AI Could be the Future of Trading

by Jurica Dujmovic
By Jurica Dujmovic

As our world increasingly digitizes, artificial intelligence has started to take on roles that were once reserved for us humans.

Its reach has extended into fields as diverse as healthcare, transportation and now, intriguingly, finance.

Could our financial future be determined by machines rather than seasoned traders analyzing the ebbs and flows of the market?

This question has been circling my mind lately, especially after hearing about a recent experiment with ChatGPT — an AI developed by OpenAI.

Surprisingly, ChatGPT managed to select a portfolio of stocks that outperformed the S&P 500 … as well as some of the U.K.’s most popular investment funds.

With the ability to crunch vast amounts of data and make decisions void of human bias, it seems these AI systems might just have a knack for this.

Today, I’ll shed light on the potential of AI in trading, its limitations and what this means for us — the humans behind the algorithms.

In the aforementioned ChatGPT experiment conducted by financial comparison site Finder UK, the AI-powered chatbot was able to build a portfolio of 38 stocks that saw a gain of 4.9% over an eight-week period.

While this might not seem all that impressive, consider this: During the same period, the S&P 500 saw a rise of 3%. And 10 of the leading investment funds in the U.K. saw an average loss of 0.8%.

By using criteria such as low levels of debt and a track record of growth, ChatGPT chose to include companies like Microsoft (MSFT), Netflix (NFLX) and Walmart (WMT) in its portfolio.

Without a human hand to guide it, the AI analyzed tons of data, made its choices and outpaced the market, leaving seasoned fund managers and algorithm-based indices in its wake.

Now, the beauty of this experiment lies not only in the impressive gains made by ChatGPT, but also in the unique advantages that AI brings to the complex world of trading.

Imagine being able to process vast amounts of data at lightning-fast speed, analyze patterns and trends without bias and operate continuously without the need for sleep or coffee breaks. That's precisely what ChatGPT and similar AI systems offer.

In a world where financial decisions often hinge on split-second timing and an ever-changing global landscape, AI’s capabilities are nothing short of revolutionary.

Still, for all the exciting opportunities it could provide, AI is not without its flaws that should be carefully weighed against any potential benefits.

The primary drawback is that we're still at the experimental stage of AI's venture into trading. The unpredictability of financial markets — a factor all too familiar to human traders — poses a significant challenge to AI as well.

Financial markets aren't just about numbers and trends; they're affected by a number of variables, many of which are inherently unpredictable.

For instance, political upheavals, natural disasters and shifts in investor sentiment are elements that a traditional AI may struggle to factor into its decisions.

Even when it comes to processing raw data, AI can run into the issue of overfitting — a scenario where the AI becomes so attuned to the historical data it has been trained on that it falters when faced with new, unfamiliar market conditions.

This is similar to studying past exam papers and expecting the same exact questions to pop up on the final exam. So, when you take the actual test and it contains questions you’ve never seen before, you’re stumped.

Moreover, while the absence of emotional bias in AI can be an advantage, this means AI also lacks human intuition and creativity.

When facing an unpredictable situation, an experienced trader can pick up on subtle market signals and respond accordingly with an innovative solution. This is a skill that AI — in its current state — struggles to replicate.

It’s no wonder that some people approach the prospect of AI-driven trading with understandable caution instead of awe. After all, entrusting our hard-earned money to a machine requires a big leap of faith.

And as the financial landscape teeters on the edge of this digital transformation, the trust and acceptance of the public is paramount.

For AI to truly make a mark in trading, it needs to win the trust of the very people it seeks to serve: individual investors.

And that's where public perception comes into play.

In a recent survey conducted by Finder UK, it was revealed that 8% of U.K. adults have already used ChatGPT for financial advice. Meanwhile, another 19% said they would consider doing so.

This indicates that there's a budding curiosity and a willingness to embrace this new technological advancement.

However, the survey also revealed significant apprehension about using AI for financial decisions. A sizable 35% of those surveyed said they would not consider using a chatbot like ChatGPT to guide their financial choices.

Such resistance could be attributed to a multitude of factors, such as a lack of understanding about how AI works, concerns about its accuracy or simply an unwillingness to trust a machine with such important decisions.

While these figures hint at a mixed public response, they also highlight the fact that we're only at the beginning of this journey.

As we navigate this technological revolution, it’s also worth considering the potential impact on those who have traditionally been at the helm of our financial choices: human traders.

So, let’s shift our focus from AI and the public to the human side of this equation.

In what ways will the role of human traders evolve in the face of their AI counterparts? And what could this mean for the trading industry as a whole?

For starters, the role of human traders could shift toward a more supervisory or strategic one.

With AI handling the grunt work of data processing and preliminary decision-making, traders could focus on tasks that require a higher level of understanding and intuition. This includes duties like interpreting unexpected market events or planning long-term investment strategies.

Additionally, traders might need to upskill or reskill to adapt to this changing landscape. For example, a trader in this AI-driven future may need to have a good understanding of how these AI systems work, enabling them to oversee these algorithms effectively and intervene when necessary.

So, a new breed of traders who are not just finance-savvy but also tech-savvy could emerge from this shift.

Overall, the potential implications for the trading industry are profound. If AI continues to advance and achieve superior performance in trading, it could lead to cost reductions and efficiency improvements in the industry.

On the flip side, it could also result in job displacement or require substantial changes in existing roles.

Next, as we envision this AI-augmented future, it’s essential to ensure that this technology is handled responsibly. The proper safeguards and regulations need to be established so that we’re not only financially sound, but also ethically robust.

First, there's the issue of transparency. AI systems used for trading should be designed and operated in a way that their decision-making processes can be understood, scrutinized and audited.

If done properly, stakeholders should be able to trace why and how a particular trading decision was made by the AI.

Then comes the issue of accountability. In the case of an AI-driven trade gone wrong, who is held accountable? Is it the creators of the AI, the operators or the AI itself?

Regulations need to clearly define roles and responsibilities to address this topic.

Another significant concern is data privacy and protection. AI systems rely on massive amounts of data, including potentially sensitive information about investors. To guarantee this data is protected and used responsibly, robust mechanisms must be constructed.

Last but certainly not least, there’s the question of fairness.

As AI systems learn from data, there's a risk that they could replicate or amplify existing biases in the financial system. So, regulations should ensure AI systems promote fair opportunities for all investors.

Looking ahead, we must remember that we are still at the very beginning of this grand journey. The potential of AI in trading is enormous, and this digital evolution could be so transformative that it touches every facet of the financial landscape.

Although we can’t predict the future, what’s clear is this: The integration of AI in trading isn’t just a technological shift, but a societal one.

It’s not just about the prospect of better returns or more efficient processing. As AI creeps further into our daily lives, we are tasked with harnessing the power of AI in a way that respects privacy, ensures accountability and upholds fairness.

Even though our financial future may be written in lines of code, remember that human hands are typing those lines. Humans are the ones guiding this journey and striving to create a future that benefits us all.

What about you? Are you for or against AI trading in your stead? Let us know by tweeting @WeissCrypto!

Best,

Jurica

About the Contributor

Jurica Dujmović has been a creator, collector and investor in digital art, including the rapidly evolving non-fungible tokens (NFT) space since its inception nearly a decade ago. He’s also passionate about digital currencies and writes about crypto trends, including what’s new in the Weiss Crypto Ratings, in Weiss Crypto Daily. 

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