Artificial Intelligence for Trading
Artificial Intelligence has had a far greater influence on our lives in more ways than we could ever envisage. AI encompasses demonstration of intelligence by machines that are not explicitly programmed, these machines tend to accomplish assignments similar to the recognition of speech, taking/suggested pinpointed decisions with significant precision, perceptual reasoning, etc.
Whereas, Machine Learning is a subgroup of AI that employs a vast amount of unstructured/structured data to predict precisely wherein the underlying algorithms upgrade with increasing experience.
For getting started with Artificial Intelligence and Machine Learning refer my blog — A Beginner’s Guide for Getting Started with Machine Learning
In the current blog, we shall dive deep into the various applications of AI in the domain of trading. Just a moment before going into the same, we shall see how trading is something different from what we know as investing. Trading is nothing more than mere selling/buying of stocks/currency pairs/commodities/bonds, traders utilize short-term strategies for maximizing the return rate in the time span of either days/weeks/months/quarters. In contrast to this, investing is maximizing the return rate gradually over an extended term.
After having known the elementary differences between trading and investing (which is the factor of time — precisely), let us move onto the core content of the blog — how AI is (or can be) leveraged for this purpose in this excessively competitive world of trading where traders are constantly under pressure betting their money and assets hoping to getter a better ROI.
Algorithmic Trading
AI Algorithms assist in optimized analysis and in the process of decision making by being good at manoeuvring data and forecasting a broader picture of the imminent marketplace with greater precision. On top of these predictions, traders can make and take timely decisions and act accordingly for maximizing returns.
It is also to be noted that the act of trading on numerous occasions is majorly governed by human emotions which serves to be nothing but an obstacle to what we are trying to achieve. These external factors are eliminated when it comes to AI computer algorithms which are commonplace in this domain.
Utilizing a pre-defined algorithm that functions on a pre-programmed set of guidelines in order to perform a trade is known to be Algorithmic Trading (also known by other names such as — Automated/Algo Trading). It has been in the industry ever since the 1980s, 1990s.
Here’s a curated list of a few algorithmic strategies in trading:
● Trade Execution Algorithms: These algorithms divide transactions into smaller transactions to reduce the influence on stock value. Percent of Value (PoV) and Time & Volume Weighted Average Price (TWAP, VWAP), are the three often utilized trade execution methods.
● Algorithms for Strategy Implementation: They trade relying on indicators derived from instantaneous marketplace analysis.
● Algorithms for Gaming/Stealth: Price momentum is caused by large transactions or other statistical tactics, which are leveraged by gaming or stealth algorithms.
● Arbitrage Opportunities: An instance of the current method is when the same commodity wound up trading at varying prices at two distinct marketplaces.
Because of its profitability, algorithmic trading drew the attention of traders when it was initially introduced to the market. However, as the level of competition increased, profitability plummeted. Traditional algorithms, developed by data scientists and programmers, are based on “if and then” principles and are incapable of learning from prior data.
Capital market organizations are now embracing AI in creating algorithms that do not solely rely on mere rule-based approaches. AI-powered computers automatically learn newer trading patterns without the need for extended manual intervention.
High-Frequency Trading
High-Frequency Trading (HFT) is an extremely complex algorithmic trading strategy that requires the execution of a huge order in a fraction of seconds. Humans are logically incapable of carrying out several commands in such a shorter span of time. Traders employ computer algorithms for automating the execution of orders since it takes a longer time in reading and in understanding the market trends and in placing the bids manually.
Every sector is embracing AI task automation. A lot of AI techniques and feature development approaches are made use of in high-frequency trading. A common scenario is the use of SVMs. The SVM model performs by drawing a line in the data to separate it — by maximizing the margin between classifying categories. It entails model training to recognize indicators that indicate an impending decrease/increase in current market pricing or bid.
For more on SVMs, refer my blog — A Beginner’s Introduction to SVM
Finding Patterns in Data
One of the most important challenges of AI algorithms is to use huge amounts of historic information to properly forecast the future state. Coincidentally, this AI challenge is highly correlated to the key structure of trading. Traders often uncover time and space-constrained localized trends and consider how to manipulate these trends for higher returns. These trends are always changing, and recognizing them takes a significant amount of work and time. AI algorithms aid in the discovery of similarities that may be paired with traders’ intuition and expertise to make more accurate judgments.
The disadvantage of utilizing AI to identify trends is that it is often used for similar purposes by most traders in the same marketplace/industry. In similar respects, there seems to be a lot of competitiveness in this sector, and the trends observed by a trader are sometimes available to other players in the market. As a result, even though a trader uses AI to detect signals, he/she might also need to respond quickly/change regularly by adapting/adopting to the immediate changes, since the signals fade quickly owing to the severe competition.
Sentiment Analysis
The share market is influenced by a variety of variables and uncertainties, particularly public sentiment. “Sentiment” is vital in stock market performance since market dynamics vary very swiftly with people’s beliefs and views. As a result, corporations are increasingly employing artificial intelligence to assess social views and anticipate asset values based upon these sentiments. Since individuals openly voice their opinions on social networking sites, it is a powerful tool for sentiment analysis.
