According to a PwC Report, the giants in the finance industry who are leveraging technology get to spend 20% more time on analysis over having to perform mechanical data gathering work. Everyone has to analyze a large chunk of data from corporates to individuals before placing a trading order. With the large quantum of events happening daily, it is impossible to consider every factor that might impact the price of a stock. Well, impossible for a human, not for a machine.
Enter Artificial Intelligence
Everyone is talking about AI and how it can transform the way we function for good. But, before we can get to understanding how AI is helping traders make more informed decisions, let’s understand what Artificial Intelligence is.
Clearly put, Artificial Intelligence is a branch of Computer Science that revolves around getting machines to perform complex tasks typically requiring human intelligence. Smart assistants like Alexa, self-driving vehicles, and OTT show recommendations are examples of AI.
How is Artificial Intelligence transforming the trading world?
The stock market is complex, unpredictable, and influenced by innumerable factors. With a human mind’s limited information processing capabilities, fundamental and technical analyses are prone to a high degree of human error, subjectivity, and bias. What may be the fair price for one may be overpriced for another.
That’s where artificial intelligence trading makes its way in, eliminating human emotions and helping take systematic and concrete positions.
What is Artificial Intelligence trading?
The capital market data is increasing with every event taking place. Artificial Intelligence algorithms are fast-paced and increase profit probabilities drastically.
Algo-trading, also called black-box trading, involves creating a computer program and giving it a set of instructions. These instructions contain a command of executing a trade whenever a set of predefined conditions are met. This brilliant mechanism increases the probability of staying in the green drastically and executing trades at speeds unimaginable by a human trader.
The computer monitors the price changes and market happenings on a real-time basis and is more efficient than humans. When the instructions stored in a code are met, the computer automatically places a trading order.
How does this benefit the trader?
Financial institutions around the world are adopting AI and machine learning rapidly. The impact of artificial intelligence is humungous, with electronic trades accounting for 45% of the revenues in cash equity trading. Let’s see how the big corporations are using AI to their maximum advantage.
1) Combining AI with data processing
There are thousands of charting techniques, trend identifiers, and patterns indicating complex trading events when discussing technical analysis. Those few who understand technical analysis in depth still find it very difficult to implement a couple of them together. These indicators are relatively complex, and implementing them requires dealing with a large quantum of data. Big corporations with the resources to afford top-notch data processing tools are combining AI and machine learning with their data processing abilities to identify trends in real-time. When the experts identify and locate complicated trading patterns, they either take the trades on behalf of their clients or advise them on the course of action.
Some companies use speech recognition technology to help traders search through their trading and financial notes in no time. Using this innovative artificial intelligence technology, traders can know about the trending stocks and market insights without looking for everything independently. Speech recognition saves the quality time of the traders. In the trading and investing world, timing is everything. If a lot of time is wasted searching for a past transaction or a piece of financial note during market hours, the trader could miss out on a great opportunity. Artificial Intelligence tools like speech recognition could be a game-changer in the trading world.
3) Using AI to generate stock rankings
Now, there are several stocks listed on all the exchanges. Someone looking to invest in a company could find manually looking for an ideal investment somewhat overwhelming. With the help of AI, based on a predefined set of programs and criteria, a stock ranking can be generated in real-time. A price forecasting model can be created to estimate the security’s future maintainable price to recommend the top picks.
4) Automating trading operations
As potential trades can be automated, so can be operations. An artificial intelligence trading algorithm can execute the client’s orders and provide a better user experience.
5) Asset allocation using best in class technology
Technology can also help in creating diverse portfolios. An intelligent asset allocation system can predict the future behaviour of every asset in the portfolio that can be used for taking reallocation decisions.
6) Identifying arbitrage opportunities
Arbitrage means buying a commodity at a low price in one market and selling it at a high price in another market. Arbitrage profit is also called risk-less profit. AI tech can help identify price differentials and place orders in real-time.
Why is Artificial Intelligence so practical?
When it comes to trading in the markets, one requires reasoning and problem-solving skills. Reasoning means deciding when to invest and at what price to enter – these decisions are taken based on data analysis. Problem-solving in the trading context typically means predicting future price movements to the best degree of accuracy. With the Web 1.0 and Web 2.0 revolution, multiple things were executed with the aid of computers. Computerization made trading boundaryless, enabling anywhere and anytime execution. With AI taking the trading world by storm, there can be an elimination of repetitive and mundane tasks.
With automation, large piles of data can be cleaned and can be put to use effectively. Artificial intelligence can help chalk out irrelevant data and focus on the data having the potential to be a game-changer for the trader.
Traders can now time their trades accurately and avoid pricing delays. With the help of this technology, stock market enthusiasts can track multiple instruments and stocks simultaneously. There is an elimination of the risk of human error and the impact of emotions on trading positions. Only a matter of time that artificial intelligence trading becomes the norm.