Artificial Intelligence (AI) in the twenty first century is one of the most demanding and innovative technologies across the world making a presence almost in every sector and playing a big role in our economic growth. Initially, AI was mostly integrated into drones, robots, self-driving cars and Chabot, but now it is being used everywhere. The stock market is one of the most interesting fields where AI is playing a significant role.
In trading AI is helping traders and investors to better utilize the market data, analyse the price movement and predict the market direction with better accuracy. The application of AI in the stock market or trading is indispensable, hence, you need to understand its significance and how you can use AI in the stock market to make better decisions and make the trading experience more enjoyable and seamless.
What is AI in Trading?
AI in trading means an automated software or computer program that uses the market data like current price movement and trading volume data to analyse the market condition and trend. The AI models are developed with the help of machine learning using the sub-sets of AI like deep learning, natural language processing, computer vision and sentiment analysis etc. to analyse the market conditions or identify the patterns of the individual stock and predict the upcoming trend or next move of stock.
These AI-based models are developed with the help of algorithms in which huge amounts of data, including historical data, chart patterns and volume related trading patterns and market movement are analysed by the AI models to predict the trend or next upcoming movement of the market. The computer can process and analyse large amounts of data with better accuracy to make such data applicable in trading.
How AI Works in Stock Market Trading?
An AI-based trading software when installed and activated, collects the data from the market that includes the historical data and latest market data to analyse the trend and recognize the price movement patterns. AI can correlate various types of information that can affect the price movement and also uses technical indicators to analyse the chart patterns and their movement in various market conditions.
Also Read: Top 5 Best Technical Indicators for Intraday or Day Trading
Based on the previous outcomes and current situations AI can suggest or choose the right trading strategies that can generate profits for the users. The algorithms used in training and developing such AI models for the stock market are capable of making well-informed decisions based on market conditions. The trade decisions by AI are taken while considering the risk profile of the user and reward expectations.
Nowadays, AI in trading is used through various automated software like Algo trading, quantitative trading and high-frequency trading or automated trading. And you can find various automated software and computer applications available in the market used in stock market trading.
Application of AI in Stock Market
The application of AI in the stock market is expanding day by day helping individual traders as well as institutional investors to not only automate their trading activities but also take a more informed decision. In the age of technology-driven trading solutions, AI is now applicable in various stages of financial activities. Let’s find out how it is used in stock market trading.
Algorithmic Trading
Algo trading software is one of the most advanced and widely used AI-based applications providing fully automated trading solutions with better efficiency. This AI-based trading software can not only automate the trading actions but can also analyse the market conditions, and identify the chart patterns or trends of the market or individual underlying security to execute buy or sell trade positions.
High-Frequency Trading
AI is also applicable in high-frequency trading (HFT) to execute trades at very high speed for performing millions of transactions in a fraction of a seconds. AI-based systems or software applications are capable of executing multiple transactions generating huge volumes of trades. HFT is applied in arbitraging and other repetitive-based transactions at a very high speed that is not possible for normal human beings. To trade in a huge quantity of shares HFT is used to get transactions executed with high accuracy.
Predictive Analytics
Another useful and very productive application of AI is in predictive analytics to analyse and predict future stock price or market movement using historical data, chart patterns and current trends. In such AI-based models, machine learning algorithms are used to recognize the pattern using technical indicators and other tools to analyse market conditions and predict the next move. AI in predictive analysis plays a big role in understanding market behaviour and adjusting trading strategies accordingly.
Sentiment Analysis
Sentiment analysis is one of the most popular techniques used to understand the sentiment of people through online platforms like social media and other activities. An AI-based text analysis or you can say sentence or speech analysis technique called natural language processing (NLP) is used to perform the sentiment analysis.
Using the NLP, you can understand the sentiment of people towards the market or towards a particular stock. You can analyse the news articles, corporate actions, financial results and other actions by the company that affect the stock price of the company. Based on the positive, negative or neutral sentiments of the people, you can define your trading strategies and take the right actions accordingly.
Quantitative Trading
AI is also applicable in quant trading to perform mathematical calculations to analyse the historical data, price and volume of trades to identify the trading opportunities in the market. This is a quantitative analysis-based trading technique to analyse the market data and find trading opportunities.