Sentiment analysis is performed utilizing Natural Language Processing (NLP) to evaluate people’s sentiments and opinions about a company’s share price into three groups: neutral/positive/negative. NLP is a branch of ML that allows computer programs to understand and analyze natural speech such as words and sentences.
If individuals have a better outlook toward the firm, the share value is likely to rise. People’s pessimism, on the other hand, will lead the share value to fall. AI algorithms can filter online networking material such as tweets, postings, and responses from people who have stock exchange market investments. The data would then be utilized to teach an AI model to estimate stock values in various circumstances.
Assessing Risks, Predicting Real-World Information
Traders may be intrigued by anticipating stock prices over time. AI-powered computer algorithms can assist them in certifying the correctness of their forecasts. AI takes into consideration a variety of elements to determine the expected stock price. Alongside that, AI uses neural network models to recognize and evaluate the elements, termed as predictors, that influence the stock market volatility.
It is important to properly analyze risks in order to thrive in trading. AI algorithms can analyze massive amounts of data to detect risks and anticipate emerging opportunities. Traders may use this data to take proactive steps to curb the effects of risks.
Usage of AI-based Chatbots in Trading
AI is redefining the process of trading by bringing in a plethora of beneficial applications, such as chatbots. Chatbots converse with traders, providing them with historic financial figures as well as other important details. A trader, for example, can inquire about potential trading opportunities with these chatbots. These chatbots will further keep him/her updated on current pricing, but can also give knowledge on prospective offerings depending on the responses from other traders.
Chatbots serve traders with crucial data like direct quotes, financial records, FAQs, and price action alerts. Such sophisticated chatbots outperform humans whenever fueled by AI techniques. The best part concerning chatbots is their analysis and learning from previous interactions, allowing them to improve faster.
Automated Advisory with Robo Advisers
The use of Robo advisers is gaining growing traction in most businesses. In the trading department, consumers may choose to use Robo advisers to establish adaptive investment portfolios and conduct transactions in various markets across the globe. Since they are computerized algorithms in the leading edge, Robo advisers may facilitate the creation of adaptive strategies. The tools allow the investor/trader in making appropriate judgments in a variety of situations. The use of Robo advisers ensures that judgments are generated upon factual evidence.
They are supplied information like investment targets, timeframes, and risk tolerance rates and evaluate data from a wide variety of techniques, employing AI models, to provide the best recommendation to the consumers. Because they are totally mechanized, they also perform the appropriate measures, such as realigning the customer’s portfolio. Their ability to take action, paired with judgement call expertise, increases their productivity in the trade industry.
They are therefore important in delivering fiscal advising services since anybody wishing to engage in the trading area will want assistance. Consulting a financial planner is more expensive than using a Robo adviser. Financial planners’ consulting fees rise with increasing level of expertise. Robo advisers, in addition to being cost-efficient, reduce effort and time since they are purely automated. They superintend these portfolios in the shortest amount of time feasible, ensuring that deals are made as quickly as practicable.
Companies Using AI for Trading
Numerous prominent corporations are using the potential of AI to increase their revenues. Such instances are shown below:
● Morgan Stanley: It is a New York-based transnational financial services firm and investment bank that uses AI-powered Robo advisers to help investors manage their assets. Based upon instantaneous data, AI tools assist traders/investors in making more informed and educated choices.
● NumerAI: It is a San Francisco-based AI-powered investment company. It drives transparent open-source trading with AI algorithms.
● TinoIQ: It is a California-based company. It uses AI and ML techniques to scan equities across marketplaces. They discover trends in the equities, and the shares are featured on the company’s mobile application with buy/sell suggestions based on these trends.
● Kavout: It is an investment service company that blends AI, ML and Big Data Analytics to provide significant share market advice. Traders can utilize “K Scores”, which ranges from 1–9 reviewed from time to time, to make purchasing and selling recommendations.
● WealthFront: It is a financial adviser programme that is mechanized. It employs Artificial Intelligence to provide financial consulting to traders and investors at a minimal cost.
Thus far, we spoke about how AI can be used in trading. AI has reshaped the trading industry by streamlining tasks — by automating them, that were traditionally impossible to complete alone without the assistance of a person. Laggard adoption of these instruments poses a considerable risk to traders and investing firms. Large financial businesses are swiftly moving on to using AI algorithms for trading, providing a good paradigm for smaller enterprises.
We can uncover market trends, estimate portfolio risks, and study public perceptions by trading with AI algorithms. Furthermore, automated chatbot solutions and Robo advisers/consultants backed by AI algorithms have rendered the judgement call to be much quicker and straightforward. Robo advisers not only have assisted automation of monotonous work, but they also drastically decreased the expenses connected with financial consulting.
Since the corollary, businesses must modernize by adopting new emerging AI tools, as it is certain that the applicability of these innovations in trade will proliferate foreseeably.
