Understanding AI Trading Bots and their Impact on Financial Markets
Artificial intelligence in the sci-fi sense of the word is still not on the table for a meaningful discussion. We will need to wait for another decade, according to some experts, before general AI will be something even remotely feasible. When we say AI, we usually mean expert artificial intelligence systems that can be used in all sorts of applications including automated trading software and financial analysis.
The current approach to machine learning trading is still in its infancy with many companies racing toward the new breakthrough in the industry. Right now, these systems are prone to some issues that may hinder their performance.
Here are some of the problems that generative expert AI systems face when it comes to any field and AI trading bots in particular:
- Hallucinations. Machine learning creates generative systems that can produce information from thin air without actually referencing any real data. We saw it happening with ChatGPT, Google’s Bard, and many other generative AIs. The same can happen to an automated trading system that will produce signals that are based on nothing.
- Emergence of new functionality. One of the problems for the current AI industry is that generative AI systems can easily obtain new properties and features that were never intended. Again, it can have massive ramifications for any system that works with finances.
- The quality of data. Imagine a machine learning trading system that must be able to predict the future of the stock market. If it will have limited information about the market, focuses on a single asset, or does not have the necessary access to various types of data capable of affecting the price, it will never produce good results that actually take everything into consideration.
Despite these challenges, the AI industry is positioned to disrupt many sectors of the economy including financial retail trading. Many AI products will be publicly available and those who will be first to adopt them will likely rise to the top. People who will spend time hesitating may simply miss out on many valuable opportunities.
AI is moving further ahead with an ever-increasing speed and we may not be able to catch up. Decisive investors will shape the future of financial markets by adopting AI trading systems faster than other people and embracing the new way of approaching the market. An AI trader is not a sci-fi concept anymore.
The Benefits of Using AI Trading Bots for Investors and Traders
Some experts believe that over 90% of all trades in financial markets will be performed by various automated trading systems. In fact, the research into the matter by multiple investment corporations revealed that the number of trades performed by ATS was already above 86% in 2012. The vast majority of these trades come from large-scale systems like statistical arbitrage and pairs trading employed by massive financial institutions.
It is possible that the last line of defense for human traders will be breached by the end of 2025 with only AI achieving increased efficiency in trading and outperforming humans most of the times. This future is easy to envision considering apparent advantages of using AI in trading that we can observe right now:
- AI analytical systems will be able to predict general trends much better than humans and capitalize on small price action changes like retracements to gain small advantages that pile up quickly.
- Many individual retail traders will be able to run massive operations like statistical arbitrage systems with hundreds of different assets.
- AI can manage various forms of automation providing algorithmic trading benefits to every single retail trader. You won’t even have to turn on and turn off your bots.
Cutting costs associated with hiring managers to do tedious repetitive tasks will be the biggest advantage for investors who want to run massive investment operations. However, even individual retail traders who will embrace the advancements of the AI technology will benefit greatly from including these new systems in their investment plans.
How AI Trading Bots Work and the Technology Behind Them
The current approach to machine learning in finance is to train bots on historical data and allow them to apply acquired knowledge to the current market situation. It is possible to create smart analytical systems that will outperform average retail traders, but it is still early to bet everything on an emerging technology.
Various financial institutions such as Fidelity Investment and Black Rock have been experimenting with using artificial intelligence in stock market predictions, but their results did not impress. Most of the decisions are still made by humans. AI is great at instantly reacting to price retracements and managing large-scale statistical arbitrage models, but their forecasts regarding any given stock or digital asset are still unreliable.
We should distinguish between classic algorithmic trading strategies slightly adjusted with the addition of some elements of AI systems and using full-blown neural networks in trading bots. The former approach is what we have right now with companies like WunderTrading using AI to identify new interesting products and adding some new features here and there. The latter is a completely new frontier that many technology experts are exploring right now.
How would a neural network even attempt at creating a new generative system designed to trade financial assets?
While it may seem like something complicated, there are distinct steps that must be taken by researchers and some of these steps are already behind us:
1. Create a massive database with historical data on the market and relevant information for context (news stories, financial calendar, and other).
2. Build a neural network with the task of creating an analytical system capable of predicting swings, price trends, and volatility using the historical data.
3. Use various test-platforms to check how these bots perform in real-time and analyze the results. Adjust the system according to the analysis and start over.
These steps can be repeated endlessly until a nearly perfect system appears. Additionally, we can use another AI system that will give feedback to the main machine learning algorithm and improve it. This approach will significantly speed up the learning process.
