Corresponding author.
Email addresses: atsalak@otenet.gr (G.S. Atsalakis), mdimitrakakis@gmail.com
(E.M. Dimitrakakis), kostas@dpem.tuc.gr (C.D. Zopounidis).
Expert Systems with Applications 38 (2011) 91969206
Contents lists available at ScienceDirect
Expert Systems with Applications
j our nal homepage: www. el sevi er . com/ l ocat e/ eswa
2.1. Elliott Wave Theory
The Elliott Wave Theory was introduced by Ralph Nelson Elliott,
during the 1930s. Elliott believed that stock trends follow a
repeating pattern, which can be forecasted both in the long and
shortterm. He published his ideas in his book The Elliott Wave
Principle in 1938. Using data from stocks he concluded, that what
seems to be a chaotic movement, actually outlines a harmony
found in nature. Elliotts discovery was completely based on obser
vation, but he tried to explain his ndings using psychological rea
sons. The main principle of his theory was that a pattern consists of
eight waves as can be seen in Diagram 1.
It is clearly indicated that waves 1, 3, 5 follow the overall trend,
while waves 2 and 4 correct the underlying trend waves a, b, c cor
rect the overall trend, while waves a and c follow the correction
and wave b resists it. Elliott observed that each wave consists of
smaller waves, which follow the exact same pattern as is shown
in Diagram 2, thereby forming a supercycle.
The numbers in the diagram represent the number of waves
when counted in a different scope. For example, the whole diagram
represents two big waves, the impulse and the correction. The im
pulse consists of 5 waves, and the correction of 3. The 5 waves of
the impulse, consist of 21 subwaves which, in turn, consist of 89
smaller waves, while the Correction wave consists of 13 subwaves
which, in turn, consist of 55 even smaller waves. As can be
observed all the above numbers are part of the Fibonacci series, a
series which can be found in many different areas in nature.
According to the Elliott Wave Theory (Prechter & Frost, 1998),
when Elliott rst expressed his theory he was not aware of the
Fibonacci series. What is even more remarkable is the fact that
some ratios which are related to the Fibonacci series can be ob
served in many stock movements, and charts, as will be presented
later.
Elliott believed that there are nine cycles, of different durations,
the bigger of which, is formed by the smaller ones. From largest to
the smallest cycles, there are: (1) Grand SuperCycle, (2) Super
Cycle, (3) Cycle, (4) Primary, (5) Intermediate, (6) Minor, (7)
Minute, (8) Minuette and (9) Subminuette.
The duration of the cycles vary from minutes to decades. Each
pattern (cycle) is outlined by the following rules:
(1) The second wave cannot be longer than the rst wave, and
cannot return to a lower price than that set at the beginning
of the rst wave.
(2) The third wave is never the smallest wave compared to the
rst and the fth.
(3) The fourth wave does not return to a lower price than the
price found at end of the rst wave. The same applies for
wave A.
(4) Usually, the third wave shows a greater dynamic, except in
some cases where the fthwave is extended (the case when
the fth wave is made up of ve smaller waves).
(5) The fth wave usually leads to a higher point than the fth.
2.1.1. Explaining the wave behavior
The rst wave is the new beginning of an impulse. It is dif
cult to differentiate it from a correction of a previous downtrend,
and therefore it is not a powerful wave. Most investors prefer to
wait for better timing. The force behind the wave pattern is the
number of investors that decide to enter and exit the market at a
given time. After some initial winnings, investors decide to exit
the market as the price becomes higher, and the stock becomes
overpriced for these few investors. This behavior explains the sec
ond wave. As the price begins falling, the stock becomes more
attractive for a greater number of investors that regretted not hav
ing entered the market during the rst wave that they missed.
Demand begins rising, which pushes the price up. More and more
investors are determined to enter the market, creating a powerful,
fast paced wave, which in turn attracts even more investors to en
ter the market at a higher price. Those who entered in the begin
ning of the wave, are satised with their winnings, and have
most likely exited the market. Investors realize that the price has
reached a level making it difcult to attract any further investors.
Demand begins falling, which leads to the fourth wave. Major
investors are out of the market, waiting for the end of the fourth
wave, to enter again and reap in the prots of the fth wave. It is
important to note that the fourth and fth waves are the easiest
ones to follow, as they come after the third wave which is the eas
iest to spot, due to its length, power, and speed. Major investors
have bought stocks on lower prices, from investors that had bought
them during the end of the third wave, who feared the price might
go lower. However as the major investors enter the market again,
they create a small hype, the fth wave, smaller than the third
wave, which usually reaches the peak of the third wave, and some
times even higher. Investors, who know the market, know that the
price is extremely overrated and therefore have exited the market.
