Summary

In this chapter, we introduced the challenge of learning from data and looked at supervised, unsupervised, and reinforcement models as the principal forms of learning that we will study in this book to build algorithmic trading strategies. We discussed the need for supervised learning algorithms to make assumptions about the functional relationships that they attempt to learn. They do this to limit the search space while incurring an inductive bias that may lead to excessive generalization errors.

We presented key aspects of the machine learning workflow, introduced the most common error metrics for regression and classification models, explained the bias-variance trade-off, and illustrated the various tools for managing the model selection process using cross-validation.

In the following chapter, we will dive into linear models for regression and classification to develop our first algorithmic trading strategies that use machine learning.