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How did AI find itself in financial markets?

It was going to happen eventually.

forex screen with glasses
Image: Unsplash

The technology of the financial markets revolves around fast calculations, transaction confirmation, and various algorithms to manage the sheer amount of volume it processes every single day.

Without the technology to do the calculating and formulating for us, we’d never have the global economy we’re enjoying nowadays. All of your currency exchanges would have to be done manually (which creates the risk of being swindled), and Bitcoin would simply not exist.

How AI was introduced as a trading tool

The nature of trading itself revolves around careful planning, tons of research, and in some cases fast reactions to the price changes. To put it more into perspective, imagine the Price of Bitcoin on a normal day in November 2017. Within a single day, the coin managed to increase its price by $500. No human was able to predict that, and no conventional logic could be applied.

But then, automatic Bitcoin trading software started to appear on nearly every single crypto exchange, crypto company or CFD Broker. The software was marketed as an automatic trading tool for every Bitcoin trader, regardless of their experience. It was showcased at this marvel of modern technology and how it would basically print them money while they were asleep. Did it work? Well, technically yes, but only during the time that prices were still increasing.

How does this AI work?

The whole idea of the Bitcoin trading AI revolves around interchangeable algorithms, price tracking, and curve measurement. For example, having a stale program that just knows when to close and when to open positions, indicated by the user does not provide enough value.

The AI needs to determine how they should act during a specific time of the market. For example, let’s say that the price of Bitcoin just increased by $100 in an hour, due to a controversial Tweet from Trump or somebody influential. The algorithm would be able to calculate that such a quick jump is sure to be followed by a fall, therefore it would start shorting (selling) the asset.

What’s important to notice here is that this happens within milliseconds. There is no human alive in this world that could achieve that speed even if they’d devoted their whole lives to it. What the AI does is allow traders to keep open positions overnight, due to the AI’s capabilities of handling them, so that losses are minimized and profits are maximized. Sure, it doesn’t produce hundreds of dollars in profits overnight, but it does help to generate additional income while the trader is not next to his station.

What are the flaws?

It can’t really be seen as a flaw of the algorithm, but more as an inconvenient market for it. You see, the market where this AI is most effective is very volatile, meaning that the prices go up and down at a very fast pace, and very often. It also depends on the spread, which is the difference between buying price and asking price. For example, when you’re at a currency exchange booth, a sign will be there showing how much dollars cost to buy and to sell. (Buy – Sell = Spread).

Seeing how the AI processes all of the trades within seconds, it’s safe to say that it’s not very useful when the market moves slowly, and it’s also not profitable to sell an asset the moment you buy it, as the spread will put you at a loss.

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Just another guy who likes to write about tech and gadgets.

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