Artificial Intelligence for Trading


Artificial intelligence for trading

Have you seen how talented traders do calculations in their minds? Or have you seen in movies how they actively record their recent deals while keeping track of current data? Such traditional trading methods have lost their relevance and are gradually disappearing. Those who wanted to keep up with the times and continue to make a profit began to turn to technical specialists.

Programmers, together with mathematicians and analysts, have provided the market with a useful tool — trading bots that conduct operations using embedded algorithms and provided data. The popularity of algorithmic trading on exchanges resulted in the emergence of high-frequency trading.

Traders, brokers, and investment funds can no longer do without bot developers because people are not able to trade with small spreads at high speed and concentration. Some people create strategies, others write algorithms, and bots trade using them — this is how trading works in the 21st century. Or, more to the point, this is how it worked.

With increasing competition in the market and the development of the Big Data field, the capabilities of bots have become insufficient. In automated trading, they began to be replaced by machines that, with the same performance, can also think like a human — models of neural networks and artificial intelligence (AI).

The participation of artificial intelligence in modern trading

Professional traders are periodically forced to upgrade their practices as progress makes trading more difficult. In 2000–2015 they had to compete with trading bots and then learn how to tune them to equalise the forces. Since about 2015, traders and their bots have to compete with artificial intelligence.

Over the past five years, the number of AI trading systems has grown significantly. As they spread and influence the market, traders using legacy automation are suffering from the decline in income. Conversely, those who use artificial intelligence to trade on exchanges perform better than the market average.

Artificial intelligence abilities in trading on exchanges

Compared to bots that need to be constantly reconfigured, artificial intelligence can operate independently, without human intervention. It can come up with trading strategies, test and refine them. It can take into account market trends in order to improve with newly acquired knowledge. That is, AI can imitate the thinking of analysts.

Here are a few more AI powers that are being used to benefit traders, brokers, funds, and their clients:

  1. Collecting information from news, social networks, thematic websites for its application in fundamental analysis.
  2. Processing market data and stock market indices for their application in technical analysis.
  3. Advising on medium-term investments.
  4. Managing the asset portfolio, its diversification.
  5. Compiling a rating of analysts, checking their performance when choosing the best strategies for mirror trading.
  6. Building behavioural models during market turmoil.
  7. Identification of cases of collusion and manipulation in the market.

What the AI is not capable of is showing human emotions such as greed and fear and making irrational guesses. However, this is its advantage, not a disadvantage. In trading, AI performs better than algorithmic bots, not to mention superiority over humans.

Artificial Intelligence for Trading

How artificial intelligence creates trading strategies

Artificial intelligence is becoming a major component in developing trading strategies for hard-to-predict markets. It not only trades according to a written algorithm but constantly collects and processes huge amounts of data, analyses events and trends, and makes decisions itself.

Data collection

Today, specialists apply deep learning to AI to make it intelligently gather unstructured data from a variety of sources such as news and social media posts. Usually, incoming data looks like a chaotic structure. However, even in such a structure, it is characteristic that past events can influence present and future trends.

AI uses historical data to understand how the current market would react to past events so it can adjust its trading strategies. Although this does not immediately bring a beneficial result, in the long term, it allows AI to learn productivity in future market conditions.

Data organisation

The principle of operation of AI software solutions is not much different from the approach used by analysts. The next step after collecting the data is to organise it and divide it into specific groups. There are two datasets: a training set and a test set.

The training dataset is intended for training and tuning the algorithm before testing. After the algorithm is calibrated, it is activated using the test set.

Building a trading algorithm

The idea of the algorithm is to predict the price dynamics of an asset being traded by a trader or investment manager. There are many ways to build a predictive algorithm. However, most of them try to simplify the problem and then follow a two-class model based on signal and predictability factors.

The signal is intended to indicate that the price is expected to rise or fall. Predictability shows confidence in it. After the output is generated, the trader receives the desired signal.

Why artificial intelligence is better than an ordinary trader

Today, with the growth of artificial intelligence, the operations of traditional traders account for 10% of the total trading volume, while back in 2012, their operations in the United States accounted for 55%. At the same time, more than 2000 hedge funds (and there are about 11,000 hedge funds in total) use AI in the development of most trading strategies. This is a significant indicator of both exchange trading and investment activities.

Multitasking

Trained machines are capable of processing countless amounts of data in a matter of minutes. In the same manner, they can find and process historical data and repetitive patterns for smart trading that are often hidden, inaccessible, or not obvious to humans.

Traders are unable to process that much data or even detect it. For example, when it comes to high-frequency trading, some people use AI to decode over 250 million different data points from the New York Stock Exchange in just the first hour of trading.

Trade speed

Although AI is not a revolutionary technology, it adds a significant speed boost to trading operations. Today, every millisecond counts. If you are a broker or an investment fund manager, then AI will make your job easier: clients will not need to call and place orders because trading will be automated.

Sentiment analysis and prediction

By studying the headlines of articles, news, posts on social networks, blogs, and other thematic sources, AI can predict the movement of stock prices and the possible actions of other traders. It conducts sentiment analysis — the process of categorising the opinions (or sentiments) that people actively share on the Internet.

Self-training

AI is not perfect from the first days of work, but it is capable of improving its skills. It will learn from its own mistakes and constantly improve. For these aims, there are automated trading advisers, with the help of which AI works to improve performance, not only by fine-tuning the existing data but also by adding and analysing new ones.

Artificial intelligence transforms trading

Numerous traders and investors are confident that the future belongs to intelligent trading tools and robotic advisers. They are easy to use, operate transparently, and trade accurately.

Artificial intelligence has already begun to change the rules of trading. Take advantage of its benefits and modernise your brokerage firm or investment fund. It will help your clients to rationally invest and manage assets wisely.

If you want to use AI for trading on exchanges or managing investments, then Polygant is ready to develop the necessary solutions for you. To find out the cost of work and development timeframes, as well as to receive detailed information about the services, fill in a short application, and we will immediately contact you.

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