from overseas stock markets.
The experiments showed that as training progressed, loss decreased and accuracy
increased, as shown in Fig. 7. The loss calculation used MSE, and the equation is as follows.
Where N is the number of samples, P is the predicted value and A is real value. Mean
square error is defined as the variance between predicted and actual values (Namasudra,

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 13/20

 Figure 7 Training and test loss and accuracy graph.
Full-size DOI: 10.7717/peerjcs.915/fig-7

Table 2 Model evaluation results.

Accuracy Precision Recall F1-Score

Model evaluation Results 0.9623 0.9638 0.9638 0.9638

Dhamodharavadhani & Rathipriya, 2021).

N
1X
MSE = (Pi − Ai )2 . (16)
N
1

Test datasets showed a slight increase in loss and a slight decrease in accuracy with each
epoch. However, we can see significantly better numerical results than the training process.
The evaluation of the prediction model is shown in Table 2. The model’s evaluation was
performed on two criteria: accuracy and F1 score. Accuracy is a metric for the classification
model as a percentage of the total predictions performed. The F1 score is the harmonic
mean of precision and recall (Chakraborty et al., 2020). The equation for accuracy and f1
score is as follows.

Accuracy
True Positives + True Negatives
= 100 × (17)
True Positives + True Negatives + False Positive + False Negatives

Precision ∗ Recall
F 1 score = 2 ∗ (18)
Precision + Recall
where:

True Positives True Positives

Precision = , Recall = .
True Positives + False Positive True Positives + False Negatives
The experiments showed that the stock price prediction model using highly volatile
stock price patterns finally showed an accuracy of 96.23% and an F1 score of 0.9638. This

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 14/20

 Table 3 Comparison of the accuracy between the proposed scheme and other stock filtering schemes.

Resisted plunge Nosedive Rise stock Our Model with

filtering filtering filtering highly volatile stock
price patterns filtering
Accuracy 72.39% 75.11% 64.93% 96.23%

result is slightly lower or better compared to other classification models (Agrawal et al.,
2021; Ndichu, Kim & Ozawa, 2020) not stock price prediction models. However, in the
case of stock price forecasts, this figure can be said to be a good result due to high uncertain
volatility.
The predictors by pattern were constructed using the training data by pattern, and the
optimum trading policies were selected by performing the integrated multiple simulation
presented in Lee (2007), applying the ‘trading policy selection set’ to each predictor. Here,
the integrated multiple simulations refer to the technique to find the optimal trading
policies best suited to a given predictive neural network. For example, when a prediction
is performed on the fund simulation set, stocks and dates that will rise more than 10% are
derived. The stocks to rise consist of those with a neural network threshold of more than
0.5. It was found that the optimum trading policy had a 20% in profit realization rate,
−12% in stop loss rate, and a holding period of 19 days.
The results of this experiment were compared with similar studies using other filtering
algorithms to derive the results shown in Table 3. Highly volatile filtering algorithm defines
the pattern of fluctuations in stock prices using the concept of upper limits. In comparison,
the remaining three algorithms are ‘Resisted plunge filtering’, ‘Nosedive filtering’, and ‘Rise
stock filtering’, respectively. ‘Resisted plunge’ refers to the type in which an ascending stock
drops for a short period. ‘Nosedive’ literally means a slump. In this case, it is to collect
stocks that have shown a period of collapse. ‘Rise stock’ filtering represented the long-term
upward trend (Song & Lee, 2018).
Experiments were conducted using the same data and model structure. The experimental
results showed that Resisted plunge filtering achieved 72.39% accuracy, Nosedive filtering
achieved 75.11% accuracy, and Rise filtering achieved 64.93% accuracy. In contrast, it can
be seen that the highly volatile pattern filtering algorithm is 96.23%, which is higher than
the accuracy of the other filtering algorithm.

Results of fund simulation

As a result of the fund simulation using optimal trading policies, it was able to earn better
profits than the domestic stock index during the same period. Industrial indicators were
not predicted separately because they were both included in the KOSPI and KOSDAQ
already as this data contains all stock data by industry. As a consequence, the number of
stock trades was small because the stock price pattern showing a highly volatile pattern did
not appear much in the fluctuation pattern of all stocks. However, when a highly volatile
pattern occurs, It was found that there is a high probability that a subsequent upward
pattern will appear. In conclusion, highly volatile stock price patterns play a big role in
predicting stock price rise.

