Artificial Intelligence (AI) is the science of making intelligent machines. This technology works to create programs which can not only calculate and solve complex problems but also learn from experience, research, reason and adapt to new situations and trends.
These learning features make AI a perfect tool to be used in stock trading. Whether you’re looking to trade oil online or invest elsewhere in the stock market, AI can be used to automate and analyse huge amounts of data and present you with forecasts and prices to help make stock trading significantly easier. Bots can also be used to execute trades at the optimum times through their ability to carry out multiple trades every single second.
But how exactly is AI used in this process? The main ways are through pattern formation, predictive trading and an increased trading speed.
- Pattern formation is where AI can analyse huge numbers of data points each second to identify trading patterns which will be profitable for traders.
- Predictive trading (sentiment-based) takes an analysis of social media interactions, news headlines and other internet platforms to help predict the movements of other traders and the likely direction of stocks.
- AI’s fast-paced technology allows an increase in trading speed with trades able to take place every millisecond.
Two Types of AI
The two main types of AI are rules-based systems and machine learning. Rules-based systems are the simpler of the two, which consist of only sets of facts or sets of rules. Machine learning, however, is an improvement on the rules-based system in which the system is provided with information concerning the outcomes of each data point but not the decision-making process.
This allows the system to make more accurate decisions than a rules-based system could. There can be as many input variables or features as required, and machine learning operates on the basis of previous outcomes and predicts the most likely future outcomes.
Machine learning may fall short if it is not provided with all the relevant information to any one decision, but to get around this machine learning can make use of a ‘decision tree’ method similar to that seen in a rules-based system. This can help AI get around any uncertainties or missing information to still predict an accurate response.
How do Artificial Intelligence and Machine Learning impact trading?
When it comes to trading, AI and Machine Learning have the capabilities to solve some of the biggest problems in trading such as forecasting, optimisation and analysis. Here are some of the main ways that AI and ML have impacted the trading industry:
- Identifying and analysing factors of stock prices
AI and ML make use of neural networks combined with a variety of methods for learning, identifying and analysing the factors that influence stock prices. These factors can be used to predict future stock prices.
- Fact-based decisions
The automation of AI allows it to make fact-based decisions without external factors such as fear or greed. This allows trading to become more profitable and less risky.
- Simulated Risk Scenarios
Being able to predict the risks associated with trading to better forecast stock prices. This allows traders to maximise gains and simulate risk scenarios, allowing the trading industry to become even more profitable.
What are the implementations of AI and ML in stock trading?
The new technology in Artificial Intelligence and Machine Learning has played a vital role in the improvement of the trading industry, allowing trading to become faster, simpler and more profitable.
Machine Learning makes use of historical data to come to a decision. In order to predict stock prices (also known as target variables), Machine Learning utilises historical data (or predictor variables). This allows the Machine Learning algorithm to apply the predictor variables to forecast target variables.
- Speed up the search for effective algorithmic trading strategies
Machine Learning is also able to be used in a way which can speed up the search for effective algorithmic trading strategies. Due to its automated approach, machine learning is much more efficient than using a manual process. The algorithmic trading strategies can help traders not only simulate risks but optimise their profits. Machine learning can make use of algorithmic optimisation, linear regressions, neural networks and deep learning (to name a few) to support users in any task through implementing automation.
- Increase the number of markets to monitor
Machine Learning can be particularly useful to traders by increasing the number of markets that are able to be monitored and responded to. The more markets that are available to a trader, the higher the chances of a profitable trade. This means that Machine Learning is a great way of increasing your chances of success in the trading field.
Overall, the impact of Artificial Intelligence and Machine Learning on stock trading is positive, with markets being expanded to greater identify and predict risks as well as increase the profitability of the industry. AI allows for significantly faster and more accurate predictions and trades and can automate and carry out processes much faster than their human equivalents.