When AI first started in the finance industry, many traders and investors were wary of the effects and trustworthiness of the product. They believed that no one can replace human intuition and calculations. Those that had a more positive outlook on these new technologies gained much more than their equal counterparts, especially in the trading sector.
Fast-forward a few years and no major hedge fund, bank, or proprietary trading room is using any major form of Artificial Intelligence. Ranging from home bred algorithms to financial Bloomberg Terminals, everyone seems to be trying to get an edge over other competitors. Now that AI is a major force in the market, people are eager to learn about this new technology and maximize their returns on their trades and investments. Furthermore, AI also allows people to minimize their losses, allowing traders to stay in the game for a longer period of time.
Now the question is, how can AI make you a better trader?
AI gives traders that competitive advantage in a variety of ways - one being trade ideas. Trade ideas include information as to when traders should initiate a trade, where to set the stop loss, and when to close their position; however, this information doesn’t guarantee that it be a successful trade. The AI is simply using historical data to create an algorithm which provides traders a trade idea. These ideas help to make further market assumptions in similar situations.
What most people don’t realize is that the difference between profitable traders and non-profitable traders is how to handle loss. Profitable traders cut their losses much shorter than the average trader. AI can help with that and provide traders a stop loss that might be shorter than what novice traders thought was appropriate. For example, if the market is at 3.50 and traders set their stop loss at 3, that might be ok, but AI might advise otherwise and tell traders to set their stop loss at 3.20 since the risk vs. reward wasn’t worth it at a stop loss at 3.
Minimizing loss is much more important than looking for super-profitable trades.
AI is not replacing traders, rather it is implemented in order to help a trader make better, more knowledgeable decisions. It can help traders by providing trade ideas, revealing when the best opportunity is to enter a market, or even when to avoid a certain market. AI can also provide traders projections as to how volatile a market may get in the coming hours. Arguably the most important part of AI is that it helps traders set their stop loss which in turn reduces their losses. Moreover, AI is only meant to help and if used properly it can be a great help to one’s trading activities.