Can AI-powered trading assistants outperform human traders?

Key Takeaways

• Artificial intelligence (AI) technology offers several major advantages over human traders.
• However, there are key human traits that AI trading platforms cannot yet replicate or replace.
• The best-case scenario for the foreseeable future is a hybrid model, where human traders use AI’s data analysis strengths to inform decisions, applying the time saved to strategic tasks.

Artificial intelligence (AI) is making waves in every industry, and stock markets are no exception. According to a Builtin report, the global AI trading market was valued at $18.2 billion in 2023, and it is likely to grow threefold by 2033.

AI offers exceptional advantages in terms of speed, data processing, and emotion-free decision-making. The crucial question is whether it can replicate human reasoning, intuition, and the ability to adapt to ever-changing market conditions.

This blog explores the strengths and limitations of humans and AI bots, and how combining the two can deliver the best results in stock trading.

What are AI-powered trading assistants?

AI trading, or algorithmic trading, involves using advanced technologies, such as machine learning (ML) and predictive analytics, to automate share trading strategies and generate new investment ideas.

By swiftly analyzing vast datasets, including historical prices, market trends, news, and social media chatter, these algorithms can identify patterns and execute trades faster than humans.

As per Nasdaq, AI trading platforms are constantly evolving, and their growing automation capabilities have the potential to empower traders to take advantage of market opportunities around the clock. In fact, many traders are already using AI systems to upgrade their trading strategies.

Why is AI trading gaining popularity?

AI has some major advantages over human traders. AI systems don’t sleep, or ask for pay. Also, emotions don’t affect AI systems!

“They’re my partners,” said Greg Ballard, a trader based in Fort Smith, Arkansas, of his PC collection, as quoted by WIRED. “I make them work 24 hours a day, don’t give them a vacation, or anything.”

Then, Al has also made it easy for newcomers to step into the world of trading with little money. Nelson Freeburg, editor of the algorithmic trading newsletter Formula Research, pointed out that “today, a new trader could probably get started with only $10,000 to $15,000.”

The major advantages of AI in stock trading

• Speed and efficiency: AI algorithms can process a huge amount of data quickly and execute trades within seconds. This capability means that they can take advantage of short-term market opportunities, which are almost impossible for human traders to execute, as per Portfolio AI.
• Risk management: AI can detect potential risks and anomalies by analyzing historical data and market trends, which may escape the human eye. These algorithms can also run scenario analysis, simulating various market conditions to evaluate how your portfolio might be affected, as per AI Journal.
• Emotion-free decisions: Unlike humans, AI systems are not influenced by emotions. Hence, they generate unbiased decisions.
• ​Continuous operation: AI bots can operate 24 hours a day, without fatigue. This ensures constant market monitoring and helps take advantage of opportunities outside regular trading hours.
• Cost efficiency: AI-powered trading systems streamline routine tasks through automation, reducing the need for manual intervention. This saves time, and minimizes operational costs.

The recent advancements in AI trading have already led to some notable successes.

For example, according to Manila Times, Castillo Trade’s Smart Trading Bots have shown a 72 percent higher success rate than floor traders in live market conditions. AI-driven hedge funds are consistently outperforming their old-school counterparts; on average, they generate 3 percent to 5 percent higher annual returns than traditional traders, as per ​Uptrends.ai | Track Trending Stocks.

In future, AI systems are expected to become more adaptive to changing market conditions and make even more accurate predictions.

Is this the end of human traders?

Not really. Despite its high adoption, AI is not advanced enough to replace human intuition or contextual understanding.

Also, as AI algorithms become more advanced and sophisticated, it will become even more challenging to decipher how they are making their predictions, leading to unexpected market movements and increased volatility. In such a scenario, human experience and insight will be crucial to mitigate potential risks and ensure that appropriate safety measures are in place.

The strengths of human traders

• Intuition and experience: In unpredictable market conditions, floor traders can make decisions based on years of experience and gut feelings, especially when historical data is not available.
• Contextual understanding: Floor traders can analyze broader market sentiments, like geopolitical events, or corporate leadership changes, and predict market movement accordingly. This subtle understanding of sentiment analysis in stock trading is difficult for AI to replicate fully. ​
• Adaptability: In unprecedented market situations, floor traders can make quick calls and adapt new strategies based on experience and intuition – a quality that bots cannot yet match.

What is the best-case scenario?

When humans use AI’s number-crunching power to analyze stocks and make trading decisions, it can provide optimal results.

Big players like BlackRock, JPMorgan Chase, and Goldman Sachs are already using Al to understand market sentiment and fine-tune portfolio performance. This allows experts in the field to focus on higher-level strategies and long-term planning.

Conclusion

Trading is inherently a game of probabilities, and it still requires human judgment and intuition.
In future, as AI trading systems evolve further and when artificial general intelligence (AGI) finally emerges, the trading landscape is likely to see another major shift.

It will be interesting to see how humans adapt effectively to these changes to remain relevant in the evolving financial landscape. However, human intelligence will remain irreplaceable in trading until AGI becomes a reality.