Unbiased, Accurate and Unemotional: How AI Could Excel in Trading
In his 1987 annual letter to investors, Warren Buffet mocked the new trend that was just beginning to make its mark on securities trading. “In my opinion, investment success will not be produced by arcane formulas, computer programs, or signals flashed by the price behavior of stocks and markets,” he scoffed to his investors. No one can deny that Mr. Buffet is one of the greatest financial forecasters of all time, but even he could not foresee the success of artificial intelligence (AI), and how it would excel in the trading market.
Trades Based on Facts
Imagine taking away emotion and bias while greatly reducing, if not totally eliminating, margins of error from the trading process. Today’s use of artificial intelligence and machine learning is making this possible, and leading to its acceptance throughout global markets.
The fundamentals behind applying AI and machine learning to the world of finance isn’t about reinventing the wheel, either. According to Matthew Dixon, a professor of finance at the Illinois Institute of Technology, machine learning has always been “an optimization machine that minimizes chaos.” Whereas humans excel at low noise tasks, AI and machine learning excels at high noise tasks, such as analyzing huge amounts of historical and current market data, all without preconceived bias or emotion to cut through data.
Capable of Detecting Patterns
A definite advantage that machine learning has over humans is the ability to detect patterns that a human would fail to notice. An algorithm that is constantly evolving and searching can be used by asset managers to uncover new patterns in the market. This allows managers to adjust their strategies based on changes to the market that ordinarily may not be noticed until it’s too late.
Whether you dislike or embrace the growth of AI and machine learning, it has had a significant impact on financial markets worldwide, with approximately 75 percent of global trades being handled by algorithmic trading systems.
