{"id":69237,"date":"2020-12-22T10:09:00","date_gmt":"2020-12-22T15:09:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=69237"},"modified":"2022-11-21T09:46:47","modified_gmt":"2022-11-21T14:46:47","slug":"reinforcement-learning-in-trading-part-v","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/reinforcement-learning-in-trading-part-v\/","title":{"rendered":"Reinforcement Learning in Trading \u2013 Part V"},"content":{"rendered":"\n<p><em>See&nbsp;<a href=\"\/campus\/ibkr-quant-news\/reinforcement-learning-in-trading\/\">Part I<\/a>,&nbsp;<a href=\"\/campus\/ibkr-quant-news\/reinforcement-learning-in-trading-part-ii\/\">Part II<\/a>,&nbsp;&nbsp;<a href=\"\/campus\/ibkr-quant-news\/reinforcement-learning-in-trading-part-iii\/\">Part III<\/a>&nbsp;and <a href=\"\/campus\/ibkr-quant-news\/reinforcement-learning-in-trading-part-iv\/\">Part IV<\/a> to get started.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-bellman-equation\">Bellman Equation<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"757\" height=\"52\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/bellman-eq-qnt-2.png\" alt=\"Bellman Equation\" class=\"wp-image-70297 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/bellman-eq-qnt-2.png 757w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/bellman-eq-qnt-2-700x48.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2020\/12\/bellman-eq-qnt-2-300x21.png 300w\" data-sizes=\"(max-width: 757px) 100vw, 757px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 757px; aspect-ratio: 757\/52;\" \/><\/figure>\n\n\n\n<p>In this equation,<strong>&nbsp;s&nbsp;<\/strong>is the state,&nbsp;<strong>a&nbsp;<\/strong>is a set of actions at time&nbsp;<strong>t&nbsp;<\/strong>and&nbsp;<strong>ai&nbsp;<\/strong>is a specific action from the set. R is the reward table.&nbsp;<strong>Q&nbsp;<\/strong>is the state action table but it is constantly updated as we learn more about our system by experience. \u03b3 &nbsp;is the learning rate<\/p>\n\n\n\n<p>We will first start with the q-value for the Hold action on July 30.<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>The first part is the reward for taking that action. As seen in the R-table it is 0<\/li><li>Let us assume that \u03b3 = 0.98. The maximum Q-value for sell and hold actions on the next day, i.e. 31 July, is 1.09<\/li><li>Thus q-value for Hold action on 30 July is 0 + 0.98 (1.09) = 1.06<\/li><\/ol>\n\n\n\n<p>In this way, we will fill the values for the other rows of the Hold column to complete the Q table.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Date<\/strong><\/td><td><strong>Sell<\/strong><\/td><td><strong>Hold<\/strong><\/td><\/tr><tr><td>23-07-2020<\/td><td>0.95<\/td><td>0.966<\/td><\/tr><tr><td>24-07-2020<\/td><td>0.95<\/td><td>0.985<\/td><\/tr><tr><td>27-07-2020<\/td><td>0.98<\/td><td>1.005<\/td><\/tr><tr><td>28-07-2020<\/td><td>0.96<\/td><td>1.026<\/td><\/tr><tr><td>29-07-2020<\/td><td>0.98<\/td><td>1.047<\/td><\/tr><tr><td>30-07-2020<\/td><td>0.99<\/td><td>1.068<\/td><\/tr><tr><td>31-07-2020<\/td><td>1.09<\/td><td>1.090<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>The RL model will now select the hold action to maximise the Q value. This was the intuition behind the Q table. This process of updating the Q table is called Q learning. Of course, we had taken a scenario with limited actions and states. In reality, we have a large state space and thus, building a q-table will be time-consuming as well as a resource constraint.<\/p>\n\n\n\n<p>To overcome this problem, you can use deep neural networks. They are also called Deep Q networks or\u00a0<a href=\"https:\/\/arxiv.org\/abs\/1509.06461\" target=\"_blank\" rel=\"noreferrer noopener\">DQN<\/a>. The deep Q networks learn the Q table from past experiences and when given state as input, they can provide the Q-value for each of the actions. We can select the action to take with the maximum Q value.<\/p>\n\n\n\n<p><em>Stay tuned for the next installment to learn how to train artificial neural networks.<\/em><\/p>\n\n\n\n<p><em>Visit QuantInsti to download practical code:&nbsp;<a href=\"https:\/\/blog.quantinsti.com\/reinforcement-learning-trading\/\">https:\/\/blog.quantinsti.com\/reinforcement-learning-trading\/<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Join Ishan Shah from QuantInsti for an overview of Bellman Equation and how to apply  it in Reinforcement Learning models.<\/p>\n","protected":false},"author":517,"featured_media":36684,"comment_status":"closed","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[339,338,350,341,344],"tags":[8577,8902,2105,8576,4922,1006,852,8575,8579,8578,494,7258],"contributors-categories":[13654],"class_list":{"0":"post-69237","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-data-science","8":"category-ibkr-quant-news","9":"category-quant-asia-pacific","10":"category-quant-development","11":"category-quant-regions","12":"tag-alphazero","13":"tag-bellman-equation","14":"tag-deep-learning","15":"tag-delayed-gratification","16":"tag-econometrics","17":"tag-fintech","18":"tag-machine-learning","19":"tag-mean-reverting-strategy","20":"tag-q-learning","21":"tag-q-table","22":"tag-quant","23":"tag-reinforcement-learning","24":"contributors-categories-quantinsti"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- 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