Recent years have seen an exponential rise in the use of AI and automation in trading across the global markets, as both individuals and institutions harness its power in their trading journey.
AI is especially prominent in the financial markets, where it has revolutionised trading by analysing vast amounts of data in seconds to help traders make fast, accurate and effective data-informed decisions in even the most complex markets. Its potential is unparalleled – from the more complex algorithms used by institutions to the everyday trading bots and apps available to retail users, AI trading is truly a game-changer.
In this article, we will explore the increasingly fundamental role and the future of AI in personal finance and trading, answering key questions including:
- What are AI and algorithmic trading?
- How do automated systems and trading bots work?
- What are the key platforms, risks, and opportunities associated with auto trading?
We will also look more closely at the role of automated trading bots, different types of automated trading and the crucial role of demo accounts.
What Is AI trading?
Also known as algorithmic, automated or auto trading, AI trading is a groundbreaking system that uses artificial intelligence, analytics and machine learning algorithms to interpret the live markets with a view to buy and sell stocks under the most favourable circumstances.
AI trading applications utilise predictive analytics which encompasses key elements of the process. One key example - trade signal generation - uses market indicators to offer precise entry and exit positions across different types of stocks and strategies.
It also includes pattern recognition where algorithms identify chart patterns and recurring price behaviours to predict future price movements, analyse the live markets and adjust strategies in order to grasp opportunities and effectively manage risk.
High-speed execution is another integral element of AI trading where the best technology can analyse vast amounts of data and execute trades in milliseconds.
AI-based trading systems monitor the markets 24/7 and analyse data to generate results and adjust strategies on an autonomous, ever-evolving basis. This differs from traditional rule-based systems (algorithmic trading) where action is taken based on a rigid and pre-defined set of rules and algorithms with the system executing trades only in line with the predetermined strategy.
Algorithmic trading: algo trading explained
Algorithmic trading is a rules-based automation process using pre-defined mathematical models to enable high-frequency trading far beyond the possible speed of any human trade and with the lowest possible latency.
Trading algorithms are built using combination of data collection and analysis, including historical data and current market news/trends, to identify patterns and predict future price movements. The algorithm then uses this data to define mathematical models and execute trades via fast, informed and precise trading decisions.
AI algorithms also utilise deeper, more complex learning models, such as the means reversion strategy. trends-following strategies and related technical indicators (e.g. RSI or Bollinger Bands). This allows trades to be executed and strategic decisions made based on the concept that prices will always return to their historical average even if the current market has seen prices veer dramatically off their typical path. The 200-day moving average is one example of a popular trend-following strategy.
Specialist algorithmic trading platforms then utilise integrated specialist software to execute the desired trades based on the algorithm's predictions and trading strategies, with consistent monitoring to adapt to current market conditions and optimise real-time trading outcomes.
Trading bots and automated systems
Trading bots are software programs that automatically executes trades based on a series of predefined rules or AI models. Trading robots are designed to reduce the need for constant human intervention and respond quickly to developments in the live markets in order to capitalise on trading opportunities.
There is a tangible difference between AI-powered bots and standard automated scripts. The latter is a more static, more limited option as it can only perform trading within the bounds of a series of pre-defined rules.
The AI model allows for more flexibility – this type of automated trading bot incorporates human-style intelligence and independence into the trading process. It can analyse data and market movements, then adjust the trading strategy and take actions based on informed insights into the live markets.
Automated trading bots are commonly used with forex, crypto and stock CFDs, helping traders by providing liquidity and capturing split-second opportunities in these ever-changing, volatile markets.
Auto trading and full automation in financial markets
Auto trading systems offer a revolutionary way of trading in the financial markets, where every element of the process can be completed using robots from super-high-speed hands-free trade execution to full, end-to-end system automation.
Operating from your chosen platform, you can set the rules and parameters of your trading strategy (such as guaranteed stops) based on individual trading goals and risk tolerance underlined with in-depth market analysis. The automated trading system then creates your custom algorithm with all auto trades subsequently made within the market entry/exit conditions of this algorithm.
Auto trading allows more trades to be made more quickly, meaning traders can benefit from market opportunities without any human intervention.
While there is always an element of risk and loss involved in trading with such complex instruments as financial CFDs, AI can help traders operate effective risk management. Systems can analyse real-time data, identify emerging risk and act quickly to minimise damage.
The best platforms and brokers also offer opportunities for customisation within the AI trading journey. Most systems allow multiple trades to be executed simultaneously, accommodating larger portfolios and encouraging diversification. AI can also identify new investment opportunities tailored to the individual trader.
The trading journey itself can also be customised with powerful tools and elements. On a broader level, users can automate recurring tasks to minimise the risk of human error. Custom-trade portfolios may also offer access to more specific features such as on-demand risk simulations.
One of ActivTrader's most popular features is the progressive trailing stop that allows traders to specify up to two price tiers that adjust the distance of the trailing stop once reached. By keeping stops closer to the chosen price, this helps traders to secure more profit or limit loss in some of the most popular markets.
Can beginners use AI or bots in a demo account?
Opening a demo account is one of the best ways to explore the potential of artificial intelligence trading and the range of algorithmic features without any pressure. Demo accounts are the ideal opportunity to learn and practise trading skills and strategies before applying them to the live environments.
We recommend choosing a platform with simulation technology, where advanced software allows users to practice trading in real time, simulate unlimited scenarios, and measure their impact in a risk-free environment. Simulation platforms also allow users to identify the most effective tactics and strategies that work for their desired outcomes. Building quantitative trading experience in the simulation environment allows for the most seamless transition from demo to live trading.
The ActivTrades demo account is 100% aligned with live conditions and also comes with unlimited usage, allowing users to trade on the demo account and test strategies for as long as is needed, only entering the live markets when they feel entirely prepared.
Another key tool offered by demo accounts is backtesting and performance monitoring, both of which are absolutely essential to an effective trading process. Backtesting allows users to test strategies from start to finish, observe outcomes and thoroughly understand the implications before rolling them out in a live environment.
FAQs – AI trading, bots, and algorithmic systems
Can beginners utilise artificial intelligence trading?
Absolutely! The best auto trading platforms will offer a demo account option whereby beginners can test out strategies and scenarios to measure outcomes and build confidence with their trading experience before entering the live markets.
Are there risks involved with auto trading and algo trading?
While AI has transformed the entire trading experience, it does inevitably come with a level of risk. One concern is an over-reliance on automation whereby the human trading experience is lost and overtaken by the auto model.
There are risks associated with transparency when complex AI algorithms make decisions that appear counterintuitive or incomprehensible to the human trader. Choosing high-quality data sources and sophisticated software to build informed risk/reward profiles can help to alleviate such concerns.
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