The Rise Of Artificial Intelligence In Stock Trading

Rise of AI

Evolution followed by revolution: We have seen these two take place simultaneously many times in history. And it is also a fact that we are in a stage of evolution since the introduction of artificial intelligence. As history repeats itself, artificial intelligence has revolutionised how we perceive and operate in the world.

From using artificial intelligence to write to using AI to trade in stock markets, technology has sneaked into our lives quickly. With over 70% of trades in the US being excited by AI, using artificial intelligence in the field of stock markets has proven to be an absolute game-changer for investors & traders.

For the unversed, artificial intelligence in stock trading means using new computer technologies to simulate human intelligence and enable them to perform trades in the market. With the help of Artificial intelligence, trading can be made easy by using it to enhance market analysis, optimise trading strategies, and improve decision-making processes.

There are various types of artificial intelligence technologies that can be used for stock trading. Some of them are:

1. Machine Learning in Trading: This technology understands and analyses historical stock market data and helps predict the stock market trend.
2. Natural Language Processing (NLP): NLP is created to go through all the relevant financial news, company reports, and social media sentiments and extract relevant data that can be helpful for the user in the stock market.
3. Neural Networks: Neural networks, which were created similarly to humans by artificial intelligence neural connections, are helpful in identifying patterns, analysing trends, and assessing risks in the market.
4. Deep Learning: Deep learning algorithms are utilised for tasks like sentiment analysis and automated trading strategies.

Why Should We Use Artificial Intelligence In Stock Trading?

While popular companies like Citadel are using artificial intelligence in their trading, it is time we, as common individuals, use the power of artificial intelligence.

Using artificial intelligence in stock trading comes with strong benefits.

Firstly, artificial intelligence helps execute lightning-fast trades. With the stock market environment being highly volatile and stock prices going up and down in seconds, using artificial intelligence for the stock market seems like a sensible choice. Artificial intelligence can help traders react quickly to market changes, execute trades in milliseconds, and capitalise on time-sensitive opportunities.

Moreover, artificial intelligence can reduce human errors and remove emotional mistakes even an experienced trader might make in their trading journey. The data-driven decisions made by artificial intelligence are unaffected by human emotions like greed, fear, etc.,

Artificial intelligence can also help traders formulate efficient strategies for trading by taking into account historical data. This work, which could take hours, can be done in minutes with the help of technology.

As engineer  W. Edwards Deming said, “In God we trust. All others must bring data."

We might think that AI is new, but it’s not true. Multiple investment companies used AI in stock markets as early as 2017.

Renaissance Technologies, an investment management firm, implemented AI in stock trading.  Renaissance’s Medallion Fund - a hedge fund that uses advanced AI algorithms and machine learning techniques to analyse vast amounts of financial data and execute high-frequency trades. Over the years, Medallion has consistently delivered outstanding returns of 71.8% annually from 1994 through mid-2014, significantly outperforming traditional investment strategies.

Why Do Some Traders Do Not Like AI In Stock Trading?

Artificial intelligence in the stock market has various benefits. But still, there is a vast majority of people who resist using Artificial intelligence in the stock market and are of the view that “Artificial intelligence can never replace humans”. The scepticism kept by these people is not without proper reasons.

Trust is the basic underlying factor during trading. But how far can we trust Artificial intelligence to make decisions for us? Although Artificial intelligence can analyse data and predict patterns, the reactivity of Artificial intelligence to unforeseen circumstances can never be compared to humans. Humans can quickly understand any new trend in market conditions and react better than any Artificial intelligence technology. And, of course, the experience that we humans have can never be taught to Artificial intelligence.

Furthermore, there is a fear of job displacement. The rise of artificial intelligence in trading has sparked concerns about job displacement. Traders worry that artificial intelligence technologies could render their skills and expertise obsolete, leading to job losses. This fear of automation replacing human traders can contribute to resistance to artificial intelligence adoption.

Most artificial intelligence algorithms are complex and require a level of computing knowledge to understand and execute them. Traders find this challenging process a waste of time and rely on their own decisions instead. There is also the problem of lack of transparency which causes traders to not opt for artificial intelligence in stock trading.

To Sum It Up

There is no doubt that artificial intelligence is the future of the world. The global artificial intelligence market was valued at USD 136.55 billion in 2022, and it is projected to expand at a compound annual growth rate (CAGR) of 37.3% from 2023 to 2030. The artificial intelligence market share is on the rise and will definitely have a huge impact on the stock markets.

Hence, as an investor/trader, you must keep track of all the recent developments in Artificial intelligence in the stock market. Turning a blind eye to scientific advancements can cost you a fortune, especially if you are a full-time trader and investor.

With the rise in AI technology, there is also a rise in many ethical considerations. Issues such as algorithmic biases, data privacy, market manipulation, and accountability require careful attention. So regulators of AI should make sure to enforce proper rules, regulations, and policies in place to protect the rights of traders. This includes monitoring AI systems, ensuring transparency in decision-making, and addressing potential risks associated with AI-driven trading strategies.

In a nutshell, there is no avoiding AI. So instead of making it a foe, why not use it to our advantage?

Summary

• Artificial intelligence (AI) has revolutionised stock trading by using advanced algorithms to analyse data and execute trades swiftly and efficiently.
• AI offers lightning-fast trade execution, reduces human errors, and eliminates emotional biases, enhancing decision-making processes.
• Renowned companies like Citadel and Renaissance Technologies have successfully integrated AI into their trading strategies, delivering outstanding returns.
• Some traders resist AI in stock trading due to concerns about trust, job displacement, complexity, and lack of transparency in algorithmic processes.
• As the global AI market grows, embracing AI in stock trading becomes essential for investors to stay competitive and adapt to the evolving financial landscape.

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