What is an AI Trading Software?

Stock traders look across many data points and charts to decide when to enter and exit positions. While this can get complex in a hurry, artificial intelligence (AI) trading software aims to simplify the trading experience. Artificial intelligence software can make trades for you or give you enough information to make trades on your own. AI trading software makes relevant information more accessible and can help your portfolio.

How Does an AI Trading Software Work?

AI trading software uses algorithms to monitor data and technical indicators to execute trades. You can choose to have AI trading software conduct the trades for you or highlight opportunities that you manually trade if you believe it makes sense for your portfolio. AI trading software has several components that make it a desirable resource for investors.

1. Data Gathering

Artificial intelligence collects real-time and historical data points about a stock’s price points and performance. AI trading software also makes it easier to view the public opinion of a stock via social media commentary and news articles. 

2. Data Preprocessing

The preprocessing step occurs before the AI trading software processes data. Data preprocessing occurs when an AI filters results and makes it ready for further analysis.

3. Analysis and Pattern Recognition

Traders look at real-time and historical price movements to detect patterns. While traders look at charts in front of them and make their best judgments, AI trading software can look at decades of data and find patterns within seconds. Traders can use AI to find patterns and trends that can tip them off on future price movements. 

4. Strategy Development

Artificial intelligence interprets the data and patterns to construct a strategy. Artificial intelligence can make investments on your behalf and establish entry and exit prices. Traders can also set parameters that help AI trading software make and recommend trades that align with their objectives.

5. Backtesting

The viability of a strategy gets tested when you take action on it. Current market conditions impact how your portfolio will perform, but you can use backtesting to see how your current strategy would have performed in other timeframes. AI trading software can test your current strategy against historical market cycles to see the effectiveness of your strategy. A successful backtest does not guarantee the strategy will work in the present, but it can provide additional insights that help you improve your strategy.

6. Execution

If you are happy with the strategy and the parameters, you can set the AI trading software loose and let it perform trades on your behalf. You won’t have to look at charts and market news as often, with the AI doing most of the work. Some traders use AI as a companion instead of having it make all of the trades, but it’s nice to know that you have both options.

7. Risk Management

Every strategy has risks, and while AI trading software isn’t using a crystal ball, it can mitigate risks. Trading software uses a combination of stop-loss orders, adjustments to portfolio allocations and adaptive strategies based on market conditions to manage risk. AI trading software can modify its course based on current market conditions and look at historical data for additional guidance.

8. Monitoring and Optimization

Stock traders learn from every trade and adjust their strategies as they get more experience and accumulate more data. AI trading software works in the same way and makes tweaks along the way. The software monitors its performance from previous trades and looks at previous market conditions to optimize its strategies.

Advantages of Using an AI Trading Software

AI trading software presents several advantages for traders. These are some of the perks you can expect. 

1. Data Analysis

Data analysis is an important part of stock trading. Traders have to look at present data points, which change every second, along with historical data points. It can get overwhelming, but AI software simplifies this process. It can interpret relevant data points and information and help traders identify patterns. The data analysis from AI trading software can lead to better trading decisions.

2. Speed and Efficiency

AI cuts down the amount of time it takes to develop and implement a coherent stock trading strategy. Relevant information is readily available, and AI can instantly discover trade signals and execute orders for you. Traders will have an easier time keeping up with a hyper-paced market and capitalizing on short-term opportunities.

3. Removing Emotional Bias

Traders can get caught up in emotions and make trades that deviate from their parameters. Artificial intelligence is not prone to emotion and can stick with the strategy regardless of sharp price movements and other factors. Fear and greed do not impact AI trading software.

4. Risk Management

AI trading software has several rulesets in place to minimize losses. AI can set stop-loss orders, automatically trim positions based on portfolio diversification goals and adjust to market conditions. Some traders ignore risk management or let their emotions get in the way, while AI trading software can stick with the plan.

5. Increased Speed of Decision-Making

AI trading software can make split-second decisions once it detects an opportunity. A vast database makes it easier for AI trading software to find compelling real-time opportunities and capitalize on them before the opportunity goes away.

Disadvantages of AI Trading Software

AI trading software has many benefits, but it also has some disadvantages. Here are some things to keep in mind before using AI software for your trading strategy. 

1. Over-Reliance on Historical Data

Artificial intelligence has a treasure trove of data, but most of it is from historical performances. This data helps with backtesting, but it may not be as relevant in the present stock market. AI may not react as quickly to earnings reports or anticipate macroeconomic changes.

1. Lack of Human Judgment

Each trader sets the rules for AI trading software. That software can follow the rules well, but some market conditions suggest quick modifications to current rulesets. Artificial intelligence needs a human to adjust the parameters based on changes in the market. A human trader can consider the slight nuances of stock trading and intervene when the AI trading software executes unprofitable trades.

1. System Complexity and Technical Issues

While artificial intelligence can seem like a flawless machine incapable of human error, it is still prone to technical errors. A server crashing, glitch in the software or connectivity issue can temporarily shut off the AI. Under this scenario, you are locked into your positions unless you manually execute trades and stay on top of your portfolio. The AI cannot buy stocks to capitalize on opportunities or sell them to take gains or limit losses. AI can work well until technical issues render it unusable until the tech issues get fixed.

1. Limited Adaptability

AI tends to perform better in calm markets where market changes aren’t as dramatic. However, AI is not as well equipped to handle dramatic market volatility and a flurry of market-moving events. Traders have to stay on top of artificial intelligence trading software to ensure it is properly configured for current market conditions.

1. Dependence on Data Quality

Artificial intelligence analyzes large datasets and relies on those insights to make trades. If the data is inaccurate, the AI can formulate faulty conclusions that hurt its performance. Traders must review the data sources and determine if they are accurate.

AI Trading Software vs Human Stock Trading

After exploring the pros and cons of AI trading software, it’s time to assess how it compares to human stock trading. Here are some things to keep in mind when deciding whether to use an AI or do the trades yourself.

• Ability to stick with the plan: Artificial intelligence does a better job at sticking to its parameters. Humans can become susceptible to fear, greed and other emotions.
• Adaptability: Artificial intelligence has some built-in adaptability, but human traders can respond more quickly to market news and real-time events.
• Errors: Humans can become prone to mistakes from emotions playing a role in trades. However, AI can get shut down or temporarily stop working because of technical glitches.
• Information: Artificial intelligence can comb through historical data much quicker than a human trader. AI can streamline research and reveal more trading ideas.
• Real-time trading: Artificial intelligence can detect opportunities that align with its parameters faster than human traders. However, relying on AI and rarely checking it can become problematic if market conditions change or a technical glitch prevents AI from working.

Should You Use AI Trading Software?

AI trading software can make your trades for you and gather relevant information to assist with your trading strategy. Some traders take a hands-off approach when enabling AI trading software, while others use it as a trading companion. AI trading software delivers quick, relevant information and lets you backtest your strategies. It can be a great addition to your trading strategy, even if you prefer doing the trades yourself.  

Frequently Asked Questions