AI has brought the power of machine learning to retail forex traders. It is now possible for a trader who doesn’t have sophisticated coding knowledge to open ChatGPT or another AI chatbot, and work with it to build a functional, personalized trading algorithm. In this post, we explore the ways that AI specifically is impacting algorithmic trading.
1. Rapid processing and execution for automated trading
AI is able to run rapid data analysis, incorporating quantitative and even qualitative data from numerous sources in real-time.
As a result, algorithmic trading with AI can now spot more opportunities more quickly, with rapid execution when setups are identified.
2. Faster and easier testing
If a trader wants to build an algorithmic trading robot, or even design a manual trading method, they can conduct much faster backtests using AI than they would have been able to carry out in the past.
As a result, it takes far less time and effort to home in on an effective trading strategy. This saves time building algorithms for auto-trading.
3. Troubleshooting and refinement
When all is going smoothly with auto-trading, things are pretty hands-off. You just check in regularly to make sure that your algorithm continues to deliver the same results you have come to rely on.
But even the best trading strategies need manual adjustments sometimes. That troubleshooting process can be slow, painstaking, and frustrating.
With AI, however, you may be able to speed up the process of figuring out what is going wrong, and fixing it.
You can tell ChatGPT what is going on, and share the decline in your results, along with any specific data you have been logging.
Ask ChatGPT to help you analyze your data and scenario, and to see if it can identify any specific patterns that might be accounting for the losses.
You can also ask it for direct recommendations for ways you could try changing your trading algorithm to boost your profits.
If it comes up with some ideas you think are worth trying, you can charge it with testing out those ideas for you.
Hopefully after a few rounds of that process, the AI will help you identify how you can improve your algorithm and get it delivering strong results again.
4. Adaptation in real-time to the markets
One of the coolest things about AI for algorithmic trading is that AI can make real-time adaptations to the markets as they change.
For example, there are now trading apps out there powered by AI for various assets that do things like detect market regime changes in real-time, and automatically adjust risk parameters in response.
Alas, MT4 doesn’t yet offer the level of integration that would allow you to run this type of continuously-adapting AI bot. But we imagine that it may be possible in the future.
One thing we will say is that you should be cautious about how much you would allow such a bot to modify itself in real-time.
The example we just gave is a good approach. It lets the AI switch risk parameters automatically when market changes warrant it. There is a balance there between being adaptive, and remaining systematic.
But if you let the AI bot spontaneously make wholesale changes to its entire code, then you have no idea what you’ll end up with while you are away from your trading platform. Whatever it is, it will be untested, and probably will not perform as you would hope.
Challenges and Limitations
We have gone over some of the opportunities that AI is bringing to algorithmic forex trading. But we also should discuss some of its challenges and limitations.
- Data quality: You know the old saying about programming, “garbage in, garbage out.” Ultimately, AI is only as good as the data that goes into it. If you are feeding it subpar data and expecting it to work wonders, you will be disappointed. You need to be feeding it high quality data if you want high quality results.
- Contextual awareness: AI is able to identify patterns in existing information, and replicate them, and make predictions based on them. But it does not actually understand what it is analyzing or doing. As a result, it frequently displays a dire lack of awareness of real-world contexts. Only a sentient, human trader is able to bring that full contextual awareness to forex trading right now. It is critical to keep in mind that you cannot depend on your AI for this.
- Hallucinating: One of the consequences of a lack of contextual awareness is that AI still regularly hallucinates. It just makes up stuff whole-cloth, and may also sometimes ignore instructions, or distort them. Therefore, you cannot totally trust it. You have to keep a close eye on what it is doing, especially during times of volatility or choppy market conditions.
- Traders might lose touch: Automated trading in general puts traders at risk for relying too much on their algorithms, and forgetting to stay involved in their trading. That risk gets even higher when incorporating AI into aspects of trading, since AI likewise seems to tempt people to disconnect from manual processes. But it is important to stay involved. Otherwise, you might not notice right away if your algorithm needs adjusting.
Expect Continuing Changes Through AI
AI is transforming algorithmic trading by making it faster and easier to test strategies, build algorithms for trading, and troubleshoot when things go wrong. In scenarios where full integration is possible, AI bots can make real-time adjustments to algorithms in response to market changes.
AI is not evolving at the insanely rapid pace it was a couple years ago, but it is still improving pretty fast. So, expect to see more and more uses for it with respect to algorithmic forex trading over the years ahead.
