AI in trading: advantages and challenges

By: Editors & ChatGPT

New City Trader
6 min readJun 26, 2023

We asked ChatGPT to tell us about the use of AI in trading so that beginner and intermediate retail traders can understand it. Chat knows what he’s talking about! We invite you to join us.

Trading in financial markets such as forex, the stock market and other exchanges can be extremely exciting, but also challenging.

Individual traders, also known as retail traders, often look for ways to increase their chances of success and minimize risk. In recent years, artificial intelligence (AI) has gained popularity as an investment decision support tool. Automating trading using AI can be a valuable tool for both beginner and intermediate traders. In this article, we will look at the advantages and challenges of using AI in trading.

The advantages of automating trading using AI are numerous. The first is the ability to analyze huge amounts of data in a very short period of time. AI can process and analyze historical data, technical indicators, financial news and other information from the market, which is impossible for a human to do in such a short time. This allows traders to receive trading signals and react to market changes in real time.

Another advantage is the ability to eliminate emotions from the decision-making process. Traders often fall prey to emotions such as fear and greed, which can lead to irrational investment decisions. AI operates on the basis of logical and objective algorithms that are not susceptible to emotions. This allows traders to avoid impulsive reactions and make decisions based on facts and data.

Another advantage is the ability to continuously monitor markets and execute multiple orders simultaneously. The AI can be programmed to analyze markets 24 hours a day, 7 days a week, which is impossible for a human. This allows traders to take advantage of every trading opportunity and minimize the risk of losing potential profits.

However, automating trading using AI is not without its challenges. One of the main challenges is programming effective trading strategies.

A well-designed trading strategy is crucial to the success of trading automation. It requires an in-depth understanding of financial markets, technical analysis and the use of appropriate indicators. In addition, the strategy must be constantly adapted to changing market conditions, which can be difficult.

Another challenge is the need to constantly monitor and update the system. Although AI is capable of analyzing markets and making decisions on its own, human supervision is still necessary. Traders need to constantly monitor the system’s performance, check the results and make the necessary changes when market conditions change.

Finally, there is the risk of over-optimizing trading strategies. Traders can spend a lot of time optimizing the parameters of their system, which can lead to over-fitting to historical data. If a strategy is over-fitted to historical data, it may be less effective in real market conditions.

In conclusion, trading automation using artificial intelligence offers many advantages for beginner and intermediate traders. It can help analyze massive amounts of data, eliminate emotions from the decision-making process, constantly monitor markets and execute multiple orders simultaneously. However, it is important to keep in mind the challenges of programming effective strategies, monitoring the system and the risk of over-optimization.

Automated trading using AI can be a valuable tool, but it requires proper preparation and supervision on the part of the trader. Always keep in mind the need for proper understanding of the markets and systematic monitoring of system performance.

Practical examples of applications of trading automation using artificial intelligence

  1. Systems based on machine learning algorithms: In this case, artificial intelligence is used to analyze historical data and identify patterns based on which trading decisions are made. For example, the system can learn to recognize specific price formations or technical signals and take appropriate actions, such as buying or selling a particular stock.
  2. Sentiment analysis-based trading: Artificial intelligence can be used to analyze sentiment in financial markets by analyzing news, comments on social networks, newspaper articles, etc. Based on this analysis, the system can identify investor sentiment and make trading decisions.
  3. Trading based on fundamental analysis: Artificial intelligence can help with fundamental analysis, that is, evaluating the value of investments based on fundamental factors such as financial performance, macroeconomic indicators, industry trends, etc. The system can automatically analyze huge amounts of data and generate recommendations to buy or sell stocks.
  4. Trading robots (trading bots): Artificial intelligence can be used to create sophisticated trading robots that autonomously analyze markets, make trading decisions and execute orders based on pre-programmed strategies. Trading robots can operate 24/7 and react to changing market conditions in real time.
  5. Portfolio optimization: Artificial intelligence can help optimize an investment portfolio by analyzing different combinations of assets and allocating capital in a way that maximizes expected returns at a given level of risk. The system can take into account factors such as correlations between assets, market conditions and investor preferences.
  6. Prediction of price movements: Artificial intelligence can be used to predict price movements based on analysis of historical market data. The system can learn to recognize patterns and trends in the markets, which can help make decisions about buying or selling assets at the right time.

These examples show the variety of applications of trading automation using artificial intelligence. In practice, traders can tailor these systems to their individual preferences and investment strategies to achieve better trading results.

How investment funds are using artificial intelligence-based solutions in trading

  1. Hedge funds: hedge funds often use advanced algorithms based on artificial intelligence to make investment decisions. They may use various strategies such as statistical arbitrage, high-frequency trading, sentiment analysis and more. Automated trading allows them to react quickly to changing market conditions and take advantage of short-term opportunites.
  2. Index funds: Index funds that track market indicators can also use artificial intelligence in the trading process. Automated trading allows them to efficiently and accurately replicate the composition of an index and perform operations based on pre-programmed trading rules.
  3. Funds managed by neural networks: Some mutual funds use advanced artificial intelligence techniques, such as neural networks, to make investment decisions. Neural networks can analyze large amounts of financial data and learn the relationships between them, which helps generate trading signals.
  4. Quantum funds: Quantum funds use advanced mathematical and statistical models to make investment decisions. Artificial intelligence often plays a key role in these models, enabling them to quickly analyze data and identify patterns in financial markets.

It is worth noting that not all mutual funds use trading automation using artificial intelligence. The use of these technologies depends on a fund’s strategy and preferences. However, more and more funds are implementing artificial intelligence-based solutions to increase their competitiveness and improve their investment performance.

What is the advantage of such funds over individual traders?

Investment funds using AI-based solutions may have several advantages over individual traders. Here are some key advantages:

  1. Access to advanced tools and technology: Mutual funds typically have access to advanced tools and technologies that can cost a lot for individual traders. They have the ability to use professional trading systems, advanced analytical platforms and trading automation tools. This gives them an advantage in analyzing markets, making investment decisions and executing trades.
  2. Scale and access to capital: Mutual funds often have more capital than individual traders. They have the ability to assemble larger investment portfolios and make more diversified investments. The scale of funds also allows them to enjoy better trading conditions, such as lower trading commissions and access to markets that may be limited for individual traders.
  3. Team of experts and expertise: Mutual funds typically have a team of financial experts, analysts and programmers who have expertise in artificial intelligence and trading. This allows them to better analyze markets, develop advanced investment strategies and continuously optimize their systems. Individual traders often do not have such access to human resources and expertise.
  4. Emotional discipline: Artificial intelligence in mutual funds eliminates the emotional factor from the trading decision-making process. Individual traders are often prone to emotions such as fear, greed or panic, which can lead to irrational investment decisions. Artificial intelligence-based systems operate on the basis of logical and objective algorithms, allowing for more disciplined decision-making.

However, it is important to note that not all mutual funds outperform individual traders. As a result, some individual traders with experience and well-developed investment strategies can still succeed in the financial markets. There are many factors that influence investment success, such as knowledge, experience, strategy, discipline and the ability to adapt to changing market conditions.

In the last issue of New City Trader there was a supplement with a very extensive interview with Chat on trading. The result of the interview is quite amazing! Recommended. Subscribe here:



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