Imagine, in the near future we may see a crash in the stock market by someone or a group of people by using AI. In fact this is not the future, but can be a present scenario because of evolving technology of AI. You, me and a lot of other people may be the victims of this bad situation. But there is also good news of this, that we can also use AI in the stock market. The best way to create opportunity from technology is to learn it. Algorithmic trading using AI is also such a skill for the future. You can either make it a way of making more money and ahead of your community or losing your position in the stock market. In this article we will explore the journey of algorithmic trading using AI.
What is algorithmic trading using AI?
Algorithmic trading, which we can also call an automated trading system, is a method of processing some pre-programmed trading instructions for some defined variables to execute some orders for human beings. It is actually a helping technology for traders to make decisions for their trading purpose. Algorithmic trading leverages the computational resources and speed of computers relative to human traders. Last year almost over 90 percent of trading was performed by algorithmic trading rather than human trading due to its efficiency and better accuracy.
If you think of trading by people and which is performed for centuries,this is almost dying. Now it is time for electronic trading which is already upgraded to an AI(artificial intelligence) based trading system. It is our time to adopt this technology. This AI based trading system actually uses some machine learning algorithm and computes the variables much faster and accurately than human beings. So, it is now very easy to make decisions for human beings to analyze the financial market. In a word this AI based trading system just revolutionized the financial market.
AI in finance:
Suppose we have 20 years of data of a company in the financial market. And there are thousands of companies also. The amount of data is huge and it will be very difficult to analyze the data and make decisions for human beings. Thank God that now we have AI which is driven by some machine learning algorithm. AI can analyze these data within the shortest possible time. Now we can also see the graphical view and numerical data of some big data of financial markets. We can analyze the trend also. Big data analysis is possible within a shortest possible time due to AI.
So we can say that AI has a huge impact on the financial market and also an amazing future for upcoming years.
Benefits of trading using AI:
You may wonder why you should learn this technology? We will clear your doubts. There are several benefits of trading using Al and machine learning algorithms. Some of them are discussed below-
- Improved accuracy- AI is the best suited to more accurate results for big data analysis.
- Faster decision making- When we have a better visual representation of data of the financial market, we can take faster decisions to grab better opportunities.
- Reduced emotions- AI made data are based on mathematical analysis.So it is independent of emotions. And we know in order to take decision in financial sector we need logical explanation than emotional mental state.
- Backsetting and optimization- AI driven data are very much optimized because we can change the variable in the algorithm anytime we want.
Types of machine learning techniques in AI for trading:
Now you know the benefits of algorithmic trading using AI. But a simple question may arise in your mind about how this works. So let us discuss it shortly. There are several algorithms for AI which can be used in trading. Some of them are follows-
- Supervised learning- When a machine is taught by given example we can call it supervised learning. In trading, we have some previous data sets and the results. So we can give instructions to AI that previous data as examples to evaluate the data and show a desired output.
- Semi supervised learning- It is almost similar to supervised learning. The difference is that here some of the given data is from the previous example and some of the data is new data.
- Unsupervised learning – In this process the algorithm will identify the pattern itself. There is no pre-defined pattern in this technique. All are new data and new patterns. Here there will be no historical trading information.
- Reinforcement learning – It is actually a trial and error process. In reinforcement learning we define the rules, provide a set of actions,parameters and end values.
Data preparation for trading using AI:
From the above discussion, it is clear that we need a lot of data for trading using AI. But the question is how can we collect the data for it? The majority of the trading data can be collected from stock exchanges. So various stock exchanges can be the greatest source of information for collecting data for trading using AI. But sometimes there are unlisted data that cannot be found in stock exchanges. Those data can be collected from brokers and buyers. Another way to collect data is buying it. Some vendors and providers are here in the marketplace to sell trading related data. We can buy data from them and use it in our algorithm.
Trading data evaluation and monitoring :
By far what we discussed was easier to take action. But ultimately we have to evaluate and monitor the data to make financial decisions. So for this first we have to develop a machine learning algorithm to make the AI. Then we have to put the collected data to the AI so that it can analyze the data and make a visual representation of data. So the question is how to evaluate and what to evaluate? As analysts we have to evaluate market trends, charts, graphs, price of movements, high volume areas to invest, low volume areas where not to invest, trends of times and places etc. So a lot can be extracted, but for this we should have the knowledge of trading and have some intellectuals with common sense.
Limitations and Risks:
If you have read this article till now, we have some bad news for you. Read this carefully. Trading using AI is not always 100% accurate. The limitations and risks of trading using AI is as follows-
- As we can see that trading using AI mostly depends on the use of technology, a simple variable change or a fault in the system can change the entire scenario. This is not the end, it can result in huge loss of money and damage mental conditions.
- Sometimes the market changes in unknown manners. Then it becomes difficult for a machine or electronic device to predict the real scenario of future value of the financial market. It may also cause huge losses.
- Every trader is not an expert in AI technology or not used to AI technology. So, it is also a draw back of AI technology.
- Entire system development of trading using AI is very complicated, sophisticated, and very expensive. So, it is very difficult for small traders to make such a system. But it can be developed for organizations or traders have a lot money to invest.
- Sometimes the system may fail or there may be fault in the system. Then expert have to be hired and it will also be expensive.
- Finally it is just an algorithm. Human brain is much faster and better to trade or to do any other work than machine if we can properly use it.
The future of trading using AI :
In the upcoming years AI will take the human job in a faster way. Technology always makes a better and comfortable life for us. So, in the trading industry AI will also play a huge impact, if we can adapt this technology. Moreover, AI technology is evolving faster. New model and language for AI is being deployed. As a result, the output accuracy is becoming greater. So, in the near future we can expect a better and reliable AI technology driven financial market.
We are human beings. Our brain is the greatest asset for us. Technology only helps us to see a specific pattern or scenario. But the decision is always ours. Without knowledge in trading or the financial market, we can’t do well in the trading industry. When knowledge is incorporated with technology only then greater outcomes can be achieved. Lastly, there are some organizations or individuals that are using AI for trading purposes. If you are interested you may research it for either getting a job or investing in it. You may also make your own algorithm or AI with a group of technical people. Finally adopt and learn new technology and use it in a proper way to make a better future.