Artificial intelligent trading is the effective application of Algorithmic trading. Then what is Algorithmic trading? It is the implementation of trading rules into a mathematical program by a method of coding and using that program to trade. Almost 98% of the young retail trading community as well as 58% of the Investment market of Africa that believe in automated trading, perceive this style of machine trading system as omnipotent to investment maximization and solution to risk management technique used in human trading for the market analysis.
In the advancement of technology, and man by nature will strive to use the easier pain to maximize benefit, has resulted in the downplay of traditional technical analysis as a complex approach and difficult method to have a good earning from the market. Then came the escalation of the campaign in favour of machine learning on alpha generation as the best alternative of profit-making compared to human trading with emotional component and inefficiencies in decision making at the trading room. Especially with long term trading, there was a common misconception that profit-making and maximization of earnings are best found in machine learning Algorithmic program usage.
While the developers of Algorithmic trading software’s has focused solely on the beneficial aspect of their trading software to sell their products by making a statement like traditional technical analysis is becoming an obsolete process and the future of trading is about Artificial Intelligence trading. As an African scholar on investment banking, I do caution the young trading community of Africa to realize the silence risk in the overconfidence and reliance on Algorithmic trading software application without quality market forecasting skills on chosen market instruments. Not forgetting the emphatical statement of Dysart (1967), which state, ‘there is no mathematical system devoid of human judgment, which will continuously work without error in the real market.’
In a twelve (12) months correlation test of the past closing price to the future closing price of both short and long term period of the following securities market trading as in Forex, Commodity and Stocks, there were fascinating findings, which indicate without a careful and effective technical application of Algorithmic trading software’s it damage to trading account is lethal.
The short term period of this article used 4hours as a minimum short term trading period and 24hours as maximum short term period. And it was observed as follows, using a standard deviation measurement range of 0 to 1.0
- In the above stated standard deviation range for the instruments in the forex market, the past price pattern to that of the future price pattern in the short term period variedly deviated at a range of 0.3-0.7
- In the commodity market, the standard deviation range of the instruments of the past price pattern to the future price pattern was within the range of 0.2- 0.5
- Finally, within the stock market, the standard deviation range of the price pattern of the past and the future was within 0-0.2
I then came to long term period observation of the market, with my long term period defined as 24hours as 1-day trading, classified as minimum long term trade and 4 weeks trading as 1-month trading, classified as maximum long term trade. The following were observed as a standard deviation measurement range of price of the past and the future from 0 to 1.0
- At the forex market, it was realized, the standard deviation of the price of the past and the future varied within the range of 0.8-1.0
- At the commodity market, the standard deviation was observed to vary from 0.3-0.6 in price pattern of the past and the future.
- Finally at the Stock market, the standard deviation of the price pattern range between 0.1-0.5 of the past to the future.
None of the market analyzed had a static variance and standard deviation, indicating, Artificial intelligence trading software to the price of the real market requires a lot of the user moderation in predictions on regular basis to enable the software to function profitably. Secondly the effective use of Artificial trading software is perceived to be relevant for long term traders, which concludes that the quality use of Algorithmic trading program seems to be profitable for commodities and stocks market due to their regular primary trend formations and noted of being a bad equipment for forex trading market due to the presence of more of tertiary trend character, if not used as a hedging target. I therefore finally conclude that to opt for Artificial Intelligent trading without not a rigorous educational understanding of technical analysis and market forecasting, it is a part leading to a crash of investment or loss of funds as a fund manager. Hence the perception that to spend a resource to acquire the best Algorithmic trading software saves you from the knowledge burden of technical analysis is a fallacy.
Emmanuel Tweneboah Senzu, Ph.D.
Dean of Research, University College of Management Studies, Ghana.
Director of Research, Frederic Bastiat Institute
- Dysart, Jr., Paul (1967) Bear Market Signal; A sensitive breath Index has just flashed one. Barron’s News Paper. Sept 4th
- Senzu, T. Emmanuel (2019) The Emotional Stress and Psychological discipline required of an automated trader.https://fbiresearchedu.org/homepage/2019/06/the-emotional-stress-and-psychological-discipline-required-of-an-automated-trader