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 15/20

 Figure 8 Comparison of the cumulative profit rate between domestic and overseas stock indices and
the prediction model.
Full-size DOI: 10.7717/peerjcs.915/fig-8

Additionally, to supplement the stock price prediction performance of the high volatile
model proposed in this paper, fund simulation results were compared it with the Nikkei
225, NYSE, and NASDAQ, which are representative stock indices in Japan and the United
States. The results are shown in a graph with the domestic stock index in Fig. 8. Even when
other indices were lowered, high volatile stock price prediction model showed a steady
upward graph. Finally, this model can earn the highest cumulative return. Figure 8 shows
the percentage of returns from each asset.
The reasons that the trading system proposed in the paper achieved better trading
performance than the domestic and overseas stock indices are: first, including the
microscopic price change processes of the most recent three days in the training input
features helped train the neural network training; second, defining the scope of each
pattern by using more strengthened constraints than the moving average pattern seems
to have contributed to the improvement of learning performance as well as the ultimate
trading performance.

CONCLUSIONS
This paper constructed a pattern-based stock trading system which learned data
corresponding to the three highly volatile stock price patterns and utilized that data
for trading. The highly volatile stock price pattern can be observed over a long period of
time and almost guarantees a short-term rise after the pattern occurs.
The significance of this study is the development of a stock price prediction model that
exceeds market indices to overcome the continued freezing of interest rates in Korea, Japan,
and the US Also, the results of this study can help investors who fail to invest in stocks due
to the information gap. If special analysis techniques and indicators such as high volatility
patterns are proven to be effective through this research method, individual investors can
use these methods in the future. In addition, a number of other patterns of variation can

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 16/20

 be added to expand the model, and if a positive return is proven, anyone can use the fund
simulation for their own investments.
Additional studies will have to be conducted to achieve much better trading performances
through microscopic analysis and classification of other highly volatile stock price patterns
not used in this paper. Improving the input feature set used in this paper, and reflecting
the variations of the periods in the target values may also help achieve better results. In
addition, performance changes will be measured by applying the NAR Neural Network
Time Series (NAR-NNTS), a recently studied model (Namasudra, Dhamodharavadhani &
Rathipriya, 2021) that is suitable for data with uncertainty in future studies.
Finally, this study was conducted only using Korean stock data as the Korean stock market
is very different from overseas stock markets such as those in the United States. However, in
order to highlight the strengths of prediction model by performing cross-comparison with
overseas stock indices, comparisons with three indices were added. Price restrictions such
as upper and lower limits are usually used in Asia including China, Japan, and Thailand.
This paper identified patterns inspired by Japanese candle charts and compared them
with the Japanese stock index. In addition, it completed the yield comparison by adding
comparison with overseas stock markets such as the US As a result, the proposed model
showed a higher return than the overseas market growth rate during the same period.

ADDITIONAL INFORMATION AND DECLARATIONS

Funding
This work was funded by the Sungshin Women’s University Research Grant no. H20200069.
The funders had no role in study design, data collection and analysis, decision to publish,
or preparation of the manuscript.

Grant Disclosures
The following grant information was disclosed by the author:
Sungshin Women’s University Research: H20200069.

Competing Interests
The authors declare there are no competing interests.

Author Contributions
• Jangmin Oh conceived and designed the experiments, performed the experiments,
analyzed the data, performed the computation work, prepared figures and/or tables,
authored or reviewed drafts of the paper, and approved the final draft.

Data Availability
The following information was supplied regarding data availability:
The data and source codes are available at GitHub: https://github.com/chfhdahwk/Hivol_
Stock_Prediction.git.