And AI is integrated into various software and applications to perform quant trading activities with better accuracy. AI can analyse a huge amount of data and perform any complex level of mathematical calculations at very high speed allowing the traders to make better decisions in the trading.
Risk Management
Trading in the stock market is risky and full of unexpected movements that can cause huge losses to the traders. Here AI is helping the traders to manage such risks and avoid unexpected losses. The AI-based software or applications can identify such risks and alert you or suggest adjusting strategies as per the changing market conditions. AI is integrated into the trading software to trade with stop loss or adjust such stop loss allowing the traders to trade with proper risk management.
Portfolio Optimization
Another useful application of AI in portfolio management is monitoring and optimizing the performance of the portfolio. The AI can adjust the asset allocation in the portfolio while maintaining the ratio of risk and reward from the investor’s perspective. Similarly, there are various other applications of AI, like sending alerts about price changes to investors and portfolio managers. AI-based portfolio management optimization helps investors to get the best returns from investments.
Automated Trading Bots
The AI-based bots are actively working in various fields including the stock market. These bots are not only available for providing automated customer service to assist investors in solving their queries but can give tips and suggestions on investments and trading. Apart from that these bots are also used for analysing market data, sending alerts, notifications and performing trading-related activities. These AI bots are playing a big role in the automation of various tasks in the stock market and trading.
Ensuring the Safety of Traders
Nowadays, most of the discount brokers in India are providing online trading platforms through mobile apps. When you log into your trading account, you need to ask for the login details to get access to your account. And if someone else tries to get illegal access to your account or if there are any suspicious activities in your trading account, you will be informed or your account might be blocked. The AI-based in-built system can detect such suspicious activities and prevent from various online frauds.
Also Read: Questions You Need to Ask Before Choosing a Discount Broker in India
Role & Benefits of AI in Stock Market Trading
AI is playing a crucial role in stock market trading not only making the trading experience more automated but it will help you to trade with a more data-driven approach. The AI-based trading software and applications provide a better trading solution with various advanced features. If you are a trader or investor you need to understand its benefits to make the best use of AI in trading.
Improved Analysis: AI or you can say computers can perform quantitative analysis more accurately than human beings. Yes, with a huge amount of data, you can make mistakes while analysing a large volume of data and while considering the various aspects of trading. AI can do data analysis much faster and accurately providing an improved data analysis solution for better decisions in trading.
More Accuracy: The AI-driven trading mechanism or machine learning-based automated AI models can perform data analysis and trade execution-related activities more accurately. Better accuracy in trading will not only improve your profitability but also help you to recognize the risk levels allowing you to take the right action timely. Overall, you will enjoy the trading with more accuracy.
High-Speed Trades: The HFT or AI-based automated trading software can perform millions of transactions in a fraction of a seconds. Performing trading activities at the lightning speed will not only save you time and effort but also minimize your cost of transactions. And AI can help you to generate a huge volume of trades at a very high speed to maximize your chances of returns. In arbitraging high-speed actions are required to complete the transactions with maximum profitability.
High Efficiency: Another advantage of AI in trading is that, such automated software or mobile applications can perform multiple transactions with high efficiency. These AI-based applications can handle huge amounts of data and perform millions of transactions at very high efficiency. The efficiency level is so high you can’t compare it with human transactions or with any other non-AI-backed software or application.
Low Cost Trading: In trading too there are various repetitive tasks that humans can do but it can increase the overall cost of transactions. But AI can do such repetitive tasks or similar actions in a better way and reduce dependency on humans to perform various tasks. The automation of trades and proper data analysis minimize the overall cost of transactions in stock market trading.
Minimizing the Risks: This is one of the most important aspects that will help you trade with the right risk management to minimize your chances of losses in various unexpected market conditions. AI-based trading applications can collect, analyse and interpret the market data to reduce the impact of risks involved in stock market trading. Based on the current market conditions the AI will suggest you pick the right strategy and also help you to choose the right stop loss points and exit from high-risk trade positions.
Emotion-Free Trading: While investing or trading in the stock market, humans can be influenced by anxiety, fear and greed which can lead to unfavourable trade decisions. These emotions can disturb the planned strategies or encourage biased decisions. While AI-backed algorithms are free from such emotions, instead use the data to make the right decision. These AI-based applications use the market data and work on the predefined criteria to enter or exit from trades as per the market conditions.
