MachineLearningStocks in python: a starter project and guide

EDIT as of Feb 2021: MachineLearningStocks is no longer actively maintained

MachineLearningStocks is designed to be an intuitive and highly extensible template project applying machine learning to making stock predictions. My hope is that this project will help you understand the overall workflow of using machine learning to predict stock movements and also appreciate some of its subtleties. And of course, after following this guide and playing around with the project, you should definitely make your own improvements – if you're struggling to think of what to do, at the end of this readme I've included a long list of possiblilities: take your pick.

Concretely, we will be cleaning and preparing a dataset of historical stock prices and fundamentals using pandas, after which we will apply a scikit-learn classifier to discover the relationship between stock fundamentals (e.g PE ratio, debt/equity, float, etc) and the subsequent annual price change (compared with the an index). We then conduct a simple backtest, before generating predictions on current data.

While I would not live trade based off of the predictions from this exact code, I do believe that you can use this project as starting point for a profitable trading system – I have actually used code based on this project to live trade, with pretty decent results (around 20% returns on backtest and 10-15% on live trading).

This project has quite a lot of personal significance for me. It was my first proper python project, one of my first real encounters with ML, and the first time I used git. At the start, my code was rife with bad practice and inefficiency: I have since tried to amend most of this, but please be warned that some minor issues may remain (feel free to raise an issue, or fork and submit a PR). Both the project and myself as a programmer have evolved a lot since the first iteration, but there is always room to improve.

As a disclaimer, this is a purely educational project. Be aware that backtested performance may often be deceptive – trade at your own risk!

MachineLearningStocks predicts which stocks will outperform. But it does not suggest how best to combine them into a portfolio. I have just released PyPortfolioOpt, a portfolio optimisation library which uses classical efficient frontier techniques (with modern improvements) in order to generate risk-efficient portfolios. Generating optimal allocations from the predicted outperformers might be a great way to improve risk-adjusted returns.

This guide has been cross-posted at my academic blog, reasonabledeviations.com

Contents

• Contents
• Overview
• EDIT as of 24/5/18
• EDIT as of October 2019
• Quickstart
• Preliminaries
• Historical data
• Historical stock fundamentals
• Historical price data
• Creating the training dataset
• Preprocessing historical price data
• Features
  • Valuation measures
  • Financials
  • Trading information
• Parsing
• Backtesting
• Current fundamental data
• Stock prediction
• Unit testing
• Where to go from here
• Data acquisition
• Data preprocessing
• Machine learning
• Contributing

Overview

The overall workflow to use machine learning to make stocks prediction is as follows:

1. Acquire historical fundamental data – these are the features or predictors
2. Acquire historical stock price data – this is will make up the dependent variable, or label (what we are trying to predict).
3. Preprocess data
4. Use a machine learning model to learn from the data
5. Backtest the performance of the machine learning model
6. Acquire current fundamental data
7. Generate predictions from current fundamental data

This is a very generalised overview, but in principle this is all you need to build a fundamentals-based ML stock predictor.

EDIT as of 24/5/18

This project uses pandas-datareader to download historical price data from Yahoo Finance. However, in the past few weeks this has become extremely inconsistent – it seems like Yahoo have added some measures to prevent the bulk download of their data. I will try to add a fix, but for now, take note that download_historical_prices.py may be deprecated.

As a temporary solution, I've uploaded stock_prices.csv and sp500_index.csv, so the rest of the project can still function.

EDIT as of October 2019

I expect that after so much time there will be many data issues. To that end, I have decided to upload the other CSV files: keystats.csv (the output of parsing_keystats.py) and forward_sample.csv (the output of current_data.py).

Quickstart

If you want to throw away the instruction manual and play immediately, clone this project, then download and unzip the data file into the same directory. Then, open an instance of terminal and cd to the project's file path, e.g

cd Users/User/Desktop/MachineLearningStocks

Then, run the following in terminal:

pip install -r requirements.txt
python download_historical_prices.py
python parsing_keystats.py
python backtesting.py
python current_data.py
pytest -v
python stock_prediction.py

Otherwise, follow the step-by-step guide below.

Preliminaries

This project uses python 3.6, and the common data science libraries pandas and scikit-learn. If you are on python 3.x less than 3.6, you will find some syntax errors wherever f-strings have been used for string formatting. These are fortunately very easy to fix (just rebuild the string using your preferred method), but I do encourage you to upgrade to 3.6 to enjoy the elegance of f-strings. A full list of requirements is included in the requirements.txt file. To install all of the requirements at once, run the following code in terminal:

pip install -r requirements.txt

To get started, clone this project and unzip it. This folder will become our working directory, so make sure you cd your terminal instance into this directory.

Historical data

Data acquisition and preprocessing is probably the hardest part of most machine learning projects. But it is a necessary evil, so it's best to not fret and just carry on.

For this project, we need three datasets:

1. Historical stock fundamentals
2. Historical stock prices
3. Historical S&P500 prices

We need the S&P500 index prices as a benchmark: a 5% stock growth does not mean much if the S&P500 grew 10% in that time period, so all stock returns must be compared to those of the index.

