How to Use Artificial Intelligence for Trading

Interested in knowing how artificial intelligence is used in stock trading? In this article, we will discuss the same in detail.

Opportunities in AI-powered Trading for Start-Ups

I see three major opportunities for start-ups in the AI-powered stock market trading space for the next few years. These are essentially three different paths starting from the same fork in the road: You‘re building an algorithm to trade with. Who is it for, and how will you monetize it? Here are the three paths:

1. Start Your Own Private AI-Powered Hedge Fund

If you can build the best algorithm for stock market trading, it makes sense to take the gains for yourself. That‘s why starting a private hedge fund with a proprietary algorithm is a huge idea.

This isn‘t for the faint of heart, even by entrepreneurial standards. You‘ll need to gain access to hundreds of millions of dollars to have the kind of leverage that it takes to earn immense financial market gains. You‘ll also need to outperform 99% of the other funds on the market, some of whom are already working with the leading developers in this field.

Remember all that info about the Medallion fund, who have earned 30+% for 28 years? That is the competition, and they‘ve got around 100 employees working on their algorithm in all its various forms. You‘ll need Elon Musk levels of fortitude and endurance to make a dent with your own fund – but you‘ll reap Musk-level rewards if you do. Good luck.

2. Build Algorithms and Sell Them to Other Hedge Funds

This is the much more reasonable version of the above idea. You don‘t need to get a fund started and work with hundreds of millions of dollars of other peoples‘ money. Instead, you simply target the people who run hedge funds and convince them that your algorithm can improve their returns.

AI-powered stock trading, using advanced machine learning technologies like deep learning, deep neural networks, and natural language processing, is an increasingly hot topic.

The New York Times, Wall Street Journal, wired.com, Forbes, and many other major publications have written about it in the last few years. People are interested, they‘re hungry to get in on the action – but access is limited.

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As banks continue to update themselves and enter the modern era, there is a big need for profitable and reliable (i.e. disaster-proof) algorithms that can earn better returns than humans can do alone.

If you can build it and get the right information to the right people, you can sell your services to the banks.

3. Sell AI Algorithms Designed for Basic Investing Practices

There are only a few companies right now offering automated investing for the average person. If somebody‘s got tens of thousands of dollars to invest, they don‘t need advanced hedge fund technology – they just need some software that can allocate their funds into a simple and smart investment portfolio.

You can build a brand and sell your services directly to consumers, ala Wealthfront or Betterment. Alternatively, and I think this is the real winning idea, you could sell these services to banks who then offer them to their customers.

Companies like Schwab Bank and Ally are prime examples of businesses that could get a lot of benefits out of consumer-oriented AI trading algorithms. It isn‘t as exciting as high-stakes hedge fund trading, but it may be enough to earn you a serious payday.

Should You Market Your Algorithms Towards Large Businesses or Average Investors?

Some AI-powered trading will be hidden within the proprietary software of the legendary hedge funds. Very few people will be able to access those funds. That means there‘s a large market still looking for access to this service.

When you build algorithms for stock trading, you will probably want to target your services at banks. It‘s going to be hugely important to network with the people at these institutions who have enough authority to purchase and use your services. They are your true target market.

If you‘re looking to build advanced stock trading AI, you won‘t be selling it to average consumers. If everybody has the best AI, it‘s the same as if nobody had it. It‘s like two computers playing each other at chess with one algorithm – it will average out to a tie game.

Ben Carlson summed up this line of thought while speaking to Wired: “It‘s really hard to envision a situation where it doesn‘t just get arbitraged away.” The more people that have access to AI trading, the less effective it becomes.

This isn‘t a Warren Buffet or Peter Lynch kind of situation. If Warren decides to switch his investments to a new fund, he‘s still one of a kind. The old fund loses him and the new fund gains him. With AI algorithms, once everybody gets access to the best program, it‘s like a million Warren Buffets all competing with each other.

Aim to sell your advanced services to the banks. They have deep pockets, so they‘re a pretty good customer to sell to anyway.

Individuals Can Almost Never Beat the Market – But They Have Other Needs

It’s important to understand that whatever happens with artificial intelligence in stock trading, most individuals won‘t beat the market.

Howard Gold, a columnist for MarketWatch, points out that “It‘s not just that true stock-picking ability is as rare as, say, being a violin virtuoso or throwing a 95-mile-an-hour fastball; it‘s that the profits from such talent are eaten up by trading costs or management fees.”

These fees will remain a problem for average investors no matter how smart the technology gets.

Darren Wu of wisebread.com offers a related piece of advice for average investors: “The answer, [Darren] concludes, is to stick to the basics: asset allocation, diversification, and rebalancing”.

This is relevant to your job as a developer because it shows a way that AI-powered trading could become available for everybody. It‘ll be a good tool for regular people who want to automate their basic investing plans.

It would be quite lucrative to sell an “average investors‘ algorithm” to a bank, for example, who would then use it to offer an automated investing service for their clients.

If you want to sell automated trading services to individual consumers, look towards market leaders Wealthfront and Betterment as examples to learn from. Focus on automating simple, straightforward long-term investing.

The System is Evolving. Stay Alert!

Keep an eye out for new developments in the AI-powered stock trading market. These things are changing every day, and it‘s important to stay up to date on your opportunities and on the competition given the current trading patterns and trading scenarios.

Read more about fintech investments in our blog post and learn why AI plays an important part in algorithmic trading strategies.

Yesterday‘s best AI won‘t stand a chance against the current model. Remember that investment is a zero-sum game and that you need to create a premium product to attract interest from the real customers: The banks. Use the lessons from this article to help your business succeed in this exciting new field.

Moreover, partner with a software development team experienced in developing a robust trading platform using cutting-edge technologies. DevTeam.Space can help you here.

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Frequently Asked Questions on Artificial Intelligence for Trading