Table of Contents

Table of Contents

Use of AI And ML In Stock Trading:

Human Strategy+ Computer = Algorithmic Trading.

Using computer software for mimicking human cognitive intelligence is termed Artificial Intelligence. These systems are used to perform complex tasks just like humans do. AI is being used in sectors such as banking, finance, marketing, healthcare, entertainment, etc..,

Machine learning, a sub-division of AI can be defined as the capability of a machine to imitate intelligent human behavior. Machine Learning has enabled machines to not only advance their cognitive functions (intelligent thinking) based on the given inputs but also to think on its own.

Thus, the potential of Artificial Intelligence and Machine Learning is explored in various spheres of human activities such as:

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1. In Traffic:

Analyzing the road traffic patterns so as to avoid traffic jams. 

Example: Waze (Google’s).

2. Banking Sector: 

Fraud protection and theft identification.

3. Aviation: 

Autopiloting of airplanes.

4. Email: 

The smart automatic email filtering and allocation of the emails to its respective category such as spam, promotions, etc..,

5. E-commerce: 

Forecasting the products based on the likes and the shopping pattern of the customers.


Amazon recommendations such as “Customers who bought this also bought this.”

“You may like this”

“More items to explore for you”,etc..,

Recommendation of content based on the past search data or viewed data on social media platforms like Youtube, Facebook, etc..,

AI-Enabled Stock Trading can be termed as a human-plus machine-formulated Stock Market Trading Strategies. The result intelligent investments. Just like humans learn from their errors, machine learning enables computers to learn from their errors

By recognizing future trends, and historical data of financial markets AI-Enabled Stock Trading automate buy and sell calls based on the given algorithm. This mitigates risks and helps in achieving high returns effectively. Due to the advancements in AI and ML, traders can opt for a completely hands-off approach.

AI is omnipresent! It is everywhere and is gaining momentum as a “lazy stock trading solution.”

Advantages Of AI In Stock Market:

Artificial Intelligence-enabled Trading Strategies in the Stock Market have become increasingly sophisticated due to their indisputable benefits to traders.

1. Emotionless Trading:

I’m sure most of you would have heard the saying “Never take decisions in haste”.

This means decisions should be well thought out and not emotional. The same applies to trading in the Stock Market. Traders and investors who enter trades based on their emotions are the most vulnerable. Most trades are governed by greed, fear, revenge (revenge trading), excitement, etc.., which often leads to disastrous illogical financial trade decisions.

These are the Stock Trading situations in the Stock Market wherein AI acts as a saving grace. AI is emotionless and thus cannot act beyond the given rules, logic, and facts. This way, traders can have less loss-making trades since trades are governed by logic, strategy, and not sentiments.

Numerous transactions take place in milliseconds in the Stock Market each and every day. With Artificial Intelligence enabled Stock Trading, traders can save time and money thus facilitating faster transactions and decisions, thereby leading to faster profits.

Since Artificial Intelligence can automate repetitive tasks such as order entry, execution, exit, portfolio management, etc.., traders can utilize their time on improving their knowledge base and higher-level decision-making.

2. Risk Management:

AI trading systems can identify the risks and returns associated with different securities in the Stock Market. It can determine the optimal portfolio allocations of various securities and optimize a portfolio’s performance by recognizing undervalued securities and bypassing overvalued ones.

3. Accurate Trading Decisions:

AI can incorporate data from various sources such as financial statements, news articles, social media, etc.., into its analysis. Henceforth, it can make predictions that would be difficult for humans to predict and detect. This leads to more accurate trading decisions.

4.Capability To Scan Through Multiple Stocks:

Do you remember Rajinikanth’s Robot and Sharuk Khan’s Ra.One? Both movies had robots that did insanely impossible tasks that a human can ever do.

Do you remember the scene wherein the robot in the Robot movie scans through all the pages of the telephone directory in seconds, prepares for a medical exam, and even handles a complicated delivery case of a pregnant woman?

Thus, the major advantage of Artificial Intelligence In The Stock Market is that it can spot repeating trading patterns, process massive amounts of past data in minutes, scan through multiple stocks at once, etc.., thus giving an edge over human traders.

5. Less Expense:

When traders sign up for tips with stock brokers, stock agencies, etc.., it comes with two disadvantages:

  1. Financial burn.
  2. Huge probability of misguidance.

With AI trading, in the Stock Market, one can cut down their expenses on commissions. Yes, coding a strategy requires money. But the advantages would be more automated emotionless trades. Thus, AI trading can threaten the jobs of most stock brokers.

6. Learning Non-Stop:

With AI in the picture, systems learn continuously and adapt to new data. This ensures improved accuracy and performance with time.

Tagline: AI fellows the trend and sets the trend.

Disadvantages Of AI Trading In The Stock Market:

When there are pros, there would be cons for any technology, thing, etc.., Machine Trading can be disastrous if handled by people who are unaware of it. 

1. Insufficient Data:

The quality of the data used to train AI systems for trading plays a vital role. If the data is inaccurate, incorrect, or incomplete, the system makes incorrect decisions, leading to catastrophic trading strategies.

AI Trading In The Stock Market comes with its own flaws. The major challenge most traders face with AI software possesses an inverse relationship with the performance and capacity of a strategy.

This means an AI-Enabled Trading Strategy with high returns is less sustainable. Besides this, the way machines and humans analyze risks, etc.., are distinct. Hence a balance between mechanical sobriety and human opportunism is yet to be achieved. 