Wave A, is a corrective wave, which is often mistaken for a second
wave. This explains wave B. Smaller investors think that wave A
corrected the price enough, so that it can lead to an upward trend.
Unfortunately, this is the wave where most smaller, and occasional
investors lose huge amounts of money, as wave C starts, pushing
the price lower until the price gets underrated again, for a new pat
tern to start.
The above explanation is by no means a statistical explanation
of the wave behavior, but explains the difference between major
and occasional investors, and their knowledge of the market. It is
very important to know the exact wave patterns, otherwise it is
very easy to misinterpret signs. It is important to note that the fol
lowing explanation regards an overall impulse trend. The opposite
would happen in the case of an overall correction.
2.1.2. The Fibonacci series
As previously mentioned, the Elliott wave principle is acciden
tally (According to Elliott) connected with the Fibonacci sequence.
The Fibonacci sequence is a sequence of numbers derived from the
addition of the previous two numbers (1, 1, 2, 3, 5, 8, 13, 21, 34, 55,
89, 144, . . .). One can observe that all these numbers are also the
numbers of waves, depending of the size of the Elliott wave pat
terns. What is remarkable for this sequence is that the division of
a number of the sequence with its previous numbers, with the
exception of the rst ones, gives the same result, the number
1.618, which is called Phi (the Greek letter /). This number is also Diagram 1. Basic Elliott wave pattern. Source: Prechter and Frost (1998).
G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206 9197
called the golden ratio, or the golden number. By dividing any
number of the sequence with its following, the result is the number
0.618, another important number as will be seen later. There are
historical evidences that this number was known to ancient civili
zations, as such ratios are found in the Egyptian Pyramids, Ancient
Greek architecture (The Parthenon). This number is also found in
nature, microcosmic and macrocosmic. It can be found in Human
DNA architecture, is spiral galaxies, and in planet movements. It
is not surprising that such ratios are also found in Stock market
movements. In a later book of Elliott, Natures Law, he states that
All human activities have three distinctive features, pattern, time and
ratio, all of which observe the Fibonacci summation series.
Elliott observed that many ratios in his patterns are derived
from the Fibonacci sequence. Wave 2, usually corrects up to 50%
or 62% of wave 1. Wave 3 is usually 1.62, 2.62 or 4.25 times the
length of wave 1. Wave 4 corrects up to 24% or 28% of wave 3.
Wave 5 is somewhat more complicated, and depends either on
wave 1 (1.62 or 2.62 times wave one), or on the length from the
beginning of wave 1 to the end of wave 3 (being 0.62, 1, or 1.62
times this length). It is important to note that these ratios are
not to be used for forecasting the market, but rather explaining
the market, and spotting the waves. Elliotts wave theory cannot
constantly explain the market perfectly, but can give fuzzy esti
mates of the market behavior. Of course, other factors affect the
market, but as the results of the suggested system show, the theory
is capable of improved stock market forecasting.
2.2. Fuzzy logic
Fuzzy logic was proposed by Zadeh (1965), as an alternative
way to express data. One of the most typical examples to under
stand fuzzy logic is the expression of age. Classical reasoning
measures age in years. Fuzzy logic can be used to express age
in three categories: young, middleaged, old. This can be used
with the help of a membership function which converts age in
years into an appropriate category. A membership function takes
on values in the space [0, 1], according to how much the data
belong to a corresponding category. This is the main difference
between fuzzy logic and classical reasoning. In Fuzzy logic, data
can belong in more than one category, while in classical
reasoning, something is either true or false. The above reasoning
is depicted in Diagram 3.
According to the diagram, the age of 30 can be categorized both
as young and middle aged, with a membership grade of 0.5 while,
the age of 80 belongs with a grade of 1 in the fuzzy set old. Clas
sical reasoning would use a threshold stating, for example, that
people older than 30 are middle aged, which would mean that a
person of 29 years of age would be young. One of the biggest
advantages of fuzzy logic is this use of verbal variables, which
are easily understood by humans. It is important to note that clas
sical reasoning can be seen as a subset of fuzzy logic. In the above
example, one could use one fuzzy set for each year, or even a fuzzy
set for every 6 months.
