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FinSMART: Financial Sentiment Analysis for Algorithmic Trading through Market-Aligned Reinforcement Learning

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  • Giorgos Iacovides
  • Wuyang Zhou
  • Danilo Mandic

Abstract

Recent advances in Generative AI have substantially improved financial sentiment analysis through post-trained financial large language models (LLMs). However, existing approaches remain confined to a market-agnostic, supervised learning paradigm that relies on limited, static and human-annotated datasets, and thus are incapable of adapting to evolving market conditions. To address this limitation, we introduce FinSMART, the first market-aligned reinforcement learning framework for financial sentiment analysis, which directly optimizes sentiment signals using realized market outcomes. To deal with the noisy, non-stationary, and multifactorial nature of financial markets, FinSMART incorporates a signal extraction pipeline that combines market-aware data filtering with a discrete asymmetric trading reward, enabling stable reinforcement learning from economically meaningful market feedback. Experimental results demonstrate that FinSMART significantly outperforms existing state-of-the-art methods in profitability, risk-adjusted performance, and sentiment signal quality, improving cumulative trading returns by 220% over the strongest baseline. Uniquely, the FinSMART framework naturally supports market-aware retraining, at any point in time, by replacing costly manual annotation with newly observed financial articles and their realized market outcomes. Such a retraining strategy enables the model to continuously adapt to changing market dynamics, resulting in consistent performance gains over its static counterpart. These findings demonstrate the practical applicability of market-aligned reinforcement learning and highlight its potential as a next-generation paradigm for developing adaptive financial LLMs.

Suggested Citation

  • Giorgos Iacovides & Wuyang Zhou & Danilo Mandic, 2026. "FinSMART: Financial Sentiment Analysis for Algorithmic Trading through Market-Aligned Reinforcement Learning," Papers 2607.28127, arXiv.org.
  • Handle: RePEc:arx:papers:2607.28127
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    File URL: https://arxiv.org/pdf/2607.28127
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