Right now, the world is fascinated with artificial intelligence (AI) and the potential impact it will have on people’s lives, including the ability for AI to trade in the stock market. But will this really become a reality?
Before we answer that, let’s take a moment to understand what AI means in the context of trading. AI is a machine’s ability to perform the cognitive functions we associate with human minds, such as reasoning and learning.
In the context of the stock market, this means AI could recognise patterns in market data to identify where a stock may unfold in the future based on historical information.
Trading the stock market isn’t complex and with the right education anyone can learn to recognise trends that enable them to maximise profits and minimise risk. This is where AI has a big advantage over humans, as it has the ability to process huge amounts of data very quickly to identify patterns that could provide the signals to buy or sell a stock.
But that raises the question whether a trader needs to analyse huge amounts of data in order to be successful. In my opinion, the answer is a resounding no, which is contrary to what most people think.
While AI has made significant strides in the financial world with hedge funds, among others, using AI algorithms to identify trading opportunities, these are large institutions rather than private traders where the rules of the game are very different.
As we know, the stock market is inherently volatile and at times unpredictable. Given this, relying on AI can provide traders with a false sense of security leading to them make poor money management decisions and taking on higher risks.
Don’t get me wrong, AI is likely to be able to assist humans, but it’s not a substitute. Particularly when the stock market is an emotional barometer of human activity. The success of anyone trading the stock market comes down to taking a balanced approach that combines aspects of AI with human knowledge, skill and experience.
We were all born with a supercomputer on our shoulders and the more we learn and practice, the better we get at something, and trading is no different.
In recent times, there has been an increase in advertising that suggests AI trading is the answer to creating riches in the stock market.
My recommendation is to be very cautious with these claims because like anything new that has come before, there are many companies who simply want take your hard earned money and not deliver.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au