What is AI in trading actually about?

Today an article for beginners on the topic of AI in trading. We will outline the topic simply and briefly.

New City Trader
3 min readJul 6, 2023

What is AI in trading?

AI is the big words now, it seems to be some-something-awesome-but-unknown-that-can-do-everything and like SkyNET in Terminator seeks to annihilate mankind… Well, no. A little short of that here 🙂

In the simplest deficit it is a computer program. A program that can accurately analyze huge amounts of different data (so-called big data), separately or in combination with others, and extract solutions from them on cue (or almost on cue).

The more qualitative data it has, the better solutions it can offer. This is possible because we simultaneously have very powerful computers and huge digital databases on a variety of topics.

AI-based systems are used by large players (e.g. funds) because they can afford it and it pays off for them. What is available for retail trading is just a tiny seed of possibilities. Many times you may come across “AI” in the name or description, while actually having little to do with AI.

The terms you may encounter are AI, AI, artificial intelligence, machine learning, deep learning, NLP, algorithmic trading, Predictive Trading, High-Frequency Trading (HFT), etc. For retail trading (in the comfort of your home), you don’t need to know exactly what it is. For simplicity, we will continue to use the term AI. At the same time, when we write “system” we mean a whole set of solutions and tools, not a trading system.

Why does it pay to invest millions of $ in trading AI systems?

Using AI in trading allows you to operate more efficiently — analyses are faster (on cue!) and can deal with huge amounts of data (something that was not possible at all until recently), and can be more accurate. Decisions made are based on specifics and become much more accurate. Some decisions are made “automatically” by AI, so the speed of trading increases as well.

Another plus is the reduction of risk. It is one thing that decisions are more accurate, and another that AI systems analyze risk in real time, so the trader can react immediately. And in more elaborate options — it is the system itself that makes and implements trading decisions.

Here we touch on another advantage of AI in trading: risk reduction directly related to human psychology. You can significantly (and sometimes completely) eliminate the problem of emotions and mental blocks. AI-based trading systems operate independently of human emotions, making decisions solely on the basis of data and algorithms. Imagine that all the analysis you do in trading “does itself”. All that is left for you is to click YES or NO — we do something or we don’t. This is something that funds have at their disposal. And it is them you have on the other side of the market.

So will traders become redundant? Not yet. The immediate future is hybrid systems (more on that in New City Trader here).

What data do AI systems use in trading?

All of them, they include market information, economic indicators, news and even social media data and… satellite data (this is an example of alternative data, more on that in New City Trader here). It combines historical and actual data to identify patterns, forecast and execute trades.

The quality of the analysis depends on the quality of the algorithms and the quality of the data you have. The better, the more powerful the tool at our disposal.

Too beautiful to be possible?

Sure, there are limitations. Interestingly — the same as always: hardware, data quality and the right specialists. On low-performance hardware, the program will not work effectively. Poor data will yield low-quality analysis. Lack of specialists will not allow at least the design of algorithms. Itd.

The future of AI in trading

In the next few years, those who can afford will develop more technologies. At the same time, more and more solutions will begin to appear in the retail market (e.g. in a subscription model or as tools provided by brokers, robots and platform automations). Undoubtedly, new regulations related to the use of AI in trading will begin to appear.

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