Enhanced Trade Decisions: Using AI in trading and investing not only makes the transactions faster and more efficient but also improves the overall trading experience. Using the market data in a better way by analyzing the various factors mathematically, statistically and technically AI-backed trading applications can make better decisions in various market conditions. Apart from trading the automation of various other activities is also providing a more enhanced solution for the users to deliver a seamless trading experience.
How to Use AI in Trading?
The AI can be applied in the stock market through various approaches. In the entire stock market, various activities are automated with AI-based applications or software. In trading, it can be used for various actions to not only make the trade execution fast and automated but also more efficient and error-free. In trading, AI can take trade decisions from trade execution to profit booking and exiting from the trades. Similarly, there are various points where AI can be used, let’s find out how you can use AI in trading.
Automated Trading: The AI-based trading software comes with built-in features to automate your trading. Yes, you can set the entry points with stop-loss and where to book profit and exit from your trade positions. Algo trading or other automated trading platforms are providing this facility to automate your trade actions. You can choose from various underlying securities traded on the exchange for such actions.
Also Read: How to Set Target Price and Stop Loss in Intraday Trading
Trade Verification: While placing the orders, the AI-based trading system verifies every trade by sending alerts or verification codes to ensure safety and precautions. While placing the orders such trade verifications take time and can delay your trading price, but still, there is such automated verification process that works at a very fast speed and gets the confirmation of the users to ensure safe trading.
Technical Analysis: Before entering into any trade position performing the technical analysis is very important to know the best possibilities of trades. Technical analysis helps to analyse the market or price movement of the underlying security you are looking to trade. You will get to know the trend, and possibility of trades with entry or exit points to enter into the trade positions. The AI software can use various technical indicators and tools to analyse the market and suggest trade opportunities or execute trades.
Chart Pattern Recognition: In technical analysis, traders mostly used the candlestick chart patterns to analyse the price movement with more insights about the trading data like highs, lows and trading volumes. While developing AI-based models, deep learning is used to analyse price movement, recognize the candlestick chart patterns, and identify trading opportunities. Precise recognition of chart patterns with other technical indicators can allow you to trade with the right strategy.
Fundamental Analysis: Just like technical analysis, analysing the fundamentals of the company’s stock you are looking to invest in is very important. The AI-based applications can be used to analyse the financial position of the company, its earning and profitability ratios and valuation to know if it is suitable for investing or not. The AI can analyse the news, corporate actions and other events that can affect the share price of the company.
Arbitraging Opportunities: The price difference of the same stock traded at different exchanges creates arbitraging opportunities for the traders. However, such a price difference remains for a few minutes and keeps matching the price at a very fast speed. You can use AI to spot such price differences and execute the buy and sell transactions at a very fast speed to take advantage of such differences.
Earnings Predictions: You can use the AI to analyse the financial performance of the companies and based on the past revenue and earnings growth while considering the future expected growth prospects, the AI can predict the future earnings of the listed companies. You can use the AI-based models to forecast the earning growth to estimate the valuation of the company’s stock.
Trade Contract Creation: The derivatives market where futures and options of the index and various selected stocks are traded paralleled providing high-risk and high-return trading opportunities. You can use AI tools to analyse the market or identify the best underlying security as per your risk tolerance and reward expectations to suggest the right contracts that suit all your parameters. You can pick the right option contract that can give you maximum returns at the lowest risks.
Summing-up
The AI uses machine learning, deep learning and NLP-based algorithms to understand the market behaviour and price movement of the stocks while considering various factors. It can work much faster speed with better accuracy while analysing the market data with the ability to take quick trade decisions and can execute millions of multiple transactions generating huge volume trades.
Algo trading is one of the best examples, where AI is integrated through certain algorithms and programming. To use or enjoy the benefits of AI in trading you can choose the best discount broker in India that can offer you a best online trading platform integrated with Algo-based trading features. Here you can choose the Moneysukh to open a trading and demat account and get access to the most advanced trading apps like TradeRadar and Smart Options to trade in various segments of the market at the lowest brokerage charges.
