AI Trading: What Is It & How Is It Used?

No one has ever said that investing, specifically stock picking, is easy. Despite vast amounts of information available, even the experienced trader doesn’t always get it right, that’s where AI technology can help.

In spite of the challenges, first time traders have been undeterred and more people than ever have entered the market in the last year. According to Investment Trends’ Online Investor research, 400,000 people started investing online for the first time and one in six of that pool are under 25 years old. CommSec’s customer base alone has risen by a third since the pandemic started – and a significant proportion of these people are first time traders.

How do companies use artificial intelligence for investing?

Against this backdrop of increasing ‘self-directed investment’, the engagement of financial advisers is startlingly low and in decline. The Investment Trends research also showed that only 1.8 million Australian adults actively use a financial planner, down from 3 million, 10 years ago. And for most first-time traders the services of wealth managers are out of reach as they require $100,000 to $150,000 minimum investment to secure their services. There is a chasm between the 1.8 million using financial advisers and DIYers and until recently there has been a shortage of technology that helps plug the gap and improve the outcomes that first-time traders achieve.

Investing with AI can enhance efficiency

All traders face the challenge of how to identify good trading opportunities, processing information and mastering emotional control. This is just as important for experienced professional traders as it is for the inexperienced. There is a school of thought that investing is 20% strategy and 80% execution. It can take years to master your emotions when investing, and it is a continual battle even for top equity strategists.

Novice stock market investors, typically struggle with processing the vast amount of information available. And by this, I mean not only the sheer volume of data but also sentiment because the markets are of course driven by fear, greed, FOMO (fear of missing out) and the full spectrum of human emotions.

How does investing with AI work?

Only AI can thoroughly process the amount of data available and remove emotion. AI takes data and uses this information to help traders know when to buy and sell, and then automates the execution of those decisions. In some cases, it is 10 million pieces of data from 250 different sources across the internet daily, including news and social media as well as fundamental market information in a matter of seconds to come up with buy and sell recommendations for equities across around the world.

How AI Will Democratise Access To Investing

AI allows everyday investors and traders to take shortcuts and access to the same algorithms that the big end of town use, leveling the playing field for the little guy investor. It allows traders to benefit from analyst quality information and fully automated trading based on other criteria such as ESG factors. Younger investors, in particular, care about the impact of their investments but need to be able to trade quickly to take advantage of the speed of the markets. In short, there’s no time to wade through greenwash and assess credentials.

Better technology and the introduction of AI has plugged a gap in the market for people who may have $40,000 in savings but want to get a better return than what is currently offered in the low-interest environment. It also allows for risk management and capital protection by quickly exiting positions when bad news sends a shockwave through the markets.

AI is like connecting data dots, while the dots are changing and exploding. The dots can be keywords, metrics, news headlines, or tweets from high profile influencers. If we consider that 90% of the data in existence was created in the past two years, it’s easy to see why using a machine can help analyse and interpret it.

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