What is AI Trading?
The term ‘AI Trading’ is somewhat of a broad one, not least because it can cover multiple aspects of automated trading. In its most basic form, AI trading typically refers to the buying and selling of assets without any human interaction. Instead, the underlying software will trade on your behalf – based on the conditions it has been programmed to follow.
For those unaware, the overarching concept of AI is that it has the capacity to analyze millions of potential scenarios in a split second. It does so by evaluating large chunks of historical data, and then it makes a decision based on the information it has available to it.
Although large financial institutions have access to some of the most advanced AI trading robots, they keep the underlying software highly guarded at all times. This prevents their ‘Secret Sauce’ from getting into the wrong hands. As such, retail traders have little access to the same level of AI trading algorithms as their institutional counterparts.
With that being said, there are a number of online platforms that allow you to trade in an automated manner. While not as advanced as the AI bots held by financial institutions, these do at the very least allow you to trade automatically – with virtually no requirement to buy and sell assets on a manual basis.
What are the Pros and Cons of AI Trading?
The Pros
- AI has the capacity to outperform the human brain
- No reliance on human emotion or gut-feeling
- Trade 24/7 – AI never encounters fatigue
- Capacity to trade multiple markets simultaneously
- Trade full-time in an autonomous manner
The Cons
- AI trading software is only as good as the underlying algorithm
- An element of manual activity required to set-up your trading parameters
How Does AI Trading Work?
So now that you have an overview of what AI trading actually is, let’s explore how the phenomenon works. In a nutshell, AI trading is centered on a pre-defined algorithm that has the capacity to place trades in an autonomous manner – with decisions based on historical data. As we briefly noted in the section above, financial institutions have some of the most advanced AI trading bots in the industry and thus – consistently outperform the markets.
However, in the retail trading space, you won’t have access to a robot as competent as what the institutional arena possesses. Instead, you’ll be purchasing a software-based trading algorithm that somebody else has designed. The underlying software will be designed on a ‘what-if’ basis, meaning that the technology will perform trades when certain conditions are met.
What are the Benefits of AI Trading?
So now that you have a firm grasp of what AI trading is and how the underlying software might operate in practice, let’s look at some of the overriding examples that AI trading presents.
Limitless Data Analysis
One of the most prominent benefits of using an AI trading robot is its ability to perform an unlimited amount of data research. If you’re a seasoned trader, you’ll know first-hand just how important technical analysis is in the case of online trading. Without it, you would not be armed with the required tools to place successful trades on a consistent basis.
For example, let’s say that you are a keen commodities trader. This can include anything from gold, silver, platinum, oil, natural gas, wheat, and much, much more. In reality, it would be virtually impossible to spend the necessary time analyzing historical data on all of the aforementioned commodities. On the contrary, experienced traders will typically niche down to a single asset.
On the one hand, this is beneficial as it allows you to gain expertise in a particular asset class, rather than attempting to be a ‘Jack of All Trades’. However, this also means you are likely to miss out on heaps of potential trading opportunities.
With that being said, a well-programmed AI software program has the capacity to perform advanced technical research on as many asset classes as you wish. As such, the bot does all of the hard work for you, subsequently allowing you to take over the reins once you have the necessary data findings in front of you!
Never Stop Trading
Whether you’re a newbie trader or a seasoned investor with years of experience under your belt – there is only so much time that you can devote to your trading endeavors. Not only does this include the data collection stage, but the actual process of placing trades, too. Those that attempt to burn the engine will ultimately find that trades are being placed in an irrational manner.
This is no different from air traffic controllers that are required to have a break after every hour of deployment, not least because the role requires extreme mental and physical dedication. With that being said, utilizing an AI trading program will allow you to trade 24 hours per day, 7 days per week. Crucially, it can do so without encountering the very real threats of fatigue and irrationality.
Trade Any Marketplace
In a similar nature to trading fatigue, you will only have the capacity to trade a certain number of marketplaces at any given time. For example, you won’t be able to trade both the Tokyo Stock Exchange and the NASDAQ, not least because of a 14 hour time difference.
This is also the case for trading the London Stock Exchange and the Australian Securities Exchange. As such, you’ll need to trade marketplaces that mirror your local timezone.
However, by utilizing the capabilities of an AI trading robot, you can access as many markets as you wish – 24 hours per day, 7 days per week!
An End to Emotional Trading
One of the main reasons that close to 75% of all online traders lose money in the long-run is because individuals cannot handle the emotional effects of ups and downs. In other words, when a well-thought-out trade goes in the wrong direction, newbie traders struggle to accept that this is just part and parcel of trading. In response, you will often find inexperienced traders place irrational trades with the view of “winning back what they lost”. This ultimately results in a downward spiral that sees the trader lose their entire bankroll.
Once again, AI trading robots are not hindered by the emotional rollercoaster of the financial markets, not least because the underlying software is based on pre-defined conditions. The AI software will only place buy and sell orders based on these conditions, so it has no capacity to act outside of these parameters. As such, by utilizing an AI trading robot you can alleviate one of the biggest threats to your long-term bankroll – emotions!
Perfect for Beginners and Advanced Traders
AI trading bots are suitable for both newbie traders and seasoned investors. Regarding the former, the underlying software allows you to access the financial markets without needing any prior experience. Instead, you will authorize your AI trading bot to buy and sell assets in an autonomous manner.
When it comes to seasoned investors, AI trading programs allow you to take your online trading endeavors to the next level. You’ll be able to analyze a significantly larger historical data set, trade as many hours as you see fit, and access an unlimited number of marketplaces.
What are the Risks of AI Trading?
While the benefits that we have presented in the section above makes robots an attractive prospect, you also need to consider some of the risks. After all, if AI trading was that easy, wouldn’t we all be doing it to guarantee indefinite profits? Unfortunately, AI trading is not a 100% fool-proof phenomenon, so be sure to review the following risks.
Only as Good as the Underlying Software
As we have noted throughout our guide thus far, robots are only as good as the underlying software. Don’t forget, somebody has to manually design, build, and train the software to perform in the open marketplace.
As such, if the AI trading bot has not been designed effectively, it’s likely that the software will lose you money.
Shady AI Trading Providers
If you Google the term ‘Best AI Trading Platform’s”, you’ll be presented with thousands of providers that promise you guaranteed profits. In fact, these AI providers will make hyperbole claims that are beyond the realms of reality. As such, you need to tread extremely carefully before parting with your money.
Crucially, you need to ask yourself why the AI trading provider would share their ‘Secret Sauce’ to the general public if the underlying software was so profitable?
Markets can Change at any Given Time
If you are fortunate enough to purchase a successful AI trading bot that has been making you consistent profits for months on-end, there is no guarantee that this will always be the case. On the contrary, the make-up of the financial markets can change at any given time.
This is why you are required to adapt and amend your AI trading robot on a consistent basis to ensure its strategy is still effective. In this sense, AI trading is not 100% autonomous, as you still need to dedicate some time to ongoing maintenance.