Decision-making for stock trading based on trading probability by considering whole market movement

Risk in prediction for decision-making should be taken into account. This paper describes a method for decreasing the risk in decision-making concerning individual events, by considering the secondary information on the relationship between these individual events and the whole sequence of related events. The proposed method is presented applied to the decision-making in stock trading. The trading probability is proposed for the prediction of the movement trend of an individual stock. This probability is constructed on the predicted values of stock price returns and their volatility. For this aim, the relationship of movement trends between the individual stock and the whole stock market is taken into consideration. A simulation study of stock trading has been performed by using this trading probability as the basic criterion of stock trading with actual stock data. The results demonstrate that the proposed method leads with high certainty to a better profit than any isolated consideration of the whole stock market trend. Possible applications of the proposed method are also discussed.