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 17/20

 REFERENCES
Abadi M, Agarwal A, Barham P, Brevdo E, Chen Z, Citro C, Corrado GS, Davis A,
Dean J, Devin M, Ghemawat S, Goodfellow I, Harp A, Irving G, Isard M, Jia Y,
Jozefowicz R, Kaiser L, Kudlur M, Levenberg J, Mane D, Monga R, Moore S,
Murray D, Olah C, Schuster M, Shlens J, Steiner B, Sutskever I, Talwar K, Tucker
P, Vanhoucke V, Vasudevan V, Viegas F, Vinyals O, Warden P, Wattenberg M,
Wicke M, Yu Y, Zheng X. 2016. Tensorflow: Large-scale machine learning on
heterogeneous distributed systems. ArXiv preprint. arXiv:1603.04467.
Aggarwal D. 2018. Random walk model and asymmetric effect in Korean composite
stock price index. Afro-Asian Journal of Finance and Accounting 8(1):85–104
DOI 10.1504/AAJFA.2018.089210.
Agrawal D, Minocha S, Namasudra S, Kumar S. 2021. Ensemble algorithm using
transfer learning for sheep breed classification. In: 2021 IEEE 15th international
symposium on applied computational intelligence and informatics (SACI). Piscataway:
IEEE, 199–204.
Alguliyev RM, Aliguliyev RM, Sukhostat LV. 2019. Efficient algorithm for big data clus-
tering on single machine. CAAI Transactions on Intelligence Technology 5(1):9–14.
Araújo RDA, Nedjah N, Oliveira AL, Silvio RDL. 2019. A deep increasing–decreasing-
linear neural network for financial time series prediction. Neurocomputing
347:59–81 DOI 10.1016/j.neucom.2019.03.017.
Ariyo AA, Adewumi AO, Ayo CK. 2014. Stock price prediction using the ARIMA model.
In: 2014 UKSim-AMSS 16th international conference on computer modelling and
simulation. 106–112.
Armano G, Marchesi M, Murru A. 2005. A Hybrid genetic-neural architecture for stock
indexes forecasting. Information Sciences 170(1):3–33 DOI 10.1016/j.ins.2003.03.023.
Ayadi OF, Pyun CS. 1994. An application of variance ratio test to the Korean securities
market. Journal of Banking & Finance 18(4):643–658
DOI 10.1016/0378-4266(94)00012-3.
Bark HKK. 1991. Risk, return, and equilibrium in the emerging markets: evidence
from the Korean stock market. Journal of Economics and Business 43(4):353–362
DOI 10.1016/0148-6195(91)90031-Q.
Benvenuto D, Giovanetti M, Vassallo L, Angeletti S, Ciccozzi M. 2020. Application of
the ARIMA model on the COVID-2019 epidemic dataset. Data in Brief 29:105340
DOI 10.1016/j.dib.2020.105340.
Bustos O, Pomares-Quimbaya A. 2020. Stock market movement forecast: a systematic
review. Expert Systems with Applications 156:113464
DOI 10.1016/j.eswa.2020.113464.
Cao J, Wang J. 2019. Stock price forecasting model based on modified convolution
neural network and financial time series analysis. International Journal of Commu-
nication Systems 32(12):e3987 DOI 10.1002/dac.3987.
Chakraborty S, Aich S, Han E E, Park J, Kim HC. 2020. Parkinson’s disease detection
from spiral and wave drawings using convolutional neural networks: A multistage

