# FinDPO: Financial Sentiment Analysis for Algorithmic Trading through Preference Optimization of LLMs

arXiv: https://arxiv.org/abs/2507.18417 · HTML: https://mlsanity.com/paper/2507.18417/

## Key facts

- Cited by 4 papers in the map (data through 14 Oct 2026).
- Placed in Preference alignment for recommenders and RAG, one of 10 directions in LLM alignment / RLHF / preference optimisation.
- Builds on 13 of its 30 references that are in the map.
- First posted on arXiv 24 Jul 2025.

## Placed in

- LLM alignment / RLHF / preference optimisation / [Preference alignment for recommenders and RAG](https://mlsanity.com/alignment/preference-alignment-for-recommenders-and-rag/)

## Builds on (most cited first, 13 of 13)

- [Training language models to follow instructions with human feedback](https://mlsanity.com/paper/2203.02155/) (2022)
- [Proximal Policy Optimization Algorithms](https://mlsanity.com/paper/1707.06347/) (2017)
- [The Llama 3 Herd of Models](https://mlsanity.com/paper/2407.21783/) (2024)
- [Direct Preference Optimization: Your Language Model is Secretly a Reward Model](https://mlsanity.com/paper/2305.18290/) (2023)
- [On Calibration of Modern Neural Networks](https://mlsanity.com/paper/1706.04599/) (2017)
- [Decoupled Weight Decay Regularization](https://mlsanity.com/paper/1711.05101/) (2017)
- [SFT Memorizes, RL Generalizes: A Comparative Study of Foundation Model Post-training](https://mlsanity.com/paper/2501.17161/) (2025)
- [FinBERT: Financial Sentiment Analysis with Pre-trained Language Models](https://mlsanity.com/paper/1908.10063/) (2019)
- [Good Debt or Bad Debt: Detecting Semantic Orientations in Economic Texts](https://mlsanity.com/paper/1307.5336/) (2013)
- [Is Reinforcement Learning (Not) for Natural Language Processing: Benchmarks, Baselines, and Building Blocks for Natural Language Policy Optimization](https://mlsanity.com/paper/2210.01241/) (2022)
- [FinGPT: Instruction Tuning Benchmark for Open-Source Large Language Models in Financial Datasets](https://mlsanity.com/paper/2310.04793/) (2023)
- [Instruct-FinGPT: Financial Sentiment Analysis by Instruction Tuning of General-Purpose Large Language Models](https://mlsanity.com/paper/2306.12659/) (2023)
- [Leverage Financial News to Predict Stock Price Movements Using Word Embeddings and Deep Neural Networks](https://mlsanity.com/paper/1506.07220/) (2015)

## Built on by (most cited first, 4 of 4)

- [Adversarial News and Lost Profits: Manipulating Headlines in LLM-Driven Algorithmic Trading](https://mlsanity.com/paper/2601.13082/) (2026)
- [Trade-R1: Bridging Verifiable Rewards to Stochastic Environments via Process-Level Reasoning Verification](https://mlsanity.com/paper/2601.03948/) (2026)
- [FinSMART: Financial Sentiment Analysis for Algorithmic Trading through Market-Aligned Reinforcement Learning](https://mlsanity.com/paper/2607.28127/) (2026)
- [PALM: Point-in-Time Adaptation for Financial Language Models](https://mlsanity.com/paper/2609.30316/) (2026)

## Abstract (arXiv)

Opinions expressed in online finance-related textual data are having an increasingly profound impact on trading decisions and market movements. This trend highlights the vital role of sentiment analysis as a tool for quantifying the nature and strength of such opinions. With the rapid development of Generative AI (GenAI), supervised fine-tuned (SFT) large language models (LLMs) have become the de facto standard for financial sentiment analysis. However, the SFT paradigm can lead to memorization of the training data and often fails to generalize to unseen samples. This is a critical limitation in financial domains, where models must adapt to previously unobserved events and the nuanced, domain-specific language of finance. To this end, we introduce FinDPO, the first finance-specific LLM framework based on post-training human preference alignment via Direct Preference Optimization (DPO). The proposed FinDPO achieves state-of-the-art performance on standard sentiment classification benchmarks, outperforming existing supervised fine-tuned models by 11% on the average. Uniquely, the FinDPO framework enables the integration of a fine-tuned causal LLM into realistic portfolio strategies through a novel 'logit-to-score' conversion, which transforms discrete sentiment predictions into continuous, rankable sentiment scores (probabilities). In this way, simulations demonstrate that FinDPO is the first sentiment-based approach to maintain substantial positive returns of 67% annually and strong risk-adjusted performance, as indicated by a Sharpe ratio of 2.0, even under realistic transaction costs of 5 basis points (bps).