Have you ever seen a robot beat a human at chess? Or at a computer game? Just like with any statistically-based outcome, including trading the stock market, for example, artificial intelligence (A.I) is always going to have the upper hand over humans. As the world of technology evolves, professional trader of 27 years, Andrew Baxter, has some revolutionary insights into the new wave of ‘algo-trading’ where a robot could literally be trading our money for us. Here’s how:
Algo Trading Could be the New Wave
You’ve probably heard someone on the internet or over the news talk about the all-encompassing power of artificial intelligence (A.I). Rumour has it – computers will be smarter than us by 2048. With modern technology, humans have been able to create robots so intelligent and so effective at machine learning, they can literally beat them at chess or a video game, or even take over the world. The same is true when it comes to trading the stock market. As A.I has the ability to make purely objective decisions based on logic and statistics, their ability to outperform a human at any statistically-based measure is obvious. As a professional trader of 27 years, I’ve certainly seen my fair share of trading strategies and methods over my time, albeit none as convincing as algorithmic system-based trading in today’s market.
More than ever, large financial firms and savvy retail traders are building algorithms to trade the stock market. This includes automating the actual execution of the buy and sell of assets, the selection of them, and the development of strategy on a purely non-emotional basis. Despite being able to have the robot hit the go button for you, based on a statistical outcome, the main benefit of system-based trading is actually the ability to back-test its performance. This is really important for traders as having a level of certainty in what is an uncertain landscape is gold. A computer ‘back test’ is effectively a snapshot of the systems past performance over a period of time – including the average number of trades, biggest loss, largest win, and overall net profit factor as examples. The funny thing is – you can really design a system to trade how and whatever you want, all presenting various snapshots of results that you can sift through and select.
Now, before you go jumping into some online algo trading specialist program, let me provide some wisdom here for you first – by the very nature of computers, having an A.I system complete your trading for you is tough. Realistically, the biggest challenge with A.I is actually understanding how it works and how to build it. Simply throwing some indicators on a screen and overlaying some fancy oscillators is not what system-based trading is about and it will sure as hell will make things more confusing than they need to be. Ideally, what you would need are a limited number of indicators that measure a combination of price and volume primarily to which the system can execute effectively. Additionally, if you’re going to run a system-based trading system – make sure your internet connection is stable! Many make the mistake of having a holiday from the trading screen only to realise their internet server dropped out and they dropped the ball. As much as the robot is trading your money for you, it’s important you monitor that the machine is still working. We actually spoke about this specifically on our Money and Investing podcast last year – check it out on Spotify for Apple Podcasts if you’re interested in hearing more on A.I trading.
Ultimately, as the financial market landscape changes, so too should your trading strategies. Right now, we’re in quite a tough period for markets considering the economic uncertainty and real risk of inflation. Gone are the days where you can buy and hold shares for dividends, expecting them to go up over the long term. Trading individual shares, ETFs, or CFDs based on fundamentals is becoming harder and harder each month as we see price-performance disconnected from business fundamentals. The solution: technical-based trading via an algorithm system. I think this will start to become more and more popular throughout the retail trader’s arsenal as we move forward – to ensure you don’t miss out, jump into one of my Australian Investment Education webinars http://bit.ly/aie-mjb to see how we can help.