What is Artificial Intelligence and how is it Used in Trading?
Artificial Intelligence (AI) is the science and engineering of making intelligent machines. Specifically, it takes into account intelligent computer programs to calculate, reason, learn from experience, adapt to new situations and solve complex problems. Artificial Intelligence (AI) also refers to Algorithmic Trading is about implementing trading rules into a program and using the program to trade. Artificial Intelligence (AI) is mainly based on disciplines such as Computer Science, Psychology, Linguistics, Mathematics, Biology and Engineering.
Since AI is shaping the future of stock trading drastically, it is going to continue making trading profitable in the coming time. For instance, Robo-advisers are automated to analyse millions of data points in as little time as possible and forecast the prices on the basis of the same. Further, it executes trades at the most profitable time because of its ability to carry out several trades in every second in the stock market. Hence, for accurate analysis, forecasting, timely execution of the trades and for mitigating the risks, AI plays an important role.
Let us see how exactly AI is used in trading:
- Pattern Formation
- Predictive Trading (Sentiment Based)
- Increased Trading Speed
Pattern Formation
Artificial Intelligence is a powerful technology which helps to analyse numerous data points within seconds. This way it can identify those trading patterns rapidly which are historical and replicating for smart trading. Whereas, humans can not identify and build patterns with such speed.
Predictive Trading (Sentiment Based)
Based on the analysis of news headlines, social media comments, and other platforms, AI is able to forecast the moves of other traders along with the direction of stocks with the help of sentiment analysis.
Increased Trading Speed
Since it is the era of fast-paced technology-oriented functioning, AI helps as it facilitates trading every millisecond. Also, AI leads to such fast-paced automated trading which needs no human intervention.
Frequently Asked Questions
1. Can AI predict stocks?
AI trading systems can be used to predict stocks, but the success rate differences are small. If a trader predicts 50% of trades accurately, and an AI algorithm correctly predicts 55% of trades, this would be considered a big success.
2. What’s the difference between AI, Machine Learning & Deep Learning?
AI is a broad category that includes machine learning and deep learning. AI refers to the execution of rules/algorithms that mimic human behavior. Machine learning refers to rules that allow a machine to form assumptions based on its data and begin developing its own rules, essentially learning. The final area of AI is a subset of machine learning known as deep learning; here, the machine teaches itself new behaviors based on its current data and past experience. Our research shows that machine learning or deep learning employed in stock trading is exclusively available to institutions or hedge funds, as in the case of J4 Capital. This does not mean that broader AI rules execution cannot be successful in trading; it simply means that a revolutionary machine-driven approach to trading is not there yet.
3. What is AI & Backtesting in Stock Trading?
As the creator of three successful algorithmic approaches to investing (the Stock Market Crash Detector, LST Beat the Market Growth Stocks System & MOSES), I know that none of this is possible without backtesting a trading strategy. Backtesting means testing a hypothesis on historical data and assessing how often that hypothesis is true. In this comparison, all five of the AI stock trading software providers use rigorous backtesting to improve the chance of trading success.
4. Can You Use AI to Predict the Stock Market?
Yes, AI stock trading algorithms are designed to predict the future direction of stocks and the stock market. However, they are not perfect predictors of the market. If an AI algorithm achieves a prediction accuracy of 60% or more, it is considered highly successful. “An exceptional trader would be thrilled with a 51% success rate—similar to the house edge at a Las Vegas blackjack table. Renaissance Technologies, perhaps the most profitable quant firm globally, has generated a vast fortune by leveraging bets with these odds. J4 Capital, which has only two other employees, claims to have a success rate of nearly 60%.”
5. Is AI Good For Trading?
Yes, AI is good for trading; most major investment banks use AI for arbitrage and portfolio selection. Modern AI trading software is now available for retail investors, providing automated trading with audited past performance and risk analysis. AI has finally matured for stock trading. No one can guarantee a profit using AI for trading, but it does stack the odds in your favor.
