Day Trading & Forex Forum

What Neural Networks Can Do for You and What You Need to Know to Make Them Work
Neural networks are definitely not a solution to all problems and they shouldn’t be regarded so. What they are is a most powerful, technology-based method of technical analysis that can become an inestimable addition to your trading arsenal. Just like any other method, neural networks have their advantages and limitations, but their unique ability to track even the most subtle interdependencies in the available data no other method can establish, as well as build patterns based on this analysis, definitely make neural nets stand out from the rest of the existing methods and tools.

You can effectively use neural nets to:

• estimate the likelihood of a trend continuing;
• classify market phases;
• produce time estimates of highs and lows for various timeframes and combine results into a committee;
• predict the probability of a new, strong upswing after an uptrend, followed by a classic correction;
• track inter-market dependencies.

In other words, you receive a TA tool which will be a lot more efficient than classic TA methods anywhere where there is too much noise or where the interdependencies in the data are floating and significantly non-linear. For example, if after analyzing a number of charts you have discovered that the closer an uptrend is to a pivot point, the closer the bar’s Close is to the bar’s High, and you  are planning to create an oscillator to anticipate reversal, you should use classic math as was done by the inventor of the Stochastic oscillator George Lane. But if you are trying to find a formula for the inter-relationship between S&P, InterestRates, $/Euro, Oil prices, and so on, you will make sure that the classical correlation or ratios won’t be any use, since although interdependencies do exist, they are not stationary or linear. These interdependencies oscillate, ”float” through time and are influenced by noise. In this case, neural networks can solve the task better than the classical statistics.

When used in a combination with other technical analysis methods, and when sufficient attention is paid to the preparation of data sets (this procedure is, actually, central to success with neural networks), neural networks will undoubtedly provide the punch you need to success on the market. After all, this has been proven by both time and experience.