Pros and cons of AI trading

In recent years, computers have been trained to do things we never dreamed of (or, more correctly, only a few visionaries, in films like Terminator 2: Judgement Day, dreamed). Specifically, computers have been guided to transcend their own passive, programmable natures. The result, shockingly, is that technology in our times is capable of inferring and reasoning on its own. Moreover, it can take the next step and make decisions based on its inferences. 

The secret force behind AI (artificial intelligence) is machine learning: the process of drilling an algorithm to come out with conclusions or predictions. The human brain is used as the model for machine learning algorithms like neural networks. When you add hundreds of layers to a neural network, you get something that resembles the human brain considerably more, and we call this deep learning. This technology has already taken up several places in our lives, for instance in the fields of self-driving vehicles and voice-recognition tools.  

Many people have written about the potential benefits of AI. Imagine if you were tasked with sorting through a thousand books for information on the industrial revolution and then presenting a well-crafted argument that its overall impact on society was positive. AI is super well-suited, not only to data collection on a massive scale, but also to arriving at unbiased, data-driven conclusions – instantly.  

On the other hand, imagine if the task before you was comforting someone in the grips of depression. At this, a chat bot could only throw up its (not very comforting) hands. There are times, then, when nothing can replace a human being.  

When it comes to using AI in automated forex trading, its special powers give us plenty of reason to get excited but, at the same time, we are reminded that real people remain indispensable. In this article, we will try to delineate where the powers of AI can enhance the online trading process, but also where the robots would do best to stand aside and let the humans take over.  

Where Can Automated Trading Improve the Online Trading Process?

Online traders use technical analysis to discern patterns and trends in asset prices. The aim is to figure out, within a certain sphere of probability, what the asset’s prices are likely to do in the near future. For this task, they use a variety of tools like candlestick charts and pattern identification according to a rulebook of reliable formations. These formations go by names like Abandoned Baby, Hanging Man, or Bearish Engulfing Pattern. 

As you might imagine, the superior data-processing powers of AI can be put to work in this part of the online trading process. Machine learning “can also find many other [patterns] that are potentially not so intuitive,” explains Stefan Zohren of Man Group, “which is an advantage because obviously fewer people might have found them”. At any given time, an asset’s prices are in the grips of both long- and short-term trends. It’s never clear which of them will be key in driving their next movement. AI can potentially give you incomparable insight into the most relevant trend for the moment.  

Taking a step back to the point where you’re choosing an asset to trade, AI can sift through hundreds of stocks for those that meet the requisite criteria. This isn’t such a simple thing to do, especially since it entails evaluating all the applicable data on a stock, from the fundamental (things like revenue reports) to the technical (for instance, moving averages and trading volume). Going about this sifting process on your own would consume many precious hours and much valuable energy. 

You might argue that AI forex trading systems can’t assist you in pursuing your personal trading goals, for example those relating to your own time horizon, budget, and risk tolerance. Here, you may insist, there is no replacement for the human touch of an old-fashioned stockbroker, who can lend you his listening ear and then fashion a portfolio suited just for you. Don’t be so sure. AI trading systems can take the personal information you fill into a questionnaire and, based on your input, devise a tailor-made portfolio to meet your needs. 

And then there’s the business of managing your trades. With all the careful monitoring of prices and other economic events entailed in this activity, your blood pressure is likely to rise a few points by the time you’re finished. Automated trading systems can free you from this stress. In particular, they can open the deal without your say-so, take responsibility for exiting your trade according to pre-set guidelines, and set in place stop loss orders that are tuned into live conditions in the market.

Where Does AI Fall Short? 

If you’ve seen Terminator 2, which depicts a future where intelligent robots take over the world, you’ve already got plenty of second thoughts on the question of AI. Putting aside apocalyptic scenarios like this, AI comes demonstrably short in performing certain tasks. It has been many years since people started figuring out how to harness the power of AI to perfect the online trading process, but success still eludes them. 

Understandably, one area of weakness for AI is in dealing with black swan events. Sometimes, unexpected and unique sets of conditions develop in the world, and their effect is to significantly alter people’s way of thinking and acting. In times like these, all the machine learning in the world won’t train a computer to assess where the market is headed. An example was the pandemic that struck in early 2020. When it did, the Voleon Group fund (which uses AI deep learning in guiding its decision-making and which, last year, controlled $5 billion in assets), stumbled.  

In fact, according to one measure, AI-powered funds underperform the benchmarks by which they gauge themselves 55% of the time. Some analysts put AI’s stock picking talents on approximately the same plateau as plain old humans. One problem that plagues automated trading systems is a dearth of relevant information to work with, which may be surprising if you consider how much data seems to be out there. But, on a deeper level, when AI systems come out with undiscovered price patterns, it’s always doubtful whether or not they will be applicable in reality.  

It’s not as if the financial markets are a math sum to be cracked. What guides them is a mix of intermingling factors whose workings are hidden from the eye – even that eerie eye of the Terminator 2 villain robot. To state it plainly: AI systems are frequently proven wrong in their predictions of future market conditions. From all appearances, they suffer from similar doubts that we do when faced with the task, and they tend to make incorrect calls in a substantial portion of cases. This is especially so when the market is volatile, which tends to knock AI off its form. Even when AI hasn’t necessarily been led astray, there’s another issue that bothers traders: its undecipherable thinking. It is often problematic when the logical process followed by AI systems is understandable to no one but themselves. For one thing, it’s difficult to trust such a system with your hard-earned money. And, especially if the AI success rate doesn’t wildly outshine that of humans, people prefer to follow a system that makes sense to them. 

Algorithmic trading, which can trigger multiple trades in seconds, also makes a significant impact on market liquidity (the ease with which you can trade an asset without affecting its price). The impact can be positive in that trading costs are lowered and bid-ask spreads tightened. But there can also be a negative effect when we see liquidity suddenly and unnaturally disappear. When the Dow Jones Industrial Average plummeted almost 1,000 points within a few minutes on May 6, 2010, the finger of blame was pointed at algorithmic trading systems that set off sell orders like dominoes. In the words of a research paper published in 2024, “Striking a balance between fostering innovation and safeguarding market integrity remains an ongoing challenge for regulators” in the financial markets.  

Automated Forex Trading Conclusion

Despite the shortcomings we see in the effectivity of AI in online trading, we should bear in mind that it hasn’t been employed here for very long. With time and practice, it’s feasible that AI will soon function much more smoothly in this field, opening doors that used to be closed. Even before we see signs of dramatic improvement, “In finance you can be very successful by just being a little better than 50%”, points out Michael Kharitonov, CEO of Voleon Group.  

In any case, there is plenty of reason to believe that human minds can’t be fully replaced in the area of online trading, perhaps ever. That’s why many fund managers use AI as a tool to streamline their own trading strategies, while firmly retaining their grip on the reigns throughout.  

On the iFOREX trading platform, AI is used in just such a way – functioning to give you instant, clear answers to your questions, and clearing the way for you to employ your own strategy with potency and poise. You’re the one with the power to elevate your trading acumen to a new level, with the help of the celebrated iFOREX education center – a storehouse of instructive articles, PDF guides, and video tutorials and more.