Fuzzy logic can be used in many problems, where information
does not have to be precise. This is the main reason why it was
chosen to be used in stock market forecast, a problem where infor
mation is not noise free, as there are different factors affecting the
output.
There are various membership functions, which work better for
different problems, the most common of which are the triangular,
trapezoidal, Gaussian, and the generalized bell membership func
tion shown in Diagram 4.
The triangular membership function requires three parameters
(a, b, c) according to the following relation, proposed by Jang and
Sun (1997)
trianglex; a; b; c max min
x a
b a
;
c x
c b
_ _
; 0
_ _
The trapezoid membership function needs four parameters (a, b, c, d)
according to the following relation
trapezoidx; a; b; c; d max min
x a
b a
; 1;
d x
d c
_ _
; 0
_ _
The Gaussian function utilizes two parameters, c, r, with c being the
center of the curve, and r indicating the width
gaussianx; a; r e
1
2
xc
r
2
Finally, the Generalized bell curve uses three parameters: (a, b, c)
bellx; a; b; c
1
1
xc
a
2b
Diagram 2. Elliott wave supercycle. Source: Prechter and Frost (1998).
9198 G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206
2.3. Fuzzy systems
According to Jang and Sun (1997), a fuzzy system consists of
three parts:
the rule base;
the database, or dictionary that includes the membership
functions;
the reasoning mechanism.
There are three main types of fuzzy systems:
(1) the Mamdani system;
(2) the Sugeno system;
(3) the Tsukamoto system.
2.3.1. Mamdani system
The difference of each system lies in the way the inputs interact
and lead to an output. A Mamdani system produces a fuzzy output
which has to be defuzzied.
Diagram 5 depicts a Mamdani system, where the value x is a
part of both the A
1
and A
2
fuzzy set, value y belongs to the B
1
and B
2
fuzzy sets, and the output Z is expressed by two fuzzy sets,
C
1
and C
2
. This system basically has two rules
If x is A
1
and y is B
1
then Z is C
1
if x is A
2
and y is B
2
then Z is C
2
The nal results C
0
is used by using the Max operator. A different
operator can also be used. As mentioned before, the Mamdani sys
tem produces a fuzzy output, which needs to be defuzzied. There
Diagram 3. Fuzzy logic example. Source: Jang and Sun (1997).
Diagram 4. Membership functions. Source: Jang and Sun (1997).
G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206 9199
are ve different methods to be used: (a) the smallest of the max;
(b) the largest of the max; (c) the centroid of the; area (d) the bisec
tor of the area and (e) the mean of the max. The above methods can
be seen in Diagram 6.
2.3.2. Sugeno system
The Sugeno type fuzzy systems are different from the Mamdani
ones, in the sense that they use a function as an output, and there
fore the output is already a crisp number and not a fuzzy set. The
same example is used as before in Diagram 7.
This time the rules have the following structure:
If x is A
1
and y is B
1
then z
1
p
1
x q
1
r
1
if x is A
2
and y is B
2
then z
2
p
2
x q
2
r
2
The nal output Z is calculated by using a weighted average of z
1
and z
2
.
Sugeno type systems are less demanding in computational
power, but not as exible as Mamdani systems. The system WASP
presented later is based on the ANFIS neurofuzzy architecture,
which uses a Sugeno type fuzzy system.
2.3.3. Tsukamoto system
Tsukamoto systems are used less often than the Mamdani and
Sugeno type systems. The difference lies again in the way the out
put is calculated. Tsukamoto system use a monotonic function as is
illustrated in Diagram 8.
The main disadvantage of fuzzy systems is that knowledge must
be predened, meaning that the membership functions must be
set.
2.4. Neural networks
An articial neural network (ANN) or neural network (NN), is a
computational method used to model data, derived from the eld
of articial intelligence. Neural networks try to imitate the archi
tecture of the human brain. Diagram 9 that follows shows a simple
Diagram 5. Mamdani architecture.
Diagram 6. Defuzzication methods.
Diagram 7. Sugeno architecture (Jang & Sun, 1997).
Diagram 8. Tsukamoto architecture.
x
1
(n)
x
2
(n)
x
3
(n)
x
p
(n) bias
Single Layer Perceptron
w
1
w
p
Output:y(n)
Inputs
Sum
v(n)
Diagram 9. Simple neural network.
9200 G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206
neural network with one neuron and n inputs. Every input is mul
tiplied by a different parameter. All inputs are added in the neuron,
giving the nal result. There is no limit in the number of neurons
used, although a very large number can make the network extre
mely demanding in computational power.
