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“In computer science, artificial intelligence (AI), sometimes called machine intelligence, is intelligence demonstrated by machines, in contrast to humans’ natural intelligence.”
While artificial intelligence (AI) has long been considered a potentially disruptive technology, it is beginning to evolve into a concept that could turn upside down the entire value chain of the financial sector. This change is a consequence of the enormous potential of artificial intelligence. AI technologies are increasingly being used to bring new products to the consumer, improve existing solutions, increase the operational efficiency of business processes, and explore discoveries that lead to innovative business ideas.
Artificial intelligence does not describe a single technology but combines different technological developments. These include text generation and machine processing of natural language, so-called automatic reasoning, pre-habilitation methods, machine learning, and autonomous and intelligent agents. In search of perfect solutions, they have all been brought together to what we now call artificial intelligence.
They describe abilities that resemble or even surpass those of a human being. But despite all these advantages, not all aspects of artificial intelligence have reached the same maturity level. Some of them need decades of development, including so-called ” strong artificial intelligence” That could eventually enable machines to mimic the intelligence, plasticity, and understanding of the human brain.
Please read our article How to use AI in Forex trading.
AI in Forex trading
Artificial intelligence AI in forex trading has a significant impact because stats emphasize that 90% of forex traders today use robots (Expert advisors) in the trading business. Innovative technologies allow traders to analyze massive amounts of data, historical prices, and past economic events to create various prediction models.
Machine learning (ML) is a subset of artificial intelligence (AI) that focuses on algorithms and statistical models, allowing computers to perform tasks without explicit programming based on data patterns. In contrast, artificial intelligence is a broader field that encompasses the development of machines or software to mimic human-like cognitive functions, including but not limited to machine learning.
Several decades ago, Jim Simons and his scientists and mathematicians built Renaissance Technology, the most profitable quant fund in history. The first mathematical expressions and the first successful use of computers in trading were started with Renaissance Technology.
Machine Learning and AI
At its core, machine learning is about making predictions based on data. It’s about teaching machines to recognize patterns and make decisions accordingly. This characteristic dovetails perfectly with the needs of algorithmic trading.
The Role of Programming Languages
Languages like C++, Python, and R have been instrumental in this revolution. These languages offer the necessary tools and libraries to facilitate the application of machine learning algorithms to vast datasets. Python, for instance, boasts libraries like TensorFlow and Scikit-learn, which are indispensable for machine learning practitioners. Often developed by prominent firms or enthusiastic communities, such packages are typically open-sourced, meaning they’re freely available. This democratization of tools has been a critical factor behind the surge in machine learning’s popularity in trading.
Why the Sudden Rise in Popularity?
Machine learning isn’t new. But what’s changed in recent years is accessibility. With increased machine learning packages, traders and firms now have better access to advanced tools and algorithms. This accessibility has led to greater experimentation and application, allowing trading strategies to evolve and become more sophisticated.
Understanding Algorithms in Trading
In the context of trading, algorithms can be classified based on their underlying logic or functionality.
For instance:
- Linear and Logistic Regression are foundational techniques that attempt to predict a value or classify data based on input variables.
- Support Vector Machine (SVM) and K-Nearest Neighbor (kNN) are used for classification and regression problems.
- Deep Learning, often associated with neural networks, is a subset of machine learning that can process vast amounts of data and recognize intricate patterns.
- Random Forests and Classification and Regression Tree (CART) are decision tree-based methods for classification, regression, and other tasks.
These algorithms, among others, are being employed by trading firms for various purposes:
- Determining the best input parameters for a trading strategy.
- Analyzing historical market behavior using extensive datasets.
- Making predictions about future price movements or market conditions.
Expanding One’s Knowledge Base
Understanding machine learning is becoming increasingly essential for anyone keen on staying updated with technology trends. Several prestigious universities worldwide offer courses on machine learning, ensuring that traders can enhance their skill set and stay ahead of the curve.
Beyond formal education, various markets, like the forex market, incorporate machine learning techniques. A blend of programming skills, technical analysis understanding, and a solid grasp of basic statistics can significantly boost a trader’s proficiency.
Machine Learning Competitions: A Different Kind of Training Ground
Machine learning competitions are a fantastic avenue for those keen to challenge themselves and learn in a competitive setting. Platforms like Kaggle, NUMERAL, and Topcoder host competitions that, while not always directly related to trading, expose participants to a wide range of machine-learning problems, broadening their horizons.
Institutional Adoption of Machine Learning
Integrating machine learning (ML) into financial strategies, especially in trading, recently gained significant attention. Notably, well-known funds like Citadel, Shaw, and Medallion leverage machine learning methodologies to enhance their trading strategies potentially. But how extensive is this integration, and what are its actual implications?
Current Scenario: High-profile Funds and Machine Learning
Prominent funds such as Citadel, Shaw, and Medallion are known to incorporate machine-learning techniques into their trading operations. Their utilization of ML has ignited immense curiosity and speculation in the financial community. However, despite the intense discussions, there is no clear consensus or transparency on the precise impact of ML on their overall performance. While it is undeniable that machine learning is rapidly becoming a crucial component in the modern trader’s toolkit, its tangible impact on trading success remains somewhat nebulous.
Machine Learning in Trading: Demystified
Contrary to popular perception, the integration of machine learning in finance is not as profound as it might seem to outsiders.
1. Signal Generation and Testing:
‘Signals’ in trading refer to indicators or triggers for trades based on past data. Machine learning, especially techniques like linear regression, can be instrumental in identifying and refining these signals. However, the success of these signals is tightly coupled with rigorous validation and statistical testing. A misstep here could be the difference between profit and loss.
