AI in trading

“Artificial intelligence is to trading what fire was to the cavemen.” This line very well depicts how important Artificial Intelligence is for trading. In other (less imaginative) words, artificial intelligence (AI) has changed the game in stock market. Till now it was the work of human traders to see the changes in stock prices and try and memorise them and then establish a pattern . But for humans it will take a hell lot of time and in that time opportunity might slip away. But the same task can be done with the help of AI with much greater speed .

Artificial Intelligence, which is based on a large number of data points, can assist you in making more objective judgments. AI is rapidly evolving and is being applied in a variety of fields. We have been using AI to imitate the human brain for a long time; for example, when we follow stock prices and try to recall them, we are developing memory, which produces patterns. AI can perform the same work more quickly and with more data points.

Classification models like Linear and logistic Regression, Random Forest, K-nearest Neighbours (KNN), Decision Trees, and other machine learning models are extensively utilised. Deep Learning is the greatest sort of machine learning model . Deep learning models are based on how our own brains function and are organised. Brains have a lot of neurons, and neurons are connected to one another — and so there are a lot of them in the brain! However, sometimes the quantity of training data required to produce a moderately decent DL model is so large that it is referred to as Big Data.

Big data is often defined as any data with a size more than or equal to 1 terabyte. You can create excellent AI systems by combining DL models with Big Data.

Now the question is what can AI do for you . If you trade in tiny timeframes, you may use AI to help you choose which stocks to trade and even allow the AI optimise your strategy, stop-loss, and position-sizing, among other things. AI algorithms can monitor and change the strategy and other factors in real-time to offer your trades the best chance of being profitable.

If you’re a long-term investor, AI can assist you in determining which type of long-term investment is best in the present market environment. For a long time, a value investor, like a growth or dividend investor, or any other long-term investment strategy, may not make money in the market. Some investment techniques do better than others depending on the economy, what market is concentrating on, and market emotion, but only for a short period, and AI can assist transition effortlessly to any style to optimise gains.

Algorithmic trading, which is used almost everywhere use AI which, makes transaction choices on behalf of people using complicated and advanced mathematical models. This model’s rules aim to find the best moment to trade with the least amount of impact on stock prices. AI algorithms work by sifting through data, looking for patterns, and teaching themselves how to predict future events. AI and machine learning make trading more accessible to a wider range of individuals by reducing reliance on human advisers by successfully duplicating the strategy and habits of human traders. “Many believe that the bulk of market data is not sufficient to enable them to make independent investment decisions.” Many investors assume that the majority of market information is insufficient to make an investment choice on their own. Retail investors are increasingly turning to AI-driven investing platforms, citing their cost-effectiveness, simplicity, and accessibility as reasons for doing so.

Traditional Trading vs Algorithmic trading

So let us first visualize how traditional trading looks like. Imagine a person sitting in front of screen with hell lot of graphs of just one company. He has to continuously see the rise and drops of prices of stock and take a note of all the previous curves and then calculate the best time to buy/sell stocks. Now it was scenario for just when that person is tracking only one company. Normally if you are a intelligent trader you will always diversify your portfolio. Now if you have diversified you have to keep track of a lot of companies and keep track of all their rise/drop of prices. Do you think it is possible for one person to keep track of. He has to hire some people for it. And moreover, He can only do that if stocks are his full time job. So only the person whose bread and butter is trading can actually invest in intraday trading. Also there is a huge chance of loss in markets as we all know. So there will be very few people who will choose trading as their full time business. If few people invests in market growth of country will be slow.

Now, let’s visualize trading with algorithmic trading. Suppose a person wants to invest in intraday trading . He purchased some software and entered the amount and companies he has to invest and wallah !! he is done. Now software or we can say AI will take care of everything. Ai will fetch data and work on it to determine best possible entry and exit time. He don’t have to sit at one place all day and check every drop or rise of market. Also AI can monitor hundred of shares like that so no one need to employ a lot of people just for trading. Thus with the help of AI even a common man can now invest in shares. This this the power of algorithmic trading and thus it is a game changer.

Advantages of AI in trading:

So now coming to advantages of AI ,as we have already discussed that AI enable even a common man can do real time trading. Real-time trading involves a lot of experience and knowledge to let you land on a stage where you start earning profit.

· Large amount of data is crunched and computed within seconds.

· Allow common people to become financial independent.

· Better Success rate

· Efficient transactions

Disadvantages of AI in trading

Now that we have discussed a lot of advantages , it looks like it is like pure gold. But as we all know we live in kali-yug and nothing can be absolute good or absolute bad in this age. So let’s discuss about where AI in trading will harm people. First of all, as number of people required is less for trading now thus a lot of jobs of data-analyst will be lost. AI will do works of us humans thus replacing us. Big data requires a lot of people to analyse it and now since big chunks of data is computed in seconds who will need people which are not efficient and also a burden to economy of company.

Secondly, market don’t always work according to previous data. There is something called emotion in market. Let’s take an example of covid that hit last year . Because of pandemic the market crashed considerable. Now no AI can predict a pandemic or the moving of market at that time. Thus it’s not a great idea to follow AI blindly. Also, it is costly to build AI systems as AI requires a lot of computation power.

Though AI has some disadvantages ,it’s advantages exceed far more so it overshadows it’s disadvantages. Today’s,70% of investment banking firms use AI. Technology and information have never been more accessible and democratised than they are now. Java, Python, R, and C++ are just a handful of the major languages used in AI. Many libraries, particularly in Python, such as Scikit-learn, Keras, PyTorch, and Tensorflow, offer a variety of basic off-the-shelf pre-built models enabling rapid and easy implementation.

When compared to bespoke or fine-tuned models, these pre-built models frequently provide comparable accuracy. With the aid of these libraries, anyone with a little knowledge and some hands-on experience may create decent models. So, what I’m trying to say is that opportunities are just getting started in this symphony of finance and AI, and that anybody may seize this chance and anticipate their p&l statements to turn greener with effort and hard work.