Neural networks are very efcient in modeling nonlinear
problems. Neural networks are trained from data with the help
of adaptive algorithms such as the back propagation algorithm
(Rumelhart, Hinton, & Williams, 1986; Werbose, 1974). The main
advantages of the neural networks are the ability to learn by exam
ple, in other words to create knowledge from past data. Addition
ally, such networks are found to be extremely useful in pattern
recognition. On the other hand, neural networks have also been
criticized mainly due to the high computational power that is re
quired, which limits the number of input variables that can be
used. The main disadvantage of a neural network is the lack of
information regarding the impact of every input on the output.
Neural networks are commonly called a black box as there is
no information given other than the output.
2.5. Neuro fuzzy systems ANFIS
Neuro fuzzy systems emerged by the need to nd a solution to
the disadvantages of neural networks and fuzzy logic, while main
taining the advantages from both theories. A neurofuzzy system is
basically a neural network, where the inputs are transformed into a
fuzzy set. The parameters are determined by an adaptive algorithm
from existing data. The advantages of the neurofuzzy architecture,
is that knowledge is created from the data, and the results are eas
ily interpreted with the use of fuzzy verbal variables. The system
WASP uses the neurofuzzy architecture ANFIS proposed by Jang
and Sun (1997), which has been found to be extremely efcient
in forecasting time series. As mentioned before, the ANFIS architec
ture uses a Sugeno type fuzzy system. Diagram 10 shows an ANFIS
system with two inputs and ve levels.
For every level, let O
ij
be the output of level i, and node j for level
one
O
1j
l
Aj
x for j 1; 2;
and
O
1j
l
Bj
x for j 3; 4;
where l
Ai
(x)l
Bi
(x) are the fuzzy values of the variables A and B of
the corresponding membership function.
For level two
O
2j
w
j
l
Aj
x l
Bj
x for j 1; 2
For level three
O
3j
w
j
w
j
w
1
w
2
for j 1; 2
For level four
O
4j
w
j
f
j
w
j
p
j
x q
j
y r
j
for j 1; 2
Finally, for level ve
O
5;1
1
w
k
f
k
1
w
k
f
k
1
w
k
for k 1; 2
Training of the system requires establishing the parameters of the
membership functions, and the parameters of the output functions
of the Sugeno type fuzzy system (p
i
, q
i
, r
i
). The latter are found in lev
els four and ve of the ANFIS system. Jang proposed a hybrid meth
od to optimize the ANFIS system, by using two phases, a forward
pass and a backward pass. The forward pass uses the least square
method to optimize the consequent parameters (p
i
, q
i
, r
i
) in levels
four and ve, while the backward pass uses a gradient descent algo
rithm such as the back propagation algorithm, to optimize the pre
mise parameters of the membership functions used as inputs in
levels one to three. The parameters of ANFIS are optimized in two
sets (premise parameters, and consequent) to reduce the computa
tional power, as the consequent parameters are linear, and there
fore, a linear method such as the least square method can be
used, while the premise parameters are nonlinear.
2.5.1. Training ANFIS forward pass
The nal output of the ANFIS system is a function of the param
eters p, q, r
O
5;1
1
w
i
f
i
w
1
x
1
p
1
w
1
x
2
q
1
w
1
r
1
w
2
x
1
p
2
w
2
x
2
q
2
w
2
r
2
which is a linear function.
2.5.2. Training ANFIS  backward pass
During the backward pass the parameters of the membership
functions are optimized. The gradient descent method is based
on a minimization of a cost function. The cost function is derived
from the sum of the square of errors. Assuming the data have p in
puts then:
J
p
L
i1
T
i;p
O
L
i;p
_ _
2
where T
i,p
is the ith element of the pth vector generated by the pth
input vector. The total error is
J
p
p1
J
p
To use a gradient descent method, the error rate
@J
p
@O
of the pth set of
input of the training data must be computed. The error rate for the
output node in level L, and element are derived from the previous
function using the derivative
@J
p
@O
L
i;p
2 T
i;p
O
L
i;p
_ _
for the internal node the error rate is
@J
p
@O
k
i;p
k1
m1
@J
p
@O
k1
m;p
@O
k1
m;p
@O
k
i;p
where 1 6 k 6 L 1. As a conclusion to the above, the error rate of
an internal node is a linear function of the error rates of the nodes of
the subsequent levels. Thus, by combining the previous functions
every error can be computed. For the parameter a of a member
ship function: Diagram 10. ANFIS architecture (Jang & Sun, 1997).
