One trending technology in recent years is artificial intelligence (AI). Be it fintech apps, stock advisor companies, or chatbots, AI is everywhere. It is disrupting industries with every passing year.
When it comes to investing, AI is a game changer for the equity market. AI is finding applications both in helping traders and investors. In this article, we will focus on AI-based stock trading. So let us get started with understanding AI-powered trading.
What is AI trading?
Let us first understand AI trading. AI trading is about using tools like algorithms predictions, and machine learning to allow traders to better their trading. Unlike sci-fi movies, you don't need separate tech-heavy machines to use AI in trading. One of the biggest advantages is that you can execute your trade on ordinary networks and computers.
Most hedge funds have used traditional quantitative funds that use computer models to predict share price movement and execute a trade. However, now an increasing number of hedge funds are using AI-powered trading engines.
Reasons: Rise of AI-powered trading
Below are some reasons why AI-based stock trading has become super popular in recent years:
- Data: An AI system is as good as the quality of data fed into the system and the volume of data available for training. Today, companies have access to large amounts of trading data, social media and news data, and micro & macro-economic data. With the vast amount of data, efficient AI trading systems can be created.
- Advancement in technology: Data is crucial, but if you don't have the required technology to convert unstructured data to structured data, there will not be much progress. Today, we have technologies that can easily process data and create a system to traders' advantage.
Advantages: AI-powered trading
Below are some advantages of AI in trading:
- Ability to identify patterns: AI systems are rising in popularity because of their ability to identify patterns and make predictions in the market. Traditional traders do that same, but they have limited capability. Also, the chances of going wrong are higher. Machine learning algos can analyze vast data to identify trends and make predictions about future market movements. As a result, traders can make informed decisions and execute trades increasing efficiency and accuracy.
- Enhanced risk management: You may be investing or trading, and risk management is a crucial part of the process. AI trading systems can analyze market data and identify potential risks in real-time. It helps traders to make informed decisions about how to go about their trading. You not only have to focus on increasing profits but also on reducing losses. With an AI-backed risk management system, you can cut your losses.
- Emotional Bias is out of the equation: Who is the biggest enemy of traders? Their own emotions are their biggest enemies. AI-backed trading systems are free of human emotions, making decisions based solely on algorithms and data. It reduces the potential for emotional bias in a decision-making process which helps in taking more rational and profitable trading decisions.
Limitation of AI-powered trading
AI trading systems have grown in popularity but have some limitations and challenges. For example, the efficiency of an AI trading system depends on the quality of data used during trading. Therefore, before using an AI-powering trading app, you must see how the app has performed historically.
Conclusion
AI in trading is becoming popular with each passing year as not only individual traders are adopting it, but large financial institutions are using it to their advantage. As technology continues to grow, the role of AI in trading will become even more prominent in the future.
Have you used any AI-based trading apps? How was your experience?
