PSO for the Sharpe Ratio in a Financial Trading System Based on Technical Analysis

Abstract

We consider four technical indicators widely used in financial practice to determine the optimal signal aggregation, trading rule definition, and indicator setting using the Particle Swarm Optimization metaheuristic applied to an important financial fitness function, that is the Sharpe Ratio. We experiment our trading system to the Italian index FTSE MIB and to a set of financial stocks belonging to the FTSE MIB over a multi-year period for training and testing. We generally achieve superior out-of-sample performance, using a standard technical analysis system as a benchmark.