G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206 9201
@J
p
@a
O2S
@J
p
@O
@O
@a
where S indicates the nodes that include the parameter a.
The derivative of the total cost J for parameter a, is:
@J
@a
p
p1
@J
p
@a
In every epoch, parameter a is optimized according to the function:
Da g
@j
@a
where g is the learning rate which changes during the repetitions of
the algorithm according to the following relation:
g
k
a
@J
@a
_ _
2
_
where k is the step size, a very important parameter for nding an
optimum. A very small k might trap the algorithm in a local opti
mum instead of a global optimum. On the other hand, a higher step
size might overpass a local or global optimum. The kvalue also af
fects the speed of the algorithm.
The parameters that ANFIS needs are: (a) the type of member
ship functions; (b) the number of membership functions for each
input; the epochs (repetition) of the training algorithm and (d)
the step size.
3. Wave Analysis Stock Prediction WASP
The greatest challenge of the Elliott Wave Theory is to count the
waves, and spot the current position of the market or stock on an
Elliott wave pattern. The same chart can be interpreted in various
ways and this can lead to disastrous results for the investor. For this
reason, researchers looked for an index to help track the waves. As
mentioned before, the easiest wave to track is the third wave, which
pushed researchers to analyze the behavior during this wave. Dur
ing this wave, a recent moving average wouldbe signicantlyhigher
than a longer moving average. This is howthe Elliott wave oscillator
emerged. The Elliott wave oscillator is derived by subtracting of a
35day moving average froma 5day moving average. The oscillator
will have higher values on the third wave, lower but positive values
on the rst and fth waves (but will show corrections and their sig
nicance), and nally, will have negative values on biggest correc
tions, or downtrend impulse waves. The Elliott wave oscillator is
used in technical analysis. The rst part of Diagram 11 depicts the
price movement of a stock. The second part shows the moving aver
ages of 5 and 35 days. The third part indicates the difference of the
moving averages, which is the Elliott wave oscillator (EWO).
The EWO is a suitable oscillator to be used with fuzzy logic as it
is important for a system to recognize high values of the index.
Depending on the value of the stock, the same number can be high
or low in different time periods; therefore, a crisp logic cannot be
used. The system will use three inputs. Many trials were, carried
out and the best results appeared when we used the Elliot wave
oscillator and two lags of the oscillator. This will help track down
the change of trend. Following the ANFIS architecture, the system
will create different rules (linear functions), for various nonlinear
scenarios that would look like the following statement:
If EWOt is High and EWOt1 is High AND EWOt2 is LOW then
FORECAST IS . . .
The output of the system is the forecasting of the next days
movement. On the training data, the output has been modied to
+1 indicating a positive rate of change, 1 for a negative rate of
change, and 0 for unchanged price movement. This was done to re
duce the complexity of the results, as it is very challenging to fore
cast the exact rate of change, while the important information is
the price trend movement.
3.1. Explaining the WASP system
The proposed system is not a single model, but a repetitive
method of selecting nine different ANFIS submodels, whose com
bination will give the nal forecast. This method was chosen due to
the fact that various models (ANFIS with different parameters of
membership function types, number, step sizes and epoch num
bers) gave very good results for some periods, but not constantly,
while the other set of parameters gave very good results for later
periods. The reasoning of WASP is depicted in Diagram 12. Using
the price, as well as the moving averages of 5 and 35 days, the
EWO, and the oscillator lags, which formulate the input data can
be calculated. The returns can also be calculated from prices, and
transformed into values [1, 0, 1] thereby creating the output data.
The last set of the input data is used for the new forecast. The
remaining data combined with the already known output data
comprises the total data, which are divided in training data and
testing data. The data used are 2060 daily observations. The last
60 entries are used for testing data and the remaining 2000 data
are used to train the neurofuzzy subsystems. Two membership
functions for each input were chosen, as the critical point of the
EWO is the change from negative to positive values. The number
of epochs used to train every subsystem is 15. In many cases,
the greatest improvements in the root mean square error took
place during the rst 1520 epochs. More epochs would mean a
longer time needed to train these 42 models, not necessarily
improving the hit rate. The 42 subsystems are trained with differ
ent combinations of step sizes, and membership functions. The val
ues of step sizes used are [0.01, 0.05, 0.1, 0.2, 0.3, 0.4, 0.5], and the
Diagram 11. Elliott wave oscillator.
