Artificial Intelligence – A Game Changer for Traders?

What is a Trading AI?

When we talk about trading robots, what we really mean is a smart computer program that trades based on an algorithm that is pre-defined. As such, the software is able to make decisions based on the wealth of information available. Given that trading comes down to market trends and information anyway, the software can analyse hundreds of pieces of complex data to come to an educated response – possibly doing so better than their human counterpart due to the sheer amount of data involved. Adding machine learning to the already common model of trading robots would mean that the AI would update its algorithm based on previous results, gradually improving its accuracy in the process rather than sticking with pre-programmed algorithms. As a result, it would be able to better assist beginner traders or those who are less confident in making trades. The machine learning allows complex processes to be done more simply. The future of AI means that tried and tested formulas can be followed and benefits can be seen in the industry.   

Static vs Dynamic AI

A trading AI can either be static or dynamic, depending on how it is programmed. Static AI refers to the algorithm of the AI being unable to be customised once it is set. These AI would do well in a fixed set of market conditions. However, for changeable conditions, they would struggle to make the right decisions. On the other hand, Dynamic AI can be changed based on market conditions. The only downside is that coding is required, which could be a full-time job depending on which market you want to trade in and the market conditions at the time. While Dynamic AI would suit better for forex trading, static AI could also be beneficial, especially for currency trades that rarely fluctuate significantly. Setting a margin for error could save time with a Static AI trader that doesn’t need to be reprogrammed often.  

Benefits and Limitations of Forex Trading AI

One of the major criticisms of trading AI is that they lack the human “gut feeling”. While we can’t quantify exactly what we call the ability to assess a situation and feel whether what we’re doing is right, the AI doesn’t even possess the ability to have any gut feelings. Top traders cite instincts as a major advantage that has helped their trading success, so to remove the ability for gut feelings and instincts in trading could have a negative impact. Running AI also requires a dedicated server that some people may not have access to, which could cause their systems to run slower and therefore not work as well. There is also no guarantee that an AI will result in a successful trade, and there is no fallback for the trader if their AI loses them large sums. Forex Artilect CEO David Lopez Onate is a huge supporter of forex trading AI. In an experiment in 2016, he discovered that through back-testing an AI forex trader, he was able to make $100 million from a $10,000 investment in two years. He cites the ability to keep trading costs down with the computational power as a huge benefit of the AI forex traders and claims that while these results may be extrapolated, even a sliver of the results would be a coup for AI forex trading.  

Many people are already practising forex and other types of trading, and many others are contemplating taking the leap. If the barrier for entry can be removed with the introduction of artificial intelligence, then the market can be opened up to a bigger audience. Forex trading offers the highest level of liquidity compared to other financial markets. However, some cite the high leverage involved to be too much of a risk. If you’re able to mitigate against this risk or take it and still be liquid to continue, it shouldn’t be too much of a problem.