Enhancing Stock Trading Strategies: Integrating Discrete Wavelet Transformation with Deep Q-Network

Abstract

The prediction of price trends in the stock market has always been a hot research topic in the financial field. However, due to the high instability and volatility of stock prices, it is very difficult to accurately predict stock trends. How to remove the noise of stock data, extract effective features, and pursue maximum value returns has always been a challenge. This paper proposes a hybrid model (DWT-DQN) that combines discrete wavelet transform with deep reinforcement learning to improve the accuracy and return rate of stock predictions. First, the model captures price fluctuation information on different scales by performing discrete wavelet transformation on the difference between long- and short-term moving averages of stock prices, and well extracts the changing characteristics of stock price data in the time domain and frequency domain. Then the feature data are input into the built DQN network for model training. The network can select the optimal trading action based on market status and historical experience and returns. At the same time, during the data sampling process, an attention mechanism is introduced to allow the model to further learn in the direction of maximizing returns. Through testing and verification on SSEC, HSI, NDX and SPX data sets, experiments show that the hybrid model proposed in this paper has excellent performance in terms of accuracy and return rate.