Artificial intelligence and big data have been successful in the fields of language and vision. This has led people to see big data and artificial intelligence as the future of financial markets. Many believe that machine learning will eventually crack the code of the financial markets.
However, there are others active in the financial markets who doubt the ability of artificial intelligence to crack the financial market code. Some don’t believe that there is a code to crack. They view artificial intelligence as a tool that can give traders a systematic edge. Artificial intelligence and machine learning can provide insight on how much risk and investors should take and when they should take said risk.
Before trusting your financial future to artificial intelligence, there are some hard questions you should ask. For example, when considering the use of an online trading platform that uses AI, it’s good to ask about the type of edge artificial intelligence and machine learning will give investors. Are the results produced by artificial intelligence and machine learning sustainable and repeatable?
According to recent reports, the data collected by online stock trading platforms in the UK and US might be very valuable, but it won’t be enough for any type of long-term predictions, or strategies. Even though artificial intelligence and machine learning algorithms may provide an investor with a temporary strategic advantage, as soon as the basis of that advantage gets out, other investors will have it, so the advantage disappears.
How Fluctuations in Financial Markets Impacts the Ability of AI to Predict the Market’s Future
People point to sectors where AI is having a positive impact and use these to extrapolate the impact AI can have in the markets. For example, people might say that if AI and machine learning can make autonomous vehicles possible, why can’t it accurately predict the market? They argue that the rules of traffic are chaotic and unpredictable, like the movement of the financial market.
There are some holes in this way of thinking. Driving is full of unpredictable events. However, within that apparent lack of predictability, there are unchangeable rules of physics and pre-defined roadways that add stability and consistency to driving.
For example, if a person walks out in front of a vehicle, the AI can calculate things like the distance a person is away from the vehicle, the amount of force needed to stop the vehicle, and the ability to maneuver around the vehicle. If a crash happens, AI can calculate what is needed to have the least damaging impact on the vehicle’s occupants.
The financial markets do not play by stationary rules. Proof of this is seen when you look at how the markets have reacted considering the coronavirus pandemic. If past performance indicated current performance, the market should be in a free fall. However, what we are seeing is that while certain sectors are suffering because of the pandemic, other sectors are flourishing.
For example, the meteoric rise of the communications company Zoom could not have been predicted. There is no learning model that would have showed that a company that was struggling to have 10 million meeting attendees per month prior to the pandemic is now boasting hundreds of millions of meeting attendees every single month.
And this is just one example. The markets fluctuate based on social, political, and economic events. AI, machine learning, or any accounting tools cannot accurately predict these – accounting tools can help you with making smart choices when it comes to your budget, but you can never create any kind of long-term strategy solely based on the current state.
For example, the markets reacted to the election of President Donald Trump in 2016. Traditional wisdom and what people consider being common knowledge dictated that then Secretary of State Hillary Clinton would win the election. However, after they cast the ballots, the world woke up to a surprise. There’s no way that artificial intelligence or machine learning could predict any of these things.
Circumstances Where Machine Learning and Artificial Intelligence Produce Reliable Results
The proceeding does not mean that machine learning and artificial intelligence have no place in predicting the financial markets. What it does mean is that there are limits to how far in the future predictions made by artificial intelligence can be counted on to be accurate. While the accuracy of machine learning and AI in predicting market fluctuations from day-to-day is doubtful, within the same day, machine learning and artificial intelligence have been shown to be a reliable source for indicating which way the markets are moving.
Part of the problem is that for AI and machine learning to predict fluctuations in the market from one day to another, there would need to be training data that spanned years or even decades. This training data would need to include enough variables and market reactions to create trustworthy models to predict the future.
Should Traders Rely on Machine Learning and Artificial Intelligence When Making Financial Decisions?
AI systems lack enough training data to produce predictable results. Still, there are many traders who have made a sizable fortune using trading bots, especially in cryptocurrency and the Forex market.
Before investing, system traders would do well to do their due diligence. This would include carefully evaluating the AI system and its track record over an extended time frame. How much training data is being used when modeling stock market fluctuations?
There is a negative correlation between performance and increased capacity of trades. This means that just because an artificial intelligence-based system produces results when a small amount of stock is being traded, these results don’t translate when larger quantities of trades are being made.
An investor would want to think about the source of the artificial intelligence trading system. Is it being offered to them and every other trader on the planet? If so, it is likely that the edge the AI system offers will be competed away because everyone else is going have access to the same system, so this will introduce a new variable into the financial market that will make the results produced by the AI negligible.
The financial markets have been and continue to be a sector that is heavily influenced by the actions of people. For example, there are certain companies that should have lost a considerable amount of value, but they are still holding onto their value because people believe that despite what the numbers tell them the company is basically sound. They believe that once the pandemic has been resolved, the company will build on its sound foundation and continue to be financially viable in the future. AI cannot quantify these types of sentiments.