9202 G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206
membership functions used are (Bell, Gaussian, Gaussian2
(a Gaussian Variation), Triangular, Trapezoidal, and Pi membership
function). These 42 submodels are evaluated with the testing data.
The models that give the highest hit rates are selected, and used
with the new data, giving nine different forecasts for the next
day. The average of these nine forecasts is used as the nal forecast.
The method has many advantages besides the nal result.
One can take under consideration the number of positive and
negative forecasts as well. Furthermore, the system presents a con
dence index. The condence index is the average hitrate of the
nine submodels achieved on the testing data. Obviously, if the
condence index is below 52%, one is advised not to follow the sys
tem, as it would not make any difference from tossing a coin, or
guessing the next days movement. This is not an irrational restric
tion, as such periods are often observed in the market place, where
movements seem to follow a chaotic pattern. It is important to be
able to recognize such periods to reduce risk. The typical output of
the WASP system is presented in Diagram 13.
The output window presents three boxplots. The rst one indi
cates the hitrate of the nine submodels, on the testing data,
which is also the condence index. The second indicates the re
turns that these submodels would achieve in the testing data.
The third boxplot depicts the predictions, which are derived by
evaluating the latest set of input data on the sub models. The re
sults show that for the next day, eight models forecasted a positive
movement, while one forecasted a negative one. On average, the
prediction is positive and the condence index is high, ranging
from 66.6% to 75%.
For every subsystem, the characteristics of the ANFIS system are
indicated in Table 1. Depending on the chosen membership
functions selected by WASP, the number of nonlinear parameters,
varies from 12 for a two parameter MF such as the Gaussian func
tion, 18 for a three parameter MF such as the Bell and Trigonal
functions, and 24 for a four parameter MF such as the trapezoid
MF. The case of a subsystem using the Bell function is presented
below.
3.2. Results
The WASP systemwas tested with the stock of the National Bank
of Greece. The system was retrained daily. A paper portfolio worth
10.000 Euros was simulated. Buy and sell decisions did not take into
account the condence index, as it is subjective, depending on the
risk the investor is willing to take, even though a threshold of 52%
is widely acceptable. Stocks were bought whenever the forecast
was positive, and the position was closed when the forecast became
negative. Transaction costs were not taken into consideration. The
system was tested for period April 2007 to November 2008, for a
total of 400 trading days. It is one of the longest periods that any
model has been tested for daily trading decisions. It is worthy to
note that this period also includes the great recession of October
2008, were the system achieved interesting results. For the whole
period of 400 trading days, the hit rate was 58.75%, mainly due to
the crisis. By breaking this period in four subperiods of 100 obser
vations, the hit rates achieved are 58%, 64%, 60% and 53%, respec
tively. It is important to note that during the last subperiod, the
condence index often had a value below52% which would prevent
investors from investing, as will be shown in the diagrams that fol
low. Again not including the condence index, the return of the
portfolio during this period was +6.79%, while the stock lost 60.9%
of its value. It is interesting to note, that just before the crisis, the
condence index fell below 52%. The respective returns on that
day were +71.49% for the WASP system, while the Buy&Hold strat
egy to this day would produce a loss of 37.13%. For ease of use, the
total period has been divided into three periods. The rst includes
200 trading days, between 11/04/2007 and 23/01/2008, the second
from 24/01/2008 to 25/06/2008 (100 trading days), and nally the
third from 26/06/2008 to 14/11/2008.
3.2.1. First period: 11/04/200723/01/2008
For every period, the results include the portfolio return
compared to the return produced by a Buy&Hold strategy
(Diagram 15), the condence index, the hitrate, and the moving
hitrate. The moving hitrate is a diagram which shows the hitrate
since the rst day of this period. Table 2 outlines some of the re
sults. Following the WASP system, the return achieved was
17.73%, which is 27.31% more than the return of the Buy&Hold
strategy. The hitrate for this period is 61%. It can be seen in
Diagram 14 that the hitrate moves towards the 60% region. The
condence index remained above 52% for the whole period, with
an average of 61%.
3.2.2. Second Period 24/01/200825/06/2008
During this second period of 100 trading days, the results are
even better. The WASP System returned a prot of +19.65% against
a price drop of 19.39% as can seen in Table 3. Diagram 16 shows the
portfolio returns usingWASP and the Buy&Hold strategy. The hit
rate for this period was 60% with the moving hitrate remaining
again on the 60% region as can be seen in Diagram 17.