2. Feature Engineering:
Supervised Learning, where feedback is vital, is more suited to trading. However, using domain knowledge to extract features from raw data, feature engineering remains critical. Sophisticated strategies might involve integrating external data or economist models into trading algorithms, but often, these complex inputs feed into relatively simple trading strategies.
3. Borrowing from Speech Recognition Methods:
Trading, in essence, is about predicting the future based on the past. Techniques from areas like Natural Language Processing (NLP) have found relevance in the trading domain, emphasizing the interdisciplinary nature of modern trading strategies.
While machine learning has found its place in the realms mentioned above, areas like option pricing, high-frequency trading execution, portfolio strategy, and risk management rely less on machine learning and more on domain-specific models.
The Role of Quantitative Traders:
Quantitative traders, or ‘quants,’ have increasingly focused on machine learning to derive trading strategies, especially in stock markets. The primary challenge is harnessing these advanced techniques to generate alpha, i.e., a performance measure on a risk-adjusted basis. The discussion about machine learning’s role in algorithmic trading has dominated many financial forums recently, signaling its growing importance.
The Future of Machine Learning in Trading:
The trajectory of machine learning in trading is ascending. Advancements in technology, especially in electronic trading, have accelerated the shift towards automated trading. Both large multinational firms and smaller outfits are adopting ML-based strategies, suggesting that a rudimentary understanding of machine learning will soon become a prerequisite for traders.
Furthermore, as hardware continues to evolve, supporting the computational demands of advanced ML models, we can anticipate even more sophisticated strategies emerging in the trading domain.
In conclusion, while machine learning’s role in finance, mainly trading, is undeniable, tempering expectations is essential. Machine learning offers tools – it’s up to the traders and strategists to harness them effectively. As the adage goes, “It’s not the tool but the craftsman that counts.”
Future Impact of Artificial Intelligence and Machine Learning in Finance
However, there are already tasks that have hitherto only been attributed to the human mind that are already performed by artificial intelligence – in a process that reflects replacing human labor with industrial machinery. The financial sector is an excellent example of how AI is already working on different levels:
- Improving customer experience and customer relationships through more human interaction with chatbots, virtual agents, and intelligent systems that can communicate and communicate with each other based on the next generation of natural language machine processing
- Through a demand-oriented offer of services such as Robo-Advisors, individualized products, and the registration of new customers entirely on an online basis, based on machine learning
- By automating internal business processes, including mechanical and cognitive processes, by replicating human cognitive abilities, such as finding and understanding the meaning in a variety of documents, recognizing hidden patterns, and creating complex systems
- Through the full practical use of financial data, machine learning can help uncover abnormalities, combat white-collar crime, and automate processes in an infinite array of financial product specifications. In which areas can artificial intelligence influence the financial business the most? The financial sector is currently being shaped by artificial intelligence. Technology has shown that, with its disruptive nature, it has the potential to change financial processes. This change holds many opportunities and possibilities: pure research projects result in the most critical business processes’ actual change.
Artificial intelligence future
What we still have not seen is the true potential of artificial intelligence. Over the next two to three years, we will witness a massive increase in processes and applications. Technologies are already maturing to challenge executives in which areas they want to use them to change their business processes. This can succeed, for example, by enhancing the customer experience and improving customer relationships by offering new services, automating tasks requiring human cognitive skills, and exploring new areas to expose new and hidden knowledge.
It is also essential to distinguish between areas where AI is already well developed and where quick, direct successes are achieved. And other areas require a more exploratory approach because the risks are higher, but there is potential for promising disruptive outcomes. Requires cognitive skills and exploring new areas to expose new and hidden knowledge. It is also essential to distinguish between areas where AI is already well developed and where quick, direct successes are achieved. And other areas require a more exploratory approach because the risks are higher, but there is potential for promising disruptive outcomes.
Requires cognitive skills and exploring new areas to expose new and hidden knowledge. It is also essential to distinguish between different areas:
There are areas where AI is already well developed and quick, direct successes are achieved. And other areas require a more exploratory approach because the risks are higher, but there is potential for promising disruptive outcomes. Apart from that, the management team must also carefully plan the implementation strategy.
To do so, it can rely on the talents in its own company, attract external professionals, collaborate with FinTechs, purchase black box products, or provide advisory services. These possibilities can also be done in collaboration with internal analysis or innovation teams by using them as playgrounds or creating prototypes on a pilot project basis. One example is the GFT Innovation Lab, where FinTechs, technology startups, and financial institutions work together to explore and design different AI applications – both at the business and some technology levels – before integrating them into their enterprise.
Also, executives should think about and identify technology platforms that best fit their business and strategy. You can choose either internal or external developers to build core capabilities, use an open-source infrastructure (such as Hadoop or TensorFlow), outsource data products and software as a service to FinTechs, or access cloud-based solutions (such as Amazon), IBM Watson, Google Cloud Platform and Microsoft Azure). Finally, those in charge should begin this process by identifying areas where artificial intelligence can change business processes.
A substantial change in human resources through artificial intelligence
Artificial intelligence will not completely replace the present – human – personnel, but it will significantly change human resources. A different focus will bring unprecedented levels of collaboration between man and machine. Every disruptive technology also brings a wave of previously unknown jobs and tasks. As in the late 1980s, when the advent of computers cost thousands of jobs, we are again shifting away from teams to more demanding jobs, such as tasks requiring excellent customer service.
Also, professional teams must constantly review AI algorithms supported by more advanced AI technologies. In short, artificial intelligence technologies can automate and industrialize the intellectual tasks previously thought only of the human brain. That’s why they have the potential to revolutionize the financial services industry completely. All this is possible, no matter the difficulties, risks, and unrealistic, short-lived expectations that each new technology brings.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
