PDF Forecasting of currency exchange rates using ANN

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Conversely, low interest rates can also sometimes induce investors to avoid investing in a particular country or even borrow that country’s currency at low interest rates to fund other investments. Many investors did this with the Japanese yen when the interest rates in Japan were at extreme lows.

Another factor bringing investors to a country is its interest rates. High interest rates will attract more investors, and the demand for that currency will increase, which would let the currency to appreciate. To implement this structure, we adopted the “RepeatVector” tool provided by Keras, which is a deep learning API. The amount of information from the previous time step cell that will be retained is determined.

Emotional Theory in the Stock Market

When all features were simply appended to each other, in what we call ME_TI_LSTM, the results did not change much. Finally, in the five-days ahead predictions, the profit_accuracy results for individual LSTMs and the ME_TI_LSTM were very close. Similar to the three-days-ahead prediction, ME_LSTM produced a very high number of transactions, with more than 97%, while ME_TI_LSTM had the lowest, with an accuracy of around 63%. Moreover, the hybrid model showed an exceptional accuracy performance of 79.42% (34.33% improvement) by reducing the number of transactions to 32.72%. To predict exchange rates, Majhi et al. proposed using new ANNs, referred to as a functional link artificial neural network and a cascaded functional link artificial neural network . They demonstrated that those new networks were more robust and had lower computational costs compared to an MLP trained with back-propagation.

This new class enabled us to eliminate some data points for generating risky trade orders. This helped us improve our results compared to the binary classification results. This approach generates a fewer number of trades but with higher accuracy, as reported in “Experiments” section.

Patel et al. developed a two-stage fusion structure to predict the future values of the stock market index for 1–10, 15, and 30 days using 10 technical indicators. In the first stage, support vector machine regression was applied to these inputs, and the results were fed into an artificial neural network . They compared the fusion model with standalone ANN, SVR, and RF models.

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Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series pvsra analysis. A stronger greenback typically eats into the profits of companies that have sprawling international operations and convert foreign currencies into dollars. Second, the central banks of the two countries must follow an inflation-targeting policy.

Rate of change ROC

That study also built a stock trading simulator to test the model on real-world stock trading activity. With that simulator, he managed to make profit in all six stock domains with an average of 6.89%. Qiu and Song developed a genetic algorithm —based optimized ANN to predict the direction of the next day’s price in the stock market index. metatrader 4 brokers list Two types of input sets were generated using several technical indicators of the daily price of the Nikkei 225 index and fed into the model. They obtained accuracies 60.87% for the first set and 81.27% for the second set. Kara et al. compared the performance of ANN and SVM for predicting the direction of stock price index movement.

Applying our labeling algorithm, we formed a data set with a balanced distribution of three classes. In their experiments, the accuracy of the prediction decreased as n became larger. This is because a split is made between the training and test sets without shuffling the data sets to preserve the order of the data points. This is a type of conservative approach to trading; it reduces the number of trades and favors only high-accuracy predictions. In addition to the decrease and increase classes, we needed to determine the threshold we could use to generate a third class—namely, a no-action class—corresponding to insignificant changes in the data.

Although that study mainly introduced methods proposed for the stock market, it also discussed applications for foreign exchange markets. The autoencoder presented in aims to generate a representation as close to an original input as possible from reduced encoding results. This method is a transformation of the basic model using stacked layers, denoising, and sparse representation and is used for financial time series prediction. Bao et al. used LSTM and stacked autoencoders to forecast stock prices and demonstrated that this type of hybrid model is more powerful than an RNN or LSTM model alone. In , a stacked denoising autoencoder applied to gravitational searching was effective at predicting the direction of stock index movement, which is affected by underlying assets.

Why not ask this same question, plus my comments, on Cross Validated? So, if exchange-rate fluctuations could be predicted, investors could improve the timing of their foreign investments and earn higher returns. Kin Keung Lai received his PhD at Michigan State University, USA. He is currently the Chair Professor of Management Science at the City University of Hong Kong. Professor Lai’s main areas of research are operations and supply chain management, financial and business risk analysis.

Chinese Currency Exchange Rates Analysis: Risk Management, Forecasting and Hedging Strategies

The second type of forecasting is economic or fundamental and takes into account the relationship of the two currency countries and their effects of their individual monetary policies. In Eqs.36–38, MiddleBand, UpperBand, and LowerBand are the Bollinger bands of the price. SMA is the simple moving average of the closing price with a period of 20, and SD is the standard deviation. In Eq.35, RS and RSI are the relative strength and relative strength index values, respectively. CurrentGain and CurrentLoss are the positive and negative absolute difference values between the current and previous period’s closing price, respectively. AverageGain, AverageLoss, AverageGain, and AverageLoss are the previous period’s average gain and loss and the current average gain and loss in N periods, respectively.

Additionally, FX rates significantly affect the estimation of currency risks and profits for international trades. Governments and policymakers are keeping a close watch on FX fluctuations to perform risk management. Therefore, FX is considered to be the most important financial index for international monetary markets (Huang et al. ). The characteristics of Forex show differences compared to other markets.

However, for such a simulator to be meaningful, several issues related to real trading (e.g., closing the account, account management, leverage ratio decision) must be carefully investigated. We can also conclude that as the number of transactions increased, it reduced the accuracy of the model. This was an expected result, and it was observed in all of the experiments. Depending on the data set, the number of transactions generated by our model could vary.