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 18/20

 classifier approach. In: International conference on advanced communication technol-
ogy (ICACT). 298–303.
Damdindorj T, Rhee JH, Choi SJ. 2016. Testing market efficiency with the top-20 index
in the Mongolian stock market. Research in Eurasia V13 1:131–151.
Devi BU, Sundar D, Alli P. 2013. An effective time series analysis for stock trend
prediction using ARIMA model for nifty midcap-50. International Journal of Data
Mining & Knowledge Management Process 3(1):65–78 DOI 10.5121/ijdkp.2013.3106.
Ding X, Zhang Y, Liu T, Duan J. 2015. Deep learning for event-driven stock prediction.
In: Twenty-fourth international joint conference on artificial intelligence.
Fama EF. 1965. The behavior of stock-market prices. The Journal of Business
38(1):34–105 DOI 10.1086/294743.
Feng F, Chen H, He X, Ding J, Sun M, Chua TS. 2018. Enhancing stock movement
prediction with adversarial training. ArXiv preprint. arXiv:1810.09936.
Guang L, Xiaojie W, Ruifan L. 2019. Multi-scale RCNN model for financial time-series
classification. ArXiv preprint. arXiv:1911.09359.
Hadavandi E, Shavandi H, Ghanbari A. 2010. Integration of genetic fuzzy systems
and artificial neural networks for stock price forecasting. Knowledge-Based Systems
23(8):800–808 DOI 10.1016/j.knosys.2010.05.004.
Han C, Wang Y, Xu Y. 2019. Efficiency and multifractality analysis of the Chinese stock
market: evidence from stock indices before and after the 2015 stock market crash.
Sustainability 11(6):1699 DOI 10.3390/su11061699.
Hooshmand MK, Gad I. 2020. Feature selection approach using ensemble learning
for network anomaly detection. CAAI Transactions on Intelligence Technology
5(4):283–293 DOI 10.1049/trit.2020.0073.
Hsu CM. 2011. A hybrid procedure for stock price prediction by integrating self-
organizing map and genetic programming. Expert Systems with Applications
8(11):14026–14036.
Jiang W. 2021. Applications of deep learning in stock market prediction: recent progress.
Expert Systems with Applications 115537(12):e3987.
Lakshminarayanan S, Weckman GR, Snow A, Marvel J. 2006. Stock market hybrid
forecasting model using neural networks. In: IIE annual conference proceedings.
Institute of industrial and systems engineers (IISE).
Lee JW. 2007. Integrated multiple simulation for optimizing performance of stock trad-
ing systems based on neural networks. The KIPS Transactions PartB 14(2):127–134.
Lin X, Yang Z, Song Y. 2011. Intelligent stock trading system based on improved
technical analysis and Echo State Network. Expert Systems with Applications
38(9):11347–11354 DOI 10.1016/j.eswa.2011.03.001.
Liu G, Wang X. 2018. A numerical-based attention method for stock market prediction
with dual information. IEEE Access 7:7357–7367.
Malagrino LS, Roman NT, Monteiro AM. 2018. Forecasting stock market index daily
direction: a Bayesian network approach. Expert Systems with Applications 105:11–22
DOI 10.1016/j.eswa.2018.03.039.

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 19/20

 Namasudra S, Dhamodharavadhani S, Rathipriya R. 2021. Nonlinear neural network
based forecasting model for predicting COVID-19 cases. Neural Processing Letters
Epub ahead of print 2021 1 April DOI 10.1007/s11063-021-10495-w.
Ndichu S, Kim S, Ozawa S. 2020. Deobfuscation, unpacking, and decoding of ob-
fuscated malicious JavaScript for machine learning models detection perfor-
mance improvement. CAAI Transactions on Intelligence Technology 5(3):184–192
DOI 10.1049/trit.2020.0026.
O J, Lee JW, Lee J, Zhang BT. 2004. Dynamic asset allocation exploiting predictors in
reinforcement learning framework. Lecture Notes in Computer Science 3201:298–309
DOI 10.1007/978-3-540-30115-8_29.
O J, Lee J, Lee JW, Zhang BT. 2006. Adaptive stock trading with dynamic asset allo-
cation using reinforcement learning. Information Sciences 176(15):2121–2147
DOI 10.1016/j.ins.2005.10.009.
Oncharoen P, Vateekul P. 2018. Deep learning for stock market prediction using
event embedding and technical indicators. In: 2018 5th international conference on
advanced informatics: concept theory and applications (ICAICTA). 19–24.
Pang X, Zhou Y, Wang P, Lin W, Chang V. 2020. An innovative neural network ap-
proach for stock market prediction. The Journal of Supercomputing 76(3):2098–2118
DOI 10.1007/s11227-017-2228-y.
Pella J, Masuda M. 2001. Bayesian methods for analysis of stock mixtures from genetic
characters. Fishery Bulletin 99(1):151–151.
Refenes AN, Zapranis A, Francis G. 1994. Stock performance modeling using neural net-
works: a comparative study with regression models. Neural Networks 7(2):375–388
DOI 10.1016/0893-6080(94)90030-2.
Ryoo HJ, Smith G. 2002. Korean stock prices under price limits: Variance ratio tests of
random walks. Applied Financial Economics 12(8):545–553
DOI 10.1080/09603100010015789.
Song Y, Lee J. 2018. Performance evaluation of deep learning stock price by chart type for
buying policy verification. In: Fuzzy Systems and Data Mining IV. 646–652.
Song Y, Lee JW, Lee J. 2020. Development of intelligent stock trading system using
pattern independent predictor and turning point matrix. Computational Economics
59(2):1–12.
Yang H, Chan L, King I. 2002. Support vector machine regression for volatile stock
market prediction. In: International conference on intelligent data engineering and
automated learning. 391–396.

Oh (2022), PeerJ Comput. Sci., DOI 10.7717/peerj-cs.915 20/20