The long awaited day has finally arrived. I have developed a Neural Network that is actually worth something, or have I? I have been down this road way too many times to get excited at this point. Too many times I have had a NN that looked great in testing and then flopped going forward. Because I have made so many mistakes in the past, I tried to be extra careful this time. With any luck maybe this will be the one.

Overview
The neural network was designed to predict the movement in either the DOW or S&P over the next 2 days. I generated two neural networks. One was trained on the SPY the other trained on the DOW. The data used is from 2001 until today. Randomly 15% of the data from each training set was removed and set aside for a validation set.

Validation
Before doing any testing, I established what the baseline was. Both the DIA and SPY go up approximately 51% of the time over any 2 day period. This value was them compared to the results produced by the Neural Nets. To validate the results each network was tested using it’s validation set. The results had to be inline with the training set in order to continue. After being burned many times in the past by only using a validation set, I decided to go a step further. Since both the DOW and S&P trade very similar to one another, I ended up validating a network trained on the DIA by validating it against the SPY and a network trained on the SPY validated against the DIA. The good thing here is, although they both have similar movements, the actual values calculated for the inputs are no where near the same which creates a bit of noise. If the network was overly curve fitted to the training data, it would fail miserably with this added noise. The fact that the networks performed very well during cross validation leads me to believe I may finally have a useful NN.

Net Naming
For simplicity I named each NN based on what it represents. For example: Spy-2 means this NN was trained on the SPY, and predicts if today close > close in 2 days

Key Testing-Validation Statistics

Neural Net Name % Correct ON SPY % Correct ON DIA % Correct ON QQQQ
SPY-2 67.3% 62.5% 63.8%
DIA-2 73.6% 70.0% 64.2%

As you can see the Neural Nets appear to have an edge in their predictions. Because I am just dying to set myself up for failure, I have decided that I will post the daily predictions produced by these nets. One thing to keep in mind, the neural nets do not make predictions everyday. Most days no predictions are given by the nets. If you want to see what happens next, subscribe to my RSS feed so you don’t miss anything.