The many ways in which Artificial Intelligence is transforming online trading

The concept of online trading has existed since the halcyon days of the Internet. First coming to light in the latter half of the 1990s, investors were provided with relatively few options at the time. The systems were rather obtuse and user-friendly platforms were rare to find. Furthermore, latency rates (the time required to update real-time data) were quite slow. It, therefore, makes a great deal of sense that many traders still preferred to interact with physical brokerages.

Of course, times have dramatically changed over the past two decades. It is now possible to execute trades within a fraction of a second. Well-known platforms offer a host of technical tools and investors can choose from an impressive array of asset classes. While this is largely due to human ingenuity, it is just as important to highlight the increasingly important role of artificial intelligence (AI).

What exactly is artificial intelligence? What purposes can it serve within the world of online investing? How will it benefit traders? What advancements might we witness in the not-so-distant future? Whether you are a seasoned trader or a novice, the answers to these questions should be explored in greater detail.

Artificial Intelligence defined: The basics

For the sake of brevity, we will not delve into the more technical aspects of AI. A more straightforward definition should suffice. AI involves the ability to extrapolate conclusions based on specific data sets. The result is the ability to create "smart" machines that appear to think and act like humans in terms of their deductive capabilities.

Note that the term like humans was employed in the previous paragraph. It is not yet possible to create a system of artificial intelligence that exhibits traits which can be defined as truly human. Perhaps the main takeaway point here is that AI systems can often be used to perform processes that would have otherwise needed to be done manually. Examples include the intelligent search results provided by Google and targeted advertisements based on the previous browsing history of a user. So, how does AI fit into the world of online investing?

AI and the online trading community

Due to the sheer scope of this technology, it enjoys a plethora of applications within the world of digital trading. Let us examine some of the most interesting uses in detail.

As an educational tool

Online trading requires patience, time and a great deal of experience before success is obtained. The only issue here is that many of the concepts can be quite difficult to understand; particularly when referring to novices who have only recently become involved. This is when the power of AI will come into play.

Artificial intelligence and machine learning can be used to address user-generated questions such as "what is the FTSE?" or "what types of currencies can be traded as futures?". These queries will subsequently be answered in simple formats such as "the FTSE is a list of the top 100 companies found on the London Stock Exchange" and "it is possible to trade CFDs on EUR/USD or spread bet on the UK 100"

In other words, traders who wish to gain an edge can leverage a wealth of information that is only a few clicks away. Many websites have likewise embedded intelligent search widgets into their architecture as a means for users to quickly find what it is that they are looking for.

Taking the guesswork out of Big Data

One of the challenges that have always represented a hurdle within the online trading community involves the sheer amount of data that is present. While this can be great news for those hoping to keep abreast of the latest movements, the fact of the matter is that interpreting such data is extremely difficult and mistakes will often be made.

Artificial intelligence is capable of collating, analysing and interpreting millions of data points within seconds. These results will then be organically summarised and presented to the trader in question. Examples can include (but are certainly not limited to):The chances of an economy entering a recession.The impact of an interest rate change in relation to a certain index.How a regional conflict may impact the price of commodities such as flour and wheat.

So, investors can make more informed decisions within a fraction of the time that would have been otherwise required.

The ability to spot longitudinal trends

The value of a short-term position is naturally based upon longitudinal sector trends. So, even day traders are keen to take advantage of artificial intelligence in terms of how the economy is predicted and how their assets will perform.

This has represented one of the holy grails of investing, as those who seemingly possess a "crystal ball" are much more likely to enjoy steady returns over time. Thanks to the notion of big data mentioned in the previous section, such an ability has become much more realistic. However, it should be mentioned that even the most advanced AI systems will still make mistakes.

Speech and language processing technologies

This is another interesting facet of AI. The ability to accurately recognise speech is an emerging technology and the chances are high that it will require some years to perfect. Still, we have already witnessed platforms such as Amazon Alexa and Google Assistant enter into mainstream society with considerable success. It, therefore, seems to be only a matter of time before they make their presence known within trading circles.

Perhaps, the main benefit here is that orders can be executed on the go without the need to manually input commands. This could represent the ideal solution for those who employ their smartphones to access well-known platforms. It will indeed be interesting to see what the not-so-distant future may have in store.

Highly accurate risk analyses

One of the main goals of any investor is to mitigate the risks associated with an open position. While it is impossible to entirely ablate such risks, artificial intelligence provides the ability to mitigate its short- and long-term effects. This is often the result of extremely advanced algorithms alongside predictive analyses.

As BBVA notes, these algorithms can also be used to identify new investment opportunities that are following the preferences of the trader in question (2). For instance, those who prefer low-risk assets may be presented with options such as fixed annuities or money market funds.

Taking bias out of the equation

Investor bias (such as a preference for a certain company even if it performs poorly) can likewise be addressed with the help of AI. Objectively collecting and interpreting market data will provide a much broader analysis of an asset without it being tainted by emotional "filters" including greed, hesitance or even fear. Therefore, more informed decisions can be made at the appropriate times.

Are there any downsides to the emergence of AI?

Up until this point, we have placed a great deal of focus on the benefits of artificial intelligence in relation to online investing. It is nonetheless prudent to mention a handful of potential pitfalls. Here are some concerns which have already been voiced by industry experts:

The high cost of this technology may result in pricey registration packages and/or limited availability.
Some cite a lack of regulatory scrutiny at the moment.
Even the most advanced AI systems can make errors on occasion.
AI may not take ethical investing into account (important in what concerns the growing ESG trend).

Furthermore, there is always the chance that traders will rely too heavily upon this technology. Should they fail to learn the fundamentals of investing, they could very well expose themselves to a significant amount of risk.

Artificial Intelligence: The wave of the (financial) future?

Ultimately, we are forced to ask a simple question. Will artificial intelligence become the driving factor within the online investment community? Some experts will note that this appears to represent yet another stage of evolution within the digital world. Others believe that traders will still rely upon acquired knowledge and instinct to determine the policies they choose to follow. The truth of the matter is that nothing is for certain.

Having said this, it is impossible to overstate the role that artificial intelligence is already playing. From advanced charting capabilities to in-depth knowledge repositories and automatic trade executions, this technology certainly shows no signs of slowing down. It is therefore wise to keep abreast of the latest innovations in order to remain one step ahead of the curve. Either way, there is no doubt that artificial intelligence and machine learning are here to stay.

*Spread bets and CFDs are complex instruments and come with an elevated risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

*Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.

The information provided in this article is being provided solely for informational purposes and should not be construed as investment, tax or legal advice.