With Development of AI and Super Advanced Trading Algorithms, What is Your Strategy to Achieve Succ

A lot of market analysts these days are getting confused between algorithmic trading, use of artificial intelligence (AI) and machine learning. While the three are related to each other, they are conceptually different. Algorithmic trading already exists in India in a big way. Most large institutions and even proprietary desks use a variety of algorithms to get an inherent advantage in the market. Algorithms can be as simple as slice trades to complex arbitrage scalps or options mispricing algorithms. In fact, a big chunk of options trading by institutions is already happening through algorithms. Artificial intelligence (AI) is about writing more advanced algorithms that can think and act like humans. Humans have the ability to learn and modify strategy, which machines don’t. When that missing link is added to a computer algorithm, we have AI. But, can one really leverage AI to profit from stock trading in the markets?

How to use AI to enhance trading strategy?

Artificial intelligence (AI) and algorithmic trading are very closely related. While algorithms add speed and smartness to routine execution, it is AI that adds the human touch to to online trading strategy and makes the calibration of strategy more intelligent. Here are some known ways in which AI can actually enhance your performance in the market.

• AI can be used to effectively trade patterns in the market. For example, if you look at vast mountains of data over the past, there are some clear trends that emerge. However, these trends are so subtle and hidden that it is hard to tap them on the strength of manual execution. Such complex patterns can be spotted with the help of algorithms and converted into adaptable online trading strategy using artificial intelligence. The advantage that AI brings here is that it is an auto learning mechanism where the algorithm learns and makes changes to its strategy without any manual intervention. It also stores such experiences for future use. This is applicable in case of very high volume and low spread trades.
• A new segment of AI based trading that is now emerging among a lot of institutions is what is referred to as Evolutionary Trading. When you implement a quantitative model, it is essential to test the model base on historical data. What AI does is it makes changes to the trade strategy in real time and also simultaneously tests these premises against back data. In the process, such intelligence is also stored for future use. It is this evolutionary process of AI that makes it extremely valuable.
• AI is also being increasingly used by analysts and fund managers to do a multivariate analysis of a particular company. In the past, companies were evaluated based on fundamentals and on technical. Then of course, there were news flows. Now, there is an additional dimension to this entire exercise in the form of social media inputs. There is a lot of intelligence hidden in the Facebook profiles, Twitter Handles and LinkedIn data of companies and top management. Obviously, that is too complex to be done manually. Intelligent AI engines can be effectively leveraged in such situations to combine the intelligence from social media to the traditional fundamental and technical analysis.
• AI can be better used to evaluate intangibles like market sentiments and factor that into investment decisions. Quite often, news flows and market sentiments tend to be discrete objects when it comes to evaluating stocks trading. By including the AI aspect into your algorithmic trades, you can actually impute a value to sentiments and also factor that into your pricing model. It helps to fine tune the model and makes it more in sync with reality.
• Finally, there is an important application that AI has in trade execution too. Normally, success of trade execution not only depends on how good you are but also on how good the competing trades are. AI allows the online trading platform to learn from the competing strategies and make suitable changes to the current online trading strategy.

AI is still an emerging area in trading. It surely promises big things for the future!