The condence index remained again above 52%, with its low
for this period at 58.7%, and a maximum of 71.67%, giving no rea
son for the investor not to trust the systems output.
3.2.3. Third period 26/06/200814/11/2008
During this period the market was much harder to explain. This
is the period where the famous 2008 crisis hit the markets
worldwide, as can be seen in Table 4. The WASP system would
Price
Moving Average
35 Day
Returns
Moving Average
5 Day
Returns
(1,0,+1)
EWO(5/35)t
EWO(5/35)t1
EWO(5/35)t2
Input
Data
Output
Data
Total
Data
New
Data
Testing
Data
Training
Data
Various
ANFIS
Model
Evaluation
Best model
Choice
Average
Prediction
Final
Prediction
Diagram 12. The WASP system.
G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206 9203
have helped investors to reduce losses, by always achieving better
results than the Buy&Hold strategy. By the end of this period, the
stock of NBG had declined by 46.35% while the WASP system lost
24.28%.
In Diagram 18, the condence index is also noted as gray circles
on theWASP return line. Every gray circle denoted a day that the
condence index was below 52%. For these days, as mentioned be
fore, the system is unable to support the results, and thus the
investor should not follow the system. The best action would be
to sell the stocks, and wait until the index gives an acceptable re
sult. The system gave early signs to exit the market. On the point of
the rst exit signal, the WASP system produced prots of 26.61%
against prots of 3.95%. After this sign, the index moved again
slightly above 52%, but not higher than 53%, giving another sign
9 days later, with the results being +15.2% for the WASP system
and 9.21% for the Buy&Hold strategy. Diagram 19 indicates the
moving Hitrate, which moves to the 60% region at the beginning,
but falls to approximately 53% at the end. The most important con
clusion for this period was the signicance of the condence index,
and how it can be used to give exit signals.
3.2.4. Further results
Diagram20 shows the results for the WASP systemfor the whole
period. The WASP System outperformed the Buy&Hold strategy.
Since the forecasting problem has been converted to a classi
cation problem, as the return has been converted to 1, 0, +1 val
ues for negative, unchanged or positive rates of change, it is
Diagram 13. WASP system output.
Table 1
Characteristics of ANFIS subsystem.
ANFIS parameter type Value
MF type Bell function
Number of MFs 6
Output MF Linear
Number of nodes 34
Number of linear parameters 32
Number of nonlinear parameters 18
Total number of parameters 50
Number of training data pairs 2000
Number of evaluating data pairs 60
Number of fuzzy rules 8
Strategy Returns
8000
9000
10000
11000
12000
13000
1 50 99 148 197
Day
E
u
r
o
Buy & Hold
W.A.S.P
Diagram 14. Returns for the rst period.
Moving HitRate
0
0.2
0.4
0.6
0.8
1
1 50 99 148 197
Days
H
i
t
R
a
t
e
Diagram 15. Moving hit rate for the rst period.
9204 G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206
common to present classication results. Results are classied into
four categories: True Positive (TP), True Negative (TN), False Posi
tive (FP) and False Negative (FN). Obviously, FP cases are the ones
that incur losses. FN cases prevent prots, while TP cases produce
prots and TN cases prevent losses. It is important to note that the
times that the stock price remained unchanged, are counted as
correct forecasts, as they bring no change to the portfolio value.
Table 5 shows the classication results for the whole testing peri
od. The results are much better if the third period is excluded, as is
indicated in Table 6.
Another interesting result is the number of consecutive correct
and wrong forecasts achieved by the system. Ideal situation would
one where the false forecasts occur once between many correct
forecasts. Table 7 presents the analysis of the whole testing period.
Column 1 shows the number of consecutive forecasts. Columns
2 and 4, depicts the frequency of wrong and correct forecasts
respectively, while columns 3 and 5 give the number of
Table 2
Results for the rst period.
Date Buy&Hold (%) WASP (%) Difference (%)
20/06/2007 +0.47 +9.61 +9.14
30/08/2007 +3.10 +8.01 +4.90
08/11/2007 +10.12 +21.04 +10.91
23/01/2008 9.57 +17.73 +27.31
Table 3
Results for the second period.
