An automated FX trading system using adaptive reinforcement learning

This paper introduces adaptive reinforcement learning (ARL) as the basis for a fully automated trading system application. The system is designed to trade foreign exchange (FX) markets and relies on a layered structure consisting of a machine learning algorithm, a risk management overlay and a dynamic utility optimization layer. An existing machine-learning method called recurrent reinforcement learning (RRL) was chosen as the underlying algorithm for ARL. One of the strengths of our approach is that the dynamic optimization layer makes a fixed choice of model tuning parameters unnecessary. It also allows for a risk-return trade-off to be made by the user within the system. The trading system is able to make consistent gains out-of-sample while avoiding large draw-downs. (c) 2005 Elsevier Ltd. All rights reserved.