2. Overreliance:

Traders might become too reliant on AI trading systems and can become:

  1. Reluctant. 
  2. Fail to make their own independent research trade analysis and decisions. 

4. Weak AI Trading Strategy:

If the AI trading strategy or the algorithm is a bit weak, there is a high chance of that AI-enabled trading strategy not being able to handle some unexpected Stock Market conditions like huge volatility, market crash, etc.,

5. Issue With Cyber Attacks:

In Stock Markets, AI Trading Systems are vulnerable to hacking and cyber attacks, which further leads to a huge financial strain.  

6. Technical Limitations:

AI algorithms are not always perfect. System failures, and software bugs can lead to accountability and trust issues. One such example of a system failure of AI Trading In The Stock Market is the “US Stock Market Flash Crash Of 2010”

Glimpse About The Flash Crash:

The “Flash Crash” of 2010 in US Stock Markets is a perfect example o….created by Artificial Intelligence In The Stock Markets. The major cause was the usage of a high-frequency trading algorithm by some financial firms. These trading algorithms were designed based on some mathematical models, etc.., so as to automate trades (buy and sell calls) in the Stock Market. But, an error in the programming of these algorithms created huge sell calls in a very short span of time, thus leading to a chain reaction of sell calls which lead to a rapid fall in the stock prices. Besides this, an absence of circuit breakers (like an automatic trading stop after 5% or 10% or 20% fall) lead to extreme volatility.

The market indices managed to rebound the same day, ie., May6, 2010,  but the flash crash almost erased a trillion US dollars from the market. 

In addition to this, traders should keep in mind that the potential of AI Trading Systems is limited to Technical Analysis. But, humans tend to shift their trading sentiments based on Fundamental Analysis, real-time price movement, etc..,

7.Rules And Regulations:

The rules and regulations in the Stock Market with respect to AI Trading are evolving on a constant basis. Hence it is important for traders to stay up-to-date with the latest ethical, legal considerations.

8. Market Volatility:

Last but not the least. Stock Market is a place filled with extreme volatility. Absence of a well-formulated Stock Market Trading Straegy can lead to a bleeding portfolio. And during times of Stock Market Crash and crisis, it becomes highly difficult for machines to grab those shocks and act accordingly.

Precautions While Using AI In Stock Trading In The Stock Market:

1. Formulating A Well Tested AI Trading Strategy In The Stock Market:

Step1: Define the trading objective: Every trader should have a trading objective. Trading without a trading  strategy or trading objective is similar to driving a car without knowing the destination. A well-defined trading strategy should have the below parameters.

  1. Reliable entry point.
  2. Exit plan
  3. Stop-loss.
  4. Favorable risk/reward ratio.
  5. Your needs, etc..,

This means, as a trader, define the requirements, the needs, the goals, etc.., 

Step2: Accumate data: Collect clean historical useful Stock Market data that has the capability of training the AI trading model. This past financial Stock Market data should include information related to the stock, stock prices, technical patterns, news, economic indicators, etc..,  

Step3: Train the AI system: 

Use the gathered historical data to train the Artificial Intelligence model. After this, test its performance on the live Stock Market data. This helps in determining the accuracy and reliability of the AI-Enabled Stock Trading System.

Step4: Implement The Strategy: Once the strategy is trained, tested, and formulated, start deploying it to make automated trades in the Stock Market.

Step5: Continuously Monitor And Improve The Strategy: Make adjustments in the trading strategy as per the requirements. This might include altering the strategy with new parameters, redefining the strategy, etc…,

2. Test The Strategy In The Most Volatile Stock Market Conditions.

When testing Stock Trading Algorithms, always test them in the worst-case scenarios. Test them in the times of the most volatile market periods in history. If that strategy is working well even in the most volatile periods, it means that strategy can work best during most market conditions.

How does Artificial Intelligence (AI) Work?

Artificial Intelligence is the combination of the below sub-domains.

Machine Learning: Machine learning teaches machines how to make decisions based on past experiences, data, etc.., ML helps in analyzing raw past data to meaningful informative data without the involvement of human experience. 

Deep Learning: Deep Learning, an ML technique, teaches machines to process inputs through layers in order to classify, infer and predict the outcome.

Neural Networks: Neural Networks in Artificial Intelligence is similar to the functionality of human neural cells in the brain.

Besides this AI uses NLP, termed as Natural Language Processing, computer vision, cognitive computing, etc.., for formulating algorithms.

What Is High-Frequency Trading In Algorithmic Trading In The Stock Market?

A popular form of Algorithmic Trading is high-frequency trading (HFT). High-Frequency Trading, a major category of algorithmic trading is a method wherein vast volumes of stocks and shares are transacted mechanically in fractions of a second at very high speeds. HFT uses complex algorithms to analyze multiple market conditions and execute orders based on them. HFT gives an edge to traders with faster execution speeds.

 High-Frequency Trading is developing rapidly in the field of the Stock Market and can become the face of the most authoritative Algorithmic Trading In The Stock Market

Bottom Line:

AI Trading In The Stock Market is evolving continuously and requires a lot of knowledge and experience. Signals generated by the Algo Trade Strategy In The Stock Market would be highly generic. Hence, traders should select stocks, strategies, etc.., based on their risk level and trading style. Another threat is that the Great AI Strategies In The Stock Market, tend to get copied, thus making the strategies obsolete to make money. A great AI Trading Strategy In The Stock Market should be good at both past analytics and the future changing market conditions.

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