This article has been written by Barnali Ghosh pursuing a Diploma in Business English Communication for International Professionals and Remote Workers from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

Let us begin by talking a little bit about AI. What is it? It is a system on the computer that is capable of executing some very common tasks that can be linked to human cognitive functions. It could include some very common and small tasks like playing games, interpreting speech and recognising patterns. And it is executed by making headway with astronomic amounts of data and modelling patterns in their decision-making. However, it can never outwit any human because there are instances where human supervision is required in decision-making procedures. 

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AI in stock trading

When you hear algorithmic trading, that is all the same as AI trading. It is the modus operandi of trading in stock or financial markets by means of computer algorithms. It is the algorithms that analyse huge amounts of data related to the stock market to trade. Information concerning historical pricing & movements, economic indicators and market trends is analysed to identify the patterns in the market based on which decisions are taken. This is gaining importance solely for the reason that AI can analyse colossal amounts of data in a short period of time and precisely. It can do these things faster than a human can, thus saving precious time and probably making huge profits. 

The best AI tools in stock trading

Before moving any further, let us delve into the names of some of the best AI tools used in stock trading markets. Here is a comprehensive list of tools used currently:

  • Sigmoidal – It predicts capital market behaviour and identifies correlations between assets. It also uses machine learning. It is a tool that facilitates the analysis of potential investments and aids in the process of decision-making. 
  • Trade Ideas – Any investor – be he an amateur or a pro, or even a mid-level trader, can use this tool for benefits in the stock market. It provides Full Quote Windows to make out the price of stock via a window that reveals all the primary data contributing to a stock.
  • Signal Stack – It helps in placing an order in a brokerage account after an alert shows on any trading platform. It also automates orders and best serves institutional firms. It gathers signals from any source and makes them an actual trade. This is not for retail traders.
  • TrendSpider – It gives an automated technical analysis of the highest kind. It best suits traders who are active during the day as well as casual traders. 
  • Tickeron – Apart from making predictions, it also gives pricing data information and a confidence rating. This helps to assess the possibility of each forecast. 
  • Equbot – It appraises and sizes up current financial news from every corner of the world and even evaluates social media happenings. It is AI that learns how to make a judgement of the user’s preferences and choices, and this helps to avoid time wastage in taking the required action.
  • Kavout – It processes all information and then generates a prediction based on stock ranking and diverse assets based on this data. The tool also has a market analysis system that takes note of the best stocks that can be invested in. It also has a calendar system that tracks the progress of the stock.

How AI works in stock trading 

The potential of AI in stock trading is immense. It is reaching dizzying heights and soon its market value will be in the ballpark of $12 million by 2028. And all this credit goes to AI. Although one cannot say that human role in this area is insignificant, one cannot ignore the role of AI. Algorithmic trading will account for 60-73% of US equity trading, according to the reports of Wall Street. 

Stock trading with AI is carried out with many tools that use various methods. These tools, at their simplest, carry out tasks like interpreting the financial market, identifying the causes of price fluctuations, using data to calculate price changes, monitoring the kaleidoscopic market and last but not least, carrying out sales and trades. Apart from that, it carries out certain other tasks like data collection & preprocessing, feature extraction, model training, decision-making, execution and monitoring and adaptation.

Methods of AI trading

To carry out such huge and crucial tasks, the methods mentioned below are used: 

  • Quantitative Trading
  • Algorithmic Trading
  • High-Frequency Trading 
  • Automated Trading 
  • Machine Learning
  • Predictive Analysis
  • Natural Language Processing 
  • Deep Learning 

Transformation of the market with its benefits

When the benefits of AI in stock trading are the talk of the town, it is time we dealt with them a little bit more in-depth. It makes sense to say that AI is like a new kid on the block for the stock trading market. So here we rattle off with the advantages of AI in stock trading.

Accurate with less time and research

With data-driven strategies and automated research processes by way of AI-powered algorithms, investing becomes more effective and time-saving. All this happens while overseeing the transactions and providing clients with expert advice, which is the need of the hour. According to a recent study, it has been found out that productivity increases by 10%. It becomes all the more effective because of the guidance provided by historical financial figures. It reduces the margin error significantly because of the minimum human connivance.

Forecast patterns

Sentiment analysis – yes, that is right. It is an AI-powered stock trading method that is capable of gathering diverse linguistic and textual aspects to draw a parallel with the underlying patterns. It is also instrumental in governing characteristic market swings and fluctuations by diagnosing and verifying the various social media and news platforms.

Trimming costs

When AI is here, then where lies the need for hiring huge teams of experts to do what AI alone can achieve in just a matter of a few minutes? The only hiccup here is the cost of initialising the cost of its installation; otherwise, it cuts down on human labour and related costs. They do what a human cannot possibly do—work 24×7 without the need for a single break warranting non-stop monitoring. 

Reinforced handling of risks

AI has the ability to weigh the pros and cons of a trade motion. This effectively minimises the potential for errors and, therefore, risks. Other ways include continual monitoring, tracking performance, detecting potential mistakes & their rectifications, preventing wrong decisions by making rational ones, observing trends & pinpointing suspicious behaviour to tone down and diminish fraudulent activity.

Versatility and adaptability

Sweeping and expansive trading operations and data analysis are what make AI a desirable option. HFT uses super-powerful computer programmes that execute trades in a fraction of a few milliseconds. 

Consistency, transparency, accessibility, personalised financial recommendations and portfolio management are some of the added benefits of AI in stock trading. 

Challenges faced by AI in stock trading

Just as there is a bright side to AI in stock trading, there is also a darker side to it. Here we will read a little about the challenges faced by AI in the stock market. Since the creators of the AI are humans, it is understood that they also might make errors. In that case, we might as well say that it is not fully foolproof. It is prone to mistakes that might make it a risky affair to totally trust the AI while trading in stocks. 

There may be a compromise in data privacy, which may occur due to leakage of data like proprietary information and so on. Frauds also loom large as a threat. There may be incidents of market manipulation. Cybersecurity should be of utmost concern for all users of this new technology. There could be AI hallucinations, which lead to inaccurate results. With so many challenges, it is in the best interest of the users of this technology to consider all the pros and cons before leaping head-on into it. 

Future of AI in the stock market

The future of AI in the stock market indeed looks stunningly bright. It has been hailed as one of the best developments in recent years in this market. It generates insights that humans cannot see or may even not be able to comprehend so quickly. With so much efficiency at reduced benefits and numerous other advantages, it is indeed the future of stock trading.

Conclusion

As the years roll by, AI is set to make stock trading even more efficient and accurate. It is understood that this technology will further evolve and elevate its presence in the coming years, making work for humans easy and seamlessly effortless. 

References

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