Described as the next frontier for global investments, algorithmic AI trading is revolutionising the finance sector at a rapid rate. Advanced programming methods and machine learning are being used to make decisions and transactions. But what are the benefits and how is AI impacting traditional buying and selling techniques? Let’s find out.
The evolution of investing
Not long ago, traders simply yelled across trade floors and threw order forms in the air. They conducted business in coffee shops and made private deals without any form of regulation or centralisation. While polished, well-organised exchanges like the London Stock Exchange and New York Stock Exchange revamped the industry in the 19th century, it was NASDAQ – founded in 1972 – that greatly pioneered the digital investment age, being held entirely on a network of computers with all trades being performed electronically.
These days, a glance at the Dow Jones or NASDAQ are taken for granted by investors looking for market moving knowledge at their fingertips. And with international brokers making it easy to invest in multiple instruments via the internet, it’s easy to see how the investment sphere has evolved – but it doesn’t stop there.
Investing in a digital age
One of the major developments for investors and the global investment sphere as a whole over the past few years has been algorithmic trading. This is a method of executing orders using automated, pre-programmed trading instructions that take into account a wide range of variables such as time, price and volume.
This type of trading has become particularly popular as computers can process data much quicker than humans and therefore trading becomes more efficient. Algorithmic trading can even be automated and run in real-time meaning traders are no longer required to sit and watch the markets for hours on end. Human mistakes are also eradicated and there’s less chance of an opportunity being missed due to untimely or overly slow trading moves.
What’s also really unique and useful about algorithmic trading is that rules – that will later be followed by advanced computer systems – can be back-tested to see if they were profitable in the past. If they were not, they’re unlikely to be again and therefore traders can hold onto their money rather than risking hard-earned cash on a fragile investment. Back-testing gives investors confidence as machines provide valuable insight.
The benefits of AI enhanced algorithmic trading
Algorithmic trading has many benefits, but what happens when you throw artificial intelligence (AI) into the mix? Well, this is where things to start get really juicy as AI essentially gives algorithmic traders extra tools to enhance their performance. Before we delve into the nitty-gritties of AI and find out how its enhancing algorithmic trading and the global investment sphere, let’s first suss out what AI actually is.
What is artificial intelligence?
You may have heard the term ‘artificial intelligence’ or ‘AI’ thrown around a lot recently. That’s not because it’s in the pipelines but because it’s being increasingly used in many sectors worldwide, including finance. Put simply, AI describes the intelligence displayed by machines and their ability to mimic human talents such as learning, problem solving, reasoning and planning on a much more efficient scale. Machine learning (ML) is a branch of AI where computer systems can learn, evolve and improve by accessing Big Data, without being explicitly programmed to do so. Incredible isn’t it.
Now, think about AI and ML when it comes to trading and executing investment decisions. If computer systems can access huge amounts of historic data and learn from them, can’t they guide our future investment strategies? The answer is yes.
AI and algorithmic trading are a powerful team
So, while algorithmic trading is all about automation and rapid execution speeds, AI can help guide the trading process further by recognising market movements and helping algorithms to bid accordingly. It’s a powerful team and one with many benefits including:
- Improved accuracy – AI has the ability to make sense of huge data sets that humans would take a long time to process. Systems of this kind can spot trends and patterns with impressive accuracy and execute decisions in the split of a second based on such knowledge. They can also make future predictions, helping to guide investment strategies. When it comes to automated algorithmic trading, AI essentially offers deeper insights based on real-life data and ML capabilities.
- The ability to react to market conditions. Whether you’re trading stocks or FX, the goal is to make an investment. Knowing when to buy and sell is crucial and that’s why AI is seriously revolutionising the sector as it can read and instantly react to market conditions. This means that if portfolio tweaks are needed to avoid a loss, they can be achieved without the need for time-consuming research by an investor which could ultimately lead to an investment failure.
- The removal of human emotions. Algorithmic based AI trading helps take the emotions out of investment decisions. Instead, Big Data is used to make trading moves that can’t be affected by spontaneous human decisions or emotions such as anger, jealousy or the fear of missing out (FOMO).
AI and fraudulent financial activity
When it comes to global investments, security is of paramount important. Fraud detection can be a difficult and time-consuming process costing companies a whole lot of money, but AI can help identify abnormalities, outliers or deviant cases requiring investigation. This helps fraudulent activities to be ironed out before they reach dangerous levels.
So, as you can see. The finance sector has evolved significantly over the years. Investment strategies and methods have taken many twists and turns with technological advancements leading to slicker processes. While algorithmic trading has soared in popularity, the AI advantage of intelligent systems ensures Big Data is used to its full potential, leading to more beneficial and informed investment decisions.