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ML: Sometimes a Nightmare for Predicting Market Events

By CIOReview | Monday, April 15, 2019

The meager signal-to-noise ratio in financial markets is one of the potential pitfalls for machine learning strategies. ML algorithms always identify a pattern, even if there is no pattern. In other words, flukes can be viewed by the algorithms as patterns, thus identifying false strategies. A successful application of machine learning to financial services requires an in-depth knowledge of the markets. When trained, ML algorithms will always need a great deal of data. These ML algorithms are often trained over a specific set of data and then used to predict future data, a process that cannot be easily anticipated. The model that was previously "accurate" over a data set may no longer be as accurate as it was once when the data set changes. The accuracy may still not be compromised for a system that changes slowly, however, if the system changes quickly, the ML algorithm will have a lower accuracy rate as past data no longer apply.

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Developers use ML to develop predictors at all times. Such predictors include improving search results and selections of products and anticipating customer behavior. Overfitting may be one reason behind inaccurate predictions, which occurs when the ML algorithm adapts in its data to the noise rather than uncovering the basic signal. When dealing with data sets, marketers should always bear these items in mind. It is mandatory to ensure the data is as clean as possible of the inherent bias and is overfitting as a result of the data set noise.

ML algorithms that run on highly automated systems must be able to handle missing data points. One common approach to the issue is to replace the missing value with the mean value. This application will provide reliable data assumptions including the specific data that is randomly missing. Machine learning allows investors to tap huge data sets like social media posts in ways that no human being could. However, its record continues to remain mixed despite the enormous potential.

The best approach with this is to look carefully at the underlying data sets, like using feature selection, add variable input, and alter the raw data sets themselves, and increase the real power of machine learning with deliberate human data craftsmanship, resulting in high analytical power, but also some of those human insights that computers are still unable to replicate.

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