Data Mining Techniques in

Stock Market

Amit Vashisth
Roll No. 03216603913
MBA(Gen) 2nd yr

ABSTRACT
One of the most important problems in modern finance is finding efficient ways to visualize
the stock market data to give individuals useful information about market behaviour for
purpose of investment decisions. Thus Investment can be considered as one of the
fundamental pillars of our national economy. The single and the most important reason is to
earn return on investment. At the present time, many investor look to find a criteria for
comparison of stocks and selecting the best. The investors try to choose the type of strategy,
to choose strategy that maximize the earning of the investment process.
Enormous amount of valuable data generated by stock market has attracted researchers in
exploring this problem domain using different methodologies. Potential benefits of solving
the problems motivated extensive research for many years. Data mining is used for mining
the data from databases and finding out meaningful pattern from the large database. Many
organizations are now using data mining techniques. So research in data mining has gained a
high attraction due to importance of its applications and the increasing information.

INTRODUCTION
A stock market or an equity market, is a private or public market for trading of a company
stock and derivatives at an agreed price; these are securities listed on a stock exchange as
well as those only traded privately. The expression stock market refers to market that
enables the trading of company stocks , other securities and derivatives. Stocks are listed and
traded on stock exchanges which are entities a corporation or mutual organization which are
specialized in business of bringing buyers and sellers of stocks and securities together.It is
nowadays a common notion that vast amount of capital is traded through the stock markets
all around world. Recently markets have become more accessible investment tool, not only
for the strategic investors but for common people as well. Consequently, they are not only
related to macroeconomic parameters, but also influence everyday life in more direct way.
Therefore they constitutes a mechanism which has important and direct social impact. The
characteristics that all the stock markets have in common is uncertainty, which is related to
their short-term and long-term future state. This feature is undesirable for investor but it is
also unavoidable whenever the stock market is selected as the investment tool. The best that
one can do is, try to reduce this uncertainty. Stock market prediction is one of the instrument
in this process. Stock market forecasting includes planning investment strategies, identifying

best time to purchase the stocks and what stocks to purchase. Financial institutions produce
huge data sets that build a foundation for approaching these dynamic problems with data
mining tools. Generally, data mining

is the process of analyzing data from different

perspectives and summarizing it into useful informations. Technically, it is the process of

finding correlations or patterns among dozens of fields in the large databases.
A transaction include the willing of an investor to sell some stocks and request of another to
buy them. Each stock is not only characterized by its price value but also by many others
variables.
The main variables are shown in the table below:
Price

Current price of a stock

Opening Price

Opening price of a stock for a specific

Closing Price

trading day
Closing price of a stock for a specific

Volume

trading day
Stock transactions volume (buy/sell)

Change

Opening and Closing stock value difference

Change (%)

Percentile Opening and Closing stock

value difference

What is Data Mining?

Data are any facts, numbers, that can be processed by a computer. It includes: Operational or
transactional data such as sales, cost, inventory, payroll.
Non - operational data such as industry sales, forecast data , macro economic data and meta
data such as logical data base design or data dictionary definitions. Data Mining
is an analytic process which is designed to explore data and in search of consistent patterns or
systematic relationships between variables and then to validate the findings by applying
detected patterns to new subsets of data. In other words, Data mining is the extraction of
hidden information from large data bases. It is used to increase the revenue and reduce cost.
It finds patterns and correlations or relationships in data by using sophisticated techniques.

Application of Data Mining Techniques in Stock Markets

The Data mining is an analytic process which is designed to explore the data in search of
consistent patterns or systematic relationships between variables, and to validate the
findings by applying the detected patterns to new subsets of data. Ultimate goal of data
mining is prediction and predictive data mining is most common type of data mining and one
that has the most direct business applications.
Various data mining techniques which are applicable in stock market are :

1) Application of decision tree in stock markets

Decision trees are excellent tools for making financial based decisions where a lot of complex
information need to be taken into account. They also help to form an accurate, balanced
picture of the risks and rewards that can result from a particular choice. In a stock market,
how to find the right stocks and the right timing to buy has been of great interest to investors.
To achieve this objective, Muh-Cherng presented a stock trading method by combining filter
rule and the decision tree technique. Accurately, forecasting stock prices has been
extensively studied. Jar-Long and Shu-Hui provided a proposal to use a two-layer bias
decision tree with technical indicators to create a decision rule that makes to buy or not to
buy recommendations in the stock market.

2) Application of neural network in stock markets

The Neural network has been successfully applied in a wide range of supervised and
unsupervised learning applications. A neural network is a computational technique that
benefits from techniques similar to ones employed in the human brain. It is nowadays a
common notion that vast amount of capital are traded through the stock markets all around
the world. National economies are strongly linked and heavily influenced by the performance
of their stock markets. Neural networks can forecast the buying and selling signs according to
the prediction of future trends to stock market, and provide decision-making for stock
investors so that the different investors could benefit from it. Neural network and time series
models are used for forecasting the volatility of stock price index in two view points:
deviation and direction.