Date Buy&Hold (%) WASP (%) Difference (%)
26/02/2008 +3.68 +16.79 +13.11
09/04/2008 6.57 +7.13 +13.71
19/05/2008 3.71 +21.18 +24.89
25/06/2008 19.39 +19.65 +39.05
Moving HitRate
0
0.2
0.4
0.6
0.8
1
1 25 49 73 97
Days
H
i
t
R
a
t
e
Diagram 16. Moving hitrate for the second period.
Strategy Returns
8000
9000
10000
11000
12000
13000
1 25 49 73 97
Day
E
u
r
o
Buy & Hold W.A.S.P
Diagram 17. Results for the second period.
Table 4
Results for the third period.
Date Buy&Hold (%) WASP (%) Difference (%)
03/09/2008 +8.53 +26.50 +7.97
24/10/2008 59.45 35.28 +18.17
14/11/2008 46.35 24.28 +26.51
Moving HitRate
0
0.2
0.4
0.6
0.8
1
1 25 49 73 97
Days
H
i
t

R
a
t
e
Diagram 18. Moving hit rate for the third period.
Strategy Returns
3000
5000
7000
9000
11000
13000
1 25 49 73 97
Day
E
u
r
o
Buy&Hold Wasp Conf idence Index
Diagram 19. Results for the third period.
Strategy Returns
0
2500
5000
7500
10000
12500
15000
17500
20000
1 51 101 151 201 251 301 351 401
Day
E
u
r
o
Buy & Hold W.A.S.P
Diagram 20. Returns for whole period.
Table 5
Classication of results for the whole period.
Movement forecast Positive Negative
Positive 114 (59.37%) TP 87 (41.82%) FP
Negative 78 (40.625%) FN 121 (58.17%)TN
Total 192 208
G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206 9205
observations that were part of each category (simply multiplying
columns 1 and 2, or columns 1 and 4).
For example, a single wrong forecast occurred 59 times. Two
consecutive wrong forecasts occurred 20 times, three consecutive
false forecasts occurred 12 times, etc. On the other hand, a single
correct forecast occurred 40 times, two consecutive correct fore
casts occurred 23 times, three consecutive correct forecasts oc
curred 12 times, etc.
From columns 3 and 5, it can be concluded that the system gave
more consecutive correct forecasts than wrong ones.
4. Conclusions future research
The systempresented in this paper achieved remarkable results,
for a very long period of 400 trading days, when the system is
retrained daily. As mentioned before, the WASP system is a meth
odology that selects 9 ANFIS systems, based on the hitrate each
subsystem achieves on out of sample data. Even those results
are extremely interesting, with some submodels achieving a hit
rate above 75% for a sample of 60 trading days. This is evidence
of how effective neurofuzzy architectures can be in stock market
forecasting. The system showed a tendency to achieve hit rates in
the 60% mark which is signicantly better than forecasting with
the help of a coin. During this period of 400 trading days, the WASP
systemmade 63 transactions. This gives a rough average of 1 trans
action every 6 days.
Variations of the WASP system could produce different results.
There are many parameters that can be changed, as can the num
ber of submodels to be chosen. The selection process of the sub
models can also differ. Risk aversion investors might want to
choose the submodels, depending on the number of false positive
cases.
A daily forecast needs approximately 90 s on a core 2 duo laptop
in 1.86 MHz with 3 GB of ram.
Of course the system has some restrictions, deriving both from
fuzzy logic theory, neural network, and the Elliott Wave Theory.
The Elliott wave oscillator is not a normalized index, which causes
price variations to change the value of the oscillator signicantly,
producing values outside of the values used to train the neuro
fuzzy system. The second restriction depends again on the Elliott
wave oscillator. The oscillator is a slow moving oscillator, as it is
derived from two moving averages. This makes the separation of
if . . . then scenarios more difcult.
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Table 6
Classication of results for the rst two periods.
Movement forecast Positive Negative
Positive 86 (57.33%) TP 54 (36.00%) FP
Negative 64 (42.66%) FN 96 (64.00%) TN
Total 150 150
Table 7
Consecutive correct and wrong forecasts.
Number of
consecutive
forecasts
Frequency of
wrong
forecasts
Number of
wrong
forecasts
Frequency of
correct
forecasts
Number of
correct
forecasts
(1) (2) (3) (4) (5)
1 59 59 40 40
2 20 40 23 46
3 12 36 12 36
4 4 16 8 32
5 0 0 6 30
6 1 6 7 42
7 0 0 0 0
8 1 8 1 8
9206 G.S. Atsalakis et al. / Expert Systems with Applications 38 (2011) 91969206
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