One thorny issue with neural networks is that the inputs need to be coded properly in order that the network can extract useful information from them. For instance, training the network simply on the share prices themselves would be unsatisfactory, as that particular pattern of prices would depend on the absolute value of the stock market. In many cases, the obvious strategy is the correct one, and in the case of stock market prediction an obvious strategy suggests itself. It is not the absolute value of the stock prices that is of interest, but the changes in prices from one time period to the next. This is where the money is to be made, regardless of whether the general value of shares is hovering around the 4000 mark, the 5000 mark or the 6000 mark. For this reason, it would make more sense for the inputs to the ANN to be the changes in share price.
Whereas conventional computer programs are written specifically and involve specific rules given by the human programmer, ANNs are trained by example. They learn to associate patterns on their inputs with corresponding patterns on their outputs. Training the neural net involves giving it a sample from the library of known input patterns and the corresponding desired output. Then the neural network is told to adapt its connections. This is repeated with other input-output pattern pairs. Typically, the set of input-output pairs used for training the net has to be presented repeatedly many times, and so neural networks can often take several hours to train. Once the neural network has been trained, you can present an input pattern to it and it will produce the corresponding output pattern.
What are Neural Networks?
Artificial Neural Networks (ANN) are simulations on a computer of groups of brain cells (neurons) configured in such a way that they perform a useful task. They are inspired by real neurons, which are simple switching elements – they gather electrochemical energy from their inputs, then either pass it on or block it. This means that individual neurons have little more intelligence than a light switch, and yet, but putting countless trillions of these cells together and setting up the correct connections between them, we get human intelligence and even (in a process that scientists haven’t even begun to understand) consciousness!