3) Application of Clustering in Stock Markets

Clustering is a tool for data analysis, which solves classification problems. Its objective is to
distribute cases (people, objects, events etc.) into groups, so that the degree of association can
be strong between members of the same cluster and weak between members of different
clusters. In clustering, there is no pre classified data and no distinction between independent
and dependent variables. Instead, clustering algorithms search for groups of records. The
algorithms discover these similarities. This way each cluster describes , in terms of data
collected, the class to which its members belong. Clustering is a discovery tool. It may reveal
associations and structure in data which, though not previously evident, nevertheless are
sensible and useful once found. As part of a stock market analysis and prediction system
consisting of an expert system and clustering of stock prices, data is needed. Stock markets
are recently triggering a growing interest in the physicists community. Basaltoa applied a
pair wise clustering approach to the analysis of the Dow Jones index companies, in order to
identify similar temporal behavior of the traded stock prices. The objective of this attention is
to understand the underlying dynamics which rules the companies stock prices. In particular,
it would be useful to find, inside a given stock market index, groups of companies sharing
a similar temporal behaviour. To this purpose, a clustering approach to the problem may
represent a good strategy.

4) Application of Association Rules in Stock Markets

The association rules algorithm is used mainly to determine the relationships between items
that occur synchronously in the database. For instance, if people who buy item X also buy
item Y, there is a relationship between item X and item Y, and this information is useful
for decision makers. Therefore, the main purpose of implementing the association rules
algorithm is to find synchronous relationships by analyzing the random data and to use these
relationships as a reference during decision making.
Association rule mining finds interesting associations and correlation relationships among
large set of data items. Association rules shows attributed value conditions that occur
frequently together in a given dataset. Mining association rules on large data sets has received
considerable attention in recent years.
Association rules are useful for determining correlations between attributes of a relation
and have applications in marketing, financial, and retail sectors. Furthermore, optimized
association rules are an effective way to focus on the most interesting characteristics
involving certain attributes.

5) Application of Factor analysis in stock market

Factor analysis is particularly useful in situations where a large number of variables are
believed to be determined by a relatively few common causes of variation. Also, it
Should be particularly useful for analyzing financial markets because if financial markets are
efficient, nominal returns will be affected by default and market risk and by expected
inflation and inflation uncertainty. Factor analysis models are used to examine hidden
patterns of relationships for a set of stocks. Recent research on dynamic factor
Models finds that the information in a large number of economic time series can be
effectively summarized by a relatively small number of estimated factors, affording the
Opportunity to exploit a rich base of information more likely to span the information sets of
financial market participants than in previous analyses. In doing so, their study
Contributes to the empirical literature by evaluating both the potential role of omitted
information in the estimated riskreturn relation as well as the robustness of previous results
to conditioning on richer information sets.

6) Application of time series in stock markets

It is obvious that the forecasting activities play an important role in our daily life. The
traditional statistical approaches for time series can predict problems arising from new trends,
but fail to forecast the data with linguistic facts. Also, it should be particularly
useful for analyzing financial market because if financial markets are efficient, nominal
returns will be affected by default and market risk and by inflation uncertainty.

Conclusion

With increase of economic globalization and evolution of information technology, financial

data are being generated & accumulated at an unprecedented pace.
As a result, there has been critical need for automated approaches to efficient utilization of
massive amount of financial data to support companies and individuals
in strategic planning and investment decision making. Data mining techniques have been
used to predict future trends and behaviours in financial markets. The competitive advantage
achieved by data mining includes increased revenue, reduced cost.
It is observed from above literature that most of research has been done on comparing
simulated trading and forecasting result with result of other methods and real gain/loss like
stock return predictability and estimation of return on investment, forecasting stock pricing
etc . But according to Indian scenario the situation is different from other countries because,
the mentality of Indian investors are different, the financial status is different, the attitude of
people is different. Therefore by considering Indian stock market situation and attitude of
Indian people towards investment in stock market, authors would like to research impact of
different scripts of stock market by using applications of data mining tools to benefit Indian
people.

References
1. Jo Ting, Tak-chung Fu, and Fu-lai Chung. Mining of Stock Data
2. Rajesh V. Argiddi, Sulabha S. Apte. Future Trend Prediction of Indian IT Stock
Market
3. Debashish Das and Mohammad Shorif Uddin. Data Mining And Neural Network
Techniques
4. Savinderjit Kaur And Veenu Mangat. Applications Of Data Mining In Stock Market