What Determines the Real Exchange Rate?

Rate of change is a momentum oscillator that defines the velocity of the price. This indicator measures the percentage of the direction by calculating the ratio between the current closing price and the closing price of the specified previous time (Ozorhan et al. 2017). Before you view cash forecast amounts for a based on date using the Cash Forecast Analysis program , specify the currency code of the display currency in the processing options. If you do not specify a display currency in the processing option, the system displays amounts in the currency for company 00000.

Additionally, these indexes reflect global economic trends (see Ishfaq et al. , Dicle and Dicle , and Pilbeam ). As mentioned previously, the forecasting of volatility in the FX market is important for global firms, financial institutions, and traders who wish to hedge currency risks (see Guo et al. , Abdalla , and Menkhoff et al. ). In particular, financial asset price volatility is a crucial concern for scholars, investors, and policymakers. Therefore, the forecasting and modeling of volatility have recently become the focus of many empirical studies and theoretical investigations in academia.

Period 2 exhibits uncertainty in the European market based on the Brexit movement. In this manner, we investigate the accuracy of prediction and model performance according to different data states. Currency volatility, also known as Foreign Exchange volatility, is the unpredictable movement of exchange rates in the global foreign exchange market. With over $5.3 trillion of USD being traded every day, this volatility can lead to large losses in the foreign exchange market—and it is the principal cause of foreign currency risk.

Forecasting three days ahead

It has three bands that provide relative definitions of high and low according to the base . While the middle band is the moving average in a specific period, the upper and lower bands are calculated by the standard deviations in the price, which are placed above and below the middle band. The distance between the bands depends on the volatility of the price (Bollinger 2001; Ozturk et al. 2016). Moving average convergence divergence is a momentum oscillator developed by Gerald Appel in the late 1970s. It is a trend-following indicator that uses the short and long term exponential moving averages of prices .

Forecasting volatility accurately remains a crucial challenge for scholars. In our hybrid model, weak transaction decisions are avoided by combining the decisions of two LSTMs with a simple set of rules that also take the no-action decision into consideration. This extension significantly reduced the number of transactions, by mostly preventing risky ones. As can be seen in Table20, which summarizes all of the results, the new approach predicted fewer transactions than the other models.

Based on the empirical results, we can conclude that the proposed hybrid method, which we call the autoencoder-LSTM model, outperforms the traditional LSTM method. Additionally, the ability to learn the magnitude of data spread and singularities determines the accuracy of predictions made using deep learning models. In summary, this study established that FX volatility can be accurately predicted using a combination of deep learning models. Because forecasting volatility is an essential task for financial decision-making, this study will enable traders and policymakers to hedge or invest efficiently and make policy decisions based on volatility forecasting. Various machine learning models have also been used to forecast time series originating from various fields, including engineering and finance.

Therefore, the volatility of FX rates is a major concern for scholars and practitioners. Forecasting FX volatility is a crucial financial problem that is attracting significant attention based on 24option reviews its diverse implications. Recently, various deep learning models based on artificial neural networks have been widely employed in finance and economics, particularly for forecasting volatility.

Chinese Currency Exchange Rates AnalysisRisk Management, Forecasting and Hedging Strategies

He received his Master Degree of from Texas A&M University, USA. Chao Wang’s main research areas are financial time series analysis and financial risk management. The rationale is that the past behavior and price patterns can affect the future price behavior and patterns. The data used in this approach is just the time series of data to use the selected parameters to create a workable model. The relative economic strength approach does not exactly forecast the future exchange rate like the PPP approach.

With these modifications, the architecture was renamed Vanilla LSTM (Greff et al. 2017), as shown in Fig.1. We chose the Euro/US dollar (EUR/USD) pair for the analysis since it is the largest traded Forex currency pair in the world, accounting for more than 80% of the total Forex volume. Score, our system outperforms all compared models and thus proves itself as the least risky model among all. If the display currency is the same as the node or base currency for a cash type rule, the performance on the Cash Forecast Analysis interactive form is improved because the program does not have to revalue amounts again. Instead, some buyers and seller vary their strategies depending on the constant stream of economic news and price fluctuations.

This method of using three currencies to calculate the expected exchange rate between two of those three currencies is called triangulation. If a gross discrepancy exists between the actual rate and that predicted by triangulation, traders could make an immediate profit by executing a series of conversions using those three currencies. Nonetheless, those participating in the market must make their forecasts, implicitly and explicitly, day after day, all of the time.

Table of Contents

For that reason, we developed a hybrid model that takes the results of two individual LSTMs separately and merges them using smart decision logic. In real data, fluctuations in the EUR/USD ratio are usually very small. That is why incorrect directional predictions made by LSTMs correspond to a very small amount of errors. This causes LSTMs to produce models making many such predictions with incorrect directions.

As in the above case, this higher accuracy was obtained by reducing the number of transactions to 42.57%. Market prices, technical indicators, financial news, Google Trends, and the number unique visitors to Wikipedia pages were used as inputs. They reported that ensembles with PCA performed better than those without PCA. They also noted that BRT and RFR were the best while SVRE was the worst in terms of mean absolute percentage error.