Historical stock fundamentals

Historical fundamental data is actually very difficult to find (for free, at least). Although sites like Quandl do have datasets available, you often have to pay a pretty steep fee.

It turns out that there is a way to parse this data, for free, from Yahoo Finance. I will not go into details, because Sentdex has done it for us. On his page you will be able to find a file called intraQuarter.zip, which you should download, unzip, and place in your working directory. Relevant to this project is the subfolder called _KeyStats, which contains html files that hold stock fundamentals for all stocks in the S&P500 between 2003 and 2013, sorted by stock. However, at this stage, the data is unusable – we will have to parse it into a nice csv file before we can do any ML.

Historical price data

In the first iteration of the project, I used pandas-datareader, an extremely convenient library which can load stock data straight into pandas. However, after Yahoo Finance changed their UI, datareader no longer worked, so I switched to Quandl, which has free stock price data for a few tickers, and a python API. However, as pandas-datareader has been fixed, we will use that instead.

Likewise, we can easily use pandas-datareader to access data for the SPY ticker. Failing that, one could manually download it from yahoo finance, place it into the project directory and rename it sp500_index.csv.

The code for downloading historical price data can be run by entering the following into terminal:

python download_historical_prices.py

Creating the training dataset

Our ultimate goal for the training data is to have a 'snapshot' of a particular stock's fundamentals at a particular time, and the corresponding subsequent annual performance of the stock.

For example, if our 'snapshot' consists of all of the fundamental data for AAPL on the date 28/1/2005, then we also need to know the percentage price change of AAPL between 28/1/05 and 28/1/06. Thus our algorithm can learn how the fundamentals impact the annual change in the stock price.

In fact, this is a slight oversimplification. In fact, what the algorithm will eventually learn is how fundamentals impact the outperformance of a stock relative to the S&P500 index. This is why we also need index data.

Preprocessing historical price data

When pandas-datareader downloads stock price data, it does not include rows for weekends and public holidays (when the market is closed).

However, referring to the example of AAPL above, if our snapshot includes fundamental data for 28/1/05 and we want to see the change in price a year later, we will get the nasty surprise that 28/1/2006 is a Saturday. Does this mean that we have to discard this snapshot?

By no means – data is too valuable to callously toss away. As a workaround, I instead decided to 'fill forward' the missing data, i.e we will assume that the stock price on Saturday 28/1/2006 is equal to the stock price on Friday 27/1/2006.

Features

Below is a list of some of the interesting variables that are available on Yahoo Finance.

Valuation measures

• 'Market Cap'
• Enterprise Value
• Trailing P/E
• Forward P/E
• PEG Ratio
• Price/Sales
• Price/Book
• Enterprise Value/Revenue
• Enterprise Value/EBITDA

Financials

• Profit Margin
• Operating Margin
• Return on Assets
• Return on Equity
• Revenue
• Revenue Per Share
• Quarterly Revenue Growth
• Gross Profit
• EBITDA
• Net Income Avi to Common
• Diluted EPS
• Quarterly Earnings Growth
• Total Cash
• Total Cash Per Share
• Total Debt
• Total Debt/Equity
• Current Ratio
• Book Value Per Share
• Operating Cash Flow
• Levered Free Cash Flow

Trading information

• Beta
• 50-Day Moving Average
• 200-Day Moving Average
• Avg Vol (3 month)
• Shares Outstanding
• Float
• % Held by Insiders
• % Held by Institutions
• Shares Short
• Short Ratio
• Short % of Float
• Shares Short (prior month)

Parsing

However, all of this data is locked up in HTML files. Thus, we need to build a parser. In this project, I did the parsing with regex, but please note that generally it is really not recommended to use regex to parse HTML. However, I think regex probably wins out for ease of understanding (this project being educational in nature), and from experience regex works fine in this case.

This is the exact regex used:

r'>' + re.escape(variable) + r'.*?(\-?\d+\.*\d*K?M?B?|N/A[\\n|\s]*|>0|NaN)%?(</td>|</span>)'

While it looks pretty arcane, all it is doing is searching for the first occurence of the feature (e.g "Market Cap"), then it looks forward until it finds a number immediately followed by a </td> or </span> (signifying the end of a table entry). The complexity of the expression above accounts for some subtleties in the parsing:

• the numbers could be preceeded by a minus sign
• Yahoo Finance sometimes uses K, M, and B as abbreviations for thousand, million and billion respectively.
• some data are given as percentages
• some datapoints are missing, so instead of a number we have to look for "N/A" or "NaN.

Both the preprocessing of price data and the parsing of keystats are included in parsing_keystats.py. Run the following in your terminal:

python parsing_keystats.py

You should see the file keystats.csv appear in your working directory. Now that we have the training data ready, we are ready to actually do some machine learning.

Backtesting

Backtesting is arguably the most important part of any quantitative strategy: you must have some way of testing the performance of your algorithm before you live trade it.

Despite its importance, I originally did not want to include backtesting code in this repository. The reasons were as follows:

• Backtesting is messy and empirical. The code is not very pleasant to use, and in practice requires a lot of manual interaction.
• Backtesting is very difficult to get right, and if you do it wrong, you will be deceiving yourself with high returns.
• Developing and working with your backtest is probably the best way to lea