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Hackernoon logoWhy Deep Reinforcement Learning is the Future of Automated Trading? by@rituraj15

Why Deep Reinforcement Learning is the Future of Automated Trading?

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@rituraj15Rituraj Sengar

The Startup Guy with a Digital Marketing head.

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Devising a winning stock trading strategy isn’t easy considering the market dynamism in general. However, if we were to create an airtight automated trading strategy that categorizes hedge funds and investment companies based on the return-to-risk ratio, it would be necessary to rely on the concepts of return maximization.

Then again, assessing return maximization in the dynamic and complex stock and even the Forex market is next to impossible unless there is a DRL-backed trading strategy to rely on.

The Relevance of Deep Reinforcement Learning in Trading

Consider you would someday be interested in creating a trading bot that uses Reinforcement Learning to gauge the sequences, existing agent transactions, and even work around the existing anomalies. Reinforcement Learning is one segment of machine learning where the receiving states of the trading info are monitored and the diverse stages are used by the bot or system to learn from.

While Reinforcement Learning is a concept where the system learns progressively and iteratively from a standalone environment, Deep Reinforcement Learning also addresses the inputs from a completely divergent source and allows you to pair the same with the existing system. When it comes to trading, DRL picks up from where a neural network leaves by approximating the Q-value and using a dedicated approximator to be applied to massive data sets.

DRL, therefore, studies the existing data and maximizes the total returns over a period of time to eliminate the trading optimization issue. Moreover, a DRL-powered automated trading system is also expected to help with stock and Forex signals by tapping into the continuity of the process. As and when the trades are executed, the inferences, ideas, and feedback are reinvested into the RL model. Clubbed with Deep Learning initiatives and the Markov Decision, the data sets are used to make an iterative, rewarding, and highly accurate model.

Why Use Deep Reinforcement Learning?

Machine learning, as a standalone approach for approximating trading, isn’t as potent as DRL. ML uses the proprietary classification and regression models that analyze and predict, instead of optimizing the future prospects.

DRL doesn’t rely unnecessarily on large data sets and, therefore, works better than supervised ML models. As the stock and Forex market data keeps growing exponentially, DRL is probably the only approach that concerns training the agent to gauge actions and not data alone.

Markov Decision Process

Every system requires a process via which the same is modeled for perfection. In the case of DRL-powered trading models, a stochastic, discrete-time process or MDP is relied upon.

As is the case with trading models, relevant to Forex or stocks, the Markov Decision Process covers aspects that are partly decision-driven and partly random.

From the DRL perspective, MDP concerns problem-solving by empowering the process or system to learn from the interactions. While we shall be unpacking the mathematical relevance and real-time models in a separate discussion, it is important to note that DRL algorithms are modeled using the MDP and designed via the Bellman Equation, where the values are segregated as immediate actions and discounted metrics for the future.

Therefore, Deep Reinforcement Learning takes the current trading trends and future values into account for creating an airtight trading strategy.

Benefits of a DRL Trading Model

In a majority of cases, algorithms based on Deep Reinforcement Learning are capable of outperforming the standard human minds, especially when the trading goal concerns ‘Return Maximization’. This is the point where the second part of a Bellman Equation comes in handy as it defines the futuristic reward functions or the expectations of the trader for driving decisions, accordingly.

Besides, DRL trading models support sequential feedbacks, which ensure that the current decision will always be better and more productive as compared to the previous one. DRL also uses the exploration-exploitation method that automatically brings out the best signals and works on them for maximizing profits. Not just that, DRL is also capable of working with multi-dimensional data whilst applying computational power to the existing trading models.

Domains That are Covered With Accuracy

While return maximization strategies are best addressed by DRL-backed automated trading models, a more seasoned approach can help you get ahead of the existing market liquidity, risk aversion strategies, non-negative balance, and other constraints. Deep Reinforcement Learning takes every possible feedback into account to address each of the concerning issues along with stock signal monitoring.


To sum it up, DRL is one highly relevant aspect of Artificial Intelligence and Machine Learning where stock trading is mostly defined as a consortium of statistical arbitrage. This means, predictive models or regression analysis isn’t always expected to work and only a behavioral design can make sense when rewarding predictions are concerned.

However, we would soon come up with the mathematical representation of a DRL algorithmic model that is great at predicting stocks and Forex buys with maximum accuracy.


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