Financial forecasting is an example of a signal processing problem which is
challenging due to small sample sizes, high noise, non-stationarity, and n
on-linearity. Neural networks have been very successful in a number of sign
al processing applications. We discuss fundamental limitations and inherent
difficulties when using neural networks for the processing of high noise,
small sample size signals. We introduce a new intelligent signal processing
method which addresses the difficulties. The method proposed uses conversi
on into a symbolic representation with a self-organizing map, and grammatic
al inference with recurrent neural networks. We apply the method to the pre
diction of daily foreign exchange rates, addressing difficulties with non-s
tationarity, overfitting, and unequal a priori class probabilities, and we
find significant predictability in comprehensive experiments covering 5 dif
ferent foreign exchange rates. The method correctly predicts the direction
of change for the next day with an error rate of 47.1%. The error rate redu
ces to around 40% when rejecting examples where the system has low confiden
ce in its prediction. We show that the symbolic representation aids the ext
raction of symbolic knowledge from the trained recurrent neural networks in
the form of deterministic finite state automata. These automata explain th
e operation of the system and are often relatively simple. Automata rules r
elated to well known behavior such as tr end following and mean reversal ar
e extracted.