Automated Trading: An Introduction
Automation, Machine Learning (ML), and Artificial Intelligence (AI) all involve
substituting human activity with machines and technology. Now that computational
means of completing tasks have become more advanced and cheaper, using machines to
solve problems and generate answers is becoming more widespread, in theory and in
practice. It is expected that over the next five years, investment in AI technology will
increase substantially, with interest particularly focused on Machine Learning and
cognitive analytics. So how is this affecting the foreign exchange and cryptocurrency
In reality, both AI and ML have been in use for many years, but were not widely used or
broadcasted, as they were confined to specific industries because of the cost entailed in
their complex configurations. Now, whether from social trading sites claiming to have
developed AI experts advisors for cryptocurrency trading, to the foreign market
exchange enlisting automation capabilities to increase profitability, news of the positive
potential of ML in these industries is spreading quickly.
This doesn’t come as a major surprise, as financial markets have a history of being the
first sector to employ new AI techniques, due to the obvious benefits of automation and
reducing the need for human logic and error. One of the first pioneers when AI
technology was first cropping up was Jim Simons of Renaissance Technologies, who
built his wealth by putting together a team of researchers who traded using advanced
quantitative methods, which proved to be one of the most successful methods of
acquiring financial market investments, by numerical means. Meanwhile, other
financial institutions such as IC markets have a long history of investing in AI
technology and ML techniques.
Industries within the financial sector are also enlisting the help of AI and ML, banks in
particular, who need to find new ways of keeping up with continuous changing
regulations every year. Capital markets strategist Peter Farley puts this down to the
2008 banking crisis, during which this onslaught of new regulations upon banks
“compounded cost pressures and drove up capital requirements,” which in the end
created “the perfect storm for the industry, creating just the right environment to
accelerate its flirtation with automation.” According to Farley, AI and ML had always
been on the radar of changing the face of banking, and this is now translating to the fx
and cryptocurrency markets also – in both exciting and uncertain ways.
AI in the foreign exchange market
The FX market has always been ready to adopt new technologies and ways to improve
the speed and accuracy of currency trading. So how could AI and prediction software
play a potentially useful role in forex?
A large majority of research analysts predict that AI is set to transform foreign trade.
Firstly, the transparency which these technologies bring to the market are enabling
banks all over the world to trade with more confidence. Over the next year, electronic
trading is estimated to account for almost 75% of FX trades, marking a leap from 66%
in 2013 and 20% in 2001.
Another major benefit that AI promises to bring to the foreign exchange market is
reducing the cost of numerous processes throughout the trade lifecycle. Automation
tools can be applied to trades to capture potential errors, thereby reducing the need for
future corrections and damage to reputation. Essentially, all fx trades pit the value of
one currency against one another, and as it is impossible to employ a single market
analysis to these activities due to interrelated factors (such as interest rates and other
global markets), AI could offer a viable solution in improving efficiency. By
implemented these technologies, computers involved in fx trading and markets could
undoubtedly make more accurate decisions, saving time and energy. Advances in big
data, open-source software, cloud computing, and increased processing speeds all also
have a role to play in this scenario.
Platforms and entrepreneurs are also building AI advisors, which use deep learning and
artificial neural networks, providing outcomes which couldn’t possibly be achieved by a
human mind. In the fx market, this involves formulae, allowing machines to adapt and
learn from the latest technical trends, and adjusting positions based on all currency
pairs’ market variations. High frequency trading (HFT) also uses algorithm to execute
swift trades, based on analysis and pre-defined programmes and conditions, activities
towards which AI could have a massive contribution.
AI and ML technologies could also potentially offer a more reliable alternative to the
well-known forex trading robot, a computer program which runs on a pre-defined
algorithm which allow the robot to make automatic decisions about whether to buy or
sell a particular currency pair. However, these robots have a history of being either
highly unpredictable and therefore of no use, or requiring the trader to have technical
and coding knowledge, as well as experience in forex trading techniques.
Several AI softwares built specifically for the fx markets have been cropping up, and
traders are relying on their intermarket analysis capabilities to increase their profits and
estimate which currencies will affect targeted pairs. VantagePoint Artificial Intelligence
is a forex trading software which puts this kind of data through a neural network
process, which they have patented, to produce a range of indicators for trend forecasts.
The company has pointed out that often, fx traders often miss out on big moves by
following strict strategies, and that by using AI technology, they are able to alert traders
to first-hand opportunities, boasting 86% accuracy on all major US dollar pairs. ROFX
Trading Platform is another innovator on the scene, positioning themselves as the only
automated forex trading platform which provides a loss coverage guarantee. Again, they
aim to base trading around AI and neural networks which function according to internal
algorithms. The appeal is strong for novice traders, as use of these platforms does not
require previous coding or analyzing abilities.
AI in cryptocurrency
While it is common knowledge in the cryptocurrency world that you shouldn’t put all
your eggs in one basket, and rather aim to diversify your portfolio using the help of
several expert advisors, the concept of AI expert trading advisors has quickly been
growing momentum. The attraction of AI to cryptocurrency is obvious, most notably in
its ability to streamline information, processes, data, and payments. This basically hails
an era of super-human traders which may just prove to be the most profitable crypto
personal assistant you’ll ever need. AI in crypto is suitable for both those with limited
experience, and for professional use, and some of the benefits touted include low risk,
high profits, and predictions in cryptocurrency trends.
AI Trader is currently leading the way, with the company claiming that automation
technologies are powering their crypto trading ecosystem with deep learning. They
currently support exchanges in Binance and BitMex, with more expected to be added
soon. The software and application is built based on the knowledge of traders
themselves, and with the addition of ML and AI, this presents a powerful and attractive
option for users looking to overcome various factors currently limiting their investing
potential. Again, the idea of a “supercomputer backed personal assistant” which trades
automatically is the main theme.
Other exciting AI-powered platforms include Cryptoindex, which promises to predict
the next Bitcoin using the Zorax algorithm and a fully-automated index, and MATRIX,
an open-source public intelligence blockchain platform which hopes to leverage its AI
technology to resolve some of the blockchain industry’s most pressing challenges.
Meanwhile, Alcoin is using similar methods with the aim of building wealth by
combining in-house AI models, which can identify and trade cryptocurrency patterns
which are otherwise hidden, with token holders, startups and investment capital, and
capital generation strategies.
It’s no doubt that the realm of blockchain will continue to draw from AI and its
predictive analytics, which offer a hybrid intelligence model which utilises human
intelligence yet is enhanced by the efficiency, speed and accuracy of machine learning.
On the Ability of Robots
While it is clear that AI’s contribution to the fx and crypto markets has the potential to
significantly decrease costs and increase profits, there have been practical and ethical
issues raised about the ability of automation to consistently generate institutional orders
in the market. Another problem with replacing human strategy with AI is that
technology can often produce models and data which can only be described as random.
Some suggestions point towards the short-term profitability of these technologies, but
uncertainty still remains about the long-term impact.
One thing is certain, is that professional software engineers will need to work together
with experience fx and crypto traders in the future, if AI technology is expected to be
able to learn as much from its mistakes as humans can – and most importantly, to act on