6. Can Trading be Automated?
Yes, trading can be automated. Over 80% of stock market trading is automated because investment banks, hedge funds, and market makers operating dark pools use computers to automate high-frequency trading (HFT) to arbitrage differences in asset prices between markets.
7. Is AI Stock Trading Worth It?
AI stock trading can be effective, providing you use a proven system with mature technology. Using AI to initiate stock trades is complex and requires stable infrastructure. AI algorithms do not guarantee success, but a good system can provide a slight edge.
8. Is AI Trading Legal?
The use of AI in trading is perfectly legal. As detailed in Dark Pools: The Rise of the Machine Traders, investment banks, dark pools, and market makers have been using AI to profit from arbitrage and inequity in stock prices. Twenty years later, AI trading is now available to retail investors through established companies like Tickeron and Trade Ideas.
9. Is AI Trading Profitable?
Very few AI trading systems remain profitable over the long term, especially in changing market conditions. Profitable AI trading systems need a proven, transparent track record over at least 3-years and demonstrate good risk management practices.
10. Do Trading Bots Work?
Yes, Trading bots do work, but future performance is never guaranteed. An AI algorithm may work for some time, but the market dynamic, business cycle, and investor sentiment are always changing, so different AI trading strategies need to be adopted in specific situations.
11. Should I Use An Automated Trading Bot?
Using an automated trading Bot to execute your trades has inherent risk. The 2010 flash crash caused a one-day 9% crash of the S&P 500 and was widely blamed on high-frequency AI algorithms and their unpredictable behavior. If you use an automated trading Bot you need to ensure it has a proven track record and good risk management rules. For example, the Trade Ideas automated trading bot clearly defines the potential profit, loss, and risk associated with each trade, allowing you to select your level of exposure.
12. How Reliable are Trading Bots?
Trading Bots are only as reliable as the AI engine and algorithms that support them. The only indication of reliability is an audited track record of past performance. No one truly knows how reliably Trading Bots will perform in the future; we can only see past performance.
13. Are Trading Bots Safe?
Untested, unproven Trading Bots are not safe. There are significant risks with using complex trading bots if you do not thoroughly understand the logic behind the algorithms. A safe trading bot would have a proven performance history and provide transparency into the decision-making logic and risk controls.
14. What are the best free stock Bots?
Free stock Bots are generally not available because cutting-edge development, testing, and maintenance are expensive. The best Trading Bots like Trade Ideas require a monthly subscription.
15. Are trading Bots Legal?
Trading bots used to actively trade stocks, crypto, and other assets are 100% legal. 80% of equity trades in the US are executed by trading Bot and algorithms. The most common use of trading bots is in high-frequency trading to arbitrage asset prices. There are far fewer trading bots trying to beat the market, as it is so much more difficult.
16. Are Trading Bots Worth It?
If you are using trading bots to arbitrage asset prices, it is worth it. Citadel investments prove the value of trading Bots as they are one of the world’s largest, most profitable market makers. Retail investors cannot compete with the cost and infrastructure required to deploy arbitrage trading bots, but they can compete using trading bots that use strategies to predict individual trade swings, such as Trade Ideas.
17. How much money can a trading bot make?
Trading Bots do not make as much money as you might think. Any claims that trading bots can make you over 50% per year on your money should not be trusted. Seeking Alpha, Zacks, and Trade Ideas claim between 20% and 25% profit per year. Do not forget, Trading Bots can also lose money. The stock market return averages 8% per year; any trading Bot that exceeds this performance over time would be considered successful.
18. Is there a trading Bot that works?
From my research, two trading bots are proven to work. Tickeron’s Long ETF Bot has a 49% annualized return over 4 years, and the Trade Ideas Holly AI Bot claimed a 3-year return of 23.2% on a moderate risk setting.
Last Updated: ZoomBull, Edited
Source: Liberated Stock Trader | ZoomBull, Attributed