The Top AI Trading Bots to Consider for Your Investment Portfolio
The best AI trading bots in the industry are designed with some crucially important features in mind. We believe that you can easily find good automation platforms to work with. There are several key aspects of such platforms that you must carefully consider before using their services:
1. User interface. When it comes to top automated trading software, the graphic user interface is incredibly important. The vast majority of computer users do not have the necessary level of technical knowledge to meaningfully interact with applications without an intuitive GUI. There is nothing wrong with not knowing how to code, but there is definitely something wrong when an online service cannot provide a good user experience.
2. Preparedness for AI integration. Generative AI and expert systems are still not available to the general public. These tools are being designed and tested as you are reading this article. We cannot predict what will soon hit the market, but we definitely suggest you working with automation vendors that have a wide range of already existing services that can be affected by popular machine learning trading systems in the future. For example, WunderTrading offers pairs trading, GRID bots, arbitrage, and other preset solutions that can be effortlessly enhanced by advanced AI.
3. Already successful products. You should look for an automation vendor that has a good catalog of useful financial products that actually can asset you in making money. An automated trading software platform that does not have the necessary level of competence proven by years of providing its goods and services to clients won’t be able to successfully integrate various machine learning systems into their architecture.
You may be interested in checking out several interesting automation vendors that may catch your attention!
- Cryptohopper is a popular automation service provider that focuses on offering a wide range of different services. It is integrated with nine CEX platforms supporting over 75 different cryptocurrencies. The company offers social trading, custom bots, and many interesting preset solutions. Their platform uses AI to enhance some of their products, but we still don’t know how exactly machine learning is implemented in the infrastructure of the platform.
- 3Commas is a widely known automation service provider that focuses on social trading and delivers a satisfactory experience to people interested in copying other successful retail traders. Other services are also quite good and can be used to great success by people who already know what they are doing in terms of investing in the crypto market. The AI is not integrated in the platform, but the company plans to start using machine learning in the nearest future.
- WunderTrading is a versatile automation vendor that offers unique preset solutions like automated pairs trading, GRID bots, and DCA bots that can be launched right away. The social trading section is presented as a large marketplace with managers working with different CEX platforms. WunderTrading uses AI-powered algorithms to build their preset solutions and allows users to customize their experience with trading bots.
We strongly believe that these companies are in the vanguard of the automation industry when it comes to using artificial intelligence and preparing their platforms for the future integration with various machine learning algorithms.
Risks and Challenges Associated with AI Trading Bots
The dream of any contemporary retail trader is to have an AI crypto trading bot that will do everything and never miss out on a valuable investment opportunity. It is an impossible scenario because such products would be used by everyone and everyone cannot win in the financial market. In order for someone to earn money by trading, someone must lose it.
What AI can do for many modern investors is improve various aspects of their investment strategies and make them consistent.
Let’s talk about some problems that AI can solve and which challenges it must overcome:
- Risk management in automated trading. Machine learning systems can design great risk management approaches to place stop-loss and take-profit orders calculated to the last decimal. It can suggest optimal hedging strategies and provide unique insights into the market to identify risky assets and swap them for something more reliable. However, we still need more machine learning systems that will analyze the historical data and find the right models to work with.
- Customization of the trading strategy. Some limitations of algorithmic trading bots are associated with creating a self-managing automated trading system that can adjust its parameters as market conditions change. However, this will unlikely be the case for the automation industry in the foreseeable future. Such systems will have to be even more complex and account for too many variables that we simply don’t know how to introduce into the machine learning algorithm. It will take large teams of engineers to solve this problem.
- Integrating AI systems into existing architectures. One of the biggest challenges of using AI in financial markets is that these expert systems must seamlessly integrate into the currently used financial infrastructure and work with various platforms without any interoperability issues. Since we have different companies leading the industry in the AI field (e.g. OpenAI, Google’s DeepMind, and more), it will be hard for the financial sector to pick a single standard. We will see some fierce competition.
Embracing the Future with AI Trading Bots for Enhanced Financial Performance
Artificial Intelligence is not a hazy dream of a sci-fi writer. We already see how generative AI transforms art, content-creation, and disrupts many industries. It will happen to the world of finance and people must be ready to adopt these emerging technologies. AI trading bots for crypto markets will be quite different from what we have right now.
Preparing for the imminent future is extremely important. If you don’t use automation now and plan to expand sometime in the future, reconsider this idea. You must experiment with bots to learn how they work and how they can be enhanced when AI starts making commotion in the cryptocurrency market. Falling behind right now is the best way to ensure that you will never catch up.