Machine learning and AI in the stock market
Over the past few years, the terms machine learning and artificial intelligence have seen tremendous growth in their usage. Artificial intelligence builds machines that can perform actions depending on the information presented to them and the training data used to train them. Artificial intelligence has touched and changed a lot of areas in our lives, so it is not a surprise to see it being used in stock trading.
Artificial Intelligence in Stock Trading
In the past few years, the number of traders on most stock exchanges has increased and so has the profits being made by these traders. Many of these new, and some older, traders leverage the power of AI to analyze data quickly and accurately and come up with predictions that help them make better trading decisions.
Using the data points gleaned from the data fed into the AI algorithm, traders can analyze patterns and trends, the same way traders have been doing it in what is known as smart trading or high-frequency trading.
One way AI comes up with predictions is using what is known as sentiments. The sources of these sentiments include social media reviews, news channels, comments on different platforms, and other resources related to trading. AI can then use this information to come up with an analysis of a particular stock using sentiment analysis.
AI affords traders another advantage in that there is no human input required. AI trading algorithms that use artificial intelligence are dominating different markets all over the world, all without any human involvement. Humans are still required to train these algorithms, but AI-based computers, programs, and algorithms are slowly taking over.
Machine Learning and the Stock Market
Machine learning is a type of artificial intelligence that uses rule-based algorithms to achieve its functions. The main difference between machine learning and artificial intelligence is that artificial intelligence analyses processes and stores the outcome, while in machine learning only the results of specific processes are stored.
Machine learning also stores the parameters required to come up with the results or outcomes it stores. The parameters used to end up with the result to be stored are what are of interest when it comes to stock trading.
Artificial intelligence and machine learning are being used to evaluate the factors that move the price of a certain stock with the predictions and factors used to predict where a particular stock will end up in the future. It is this information that is important to traders using these technologies.
Can Human Traders Compete?
Yes and no. Humans can compete because they can glean much more information than machines ever could. When trading like a pro, you can see and understand what actual people are thinking and use that information to get better results. This component is still missing from artificial intelligence and machine learning algorithms.
Where humans cannot compete is in the trading speed. Artificial intelligence makes decisions faster than humans could and if enabled, can trade much faster than humans even if they are missing the intuition and understanding a human could have.
Even with the rise in the use of artificial intelligence and machine learning in trading stocks, a human component is still required to make use of the data the algorithms come up with. This is why we are some way off from computers completely taking over the stock market.