Artificial Intelligence (AI) is transforming various industries, including music, social media, agriculture, and healthcare. However, its impact on finance is particularly significant. One aspect of AI, machine learning, is revolutionizing how investors approach trading by increasing returns while minimizing risks.

Machine learning is an evolution of data analytics that utilizes AI technology. Traders have long sought strategies that consistently yield profits, and machine learning offers a powerful solution. Traditionally, traders would select strategies based on predefined parameters. However, machine learning takes a different approach by allowing AI to analyze trillions of data points without any predefined rules.

A renowned trader named Mr. Henry, with a master’s degree in mathematics from MIT, discovered a profitable trading niche. He observed bid/ask spreads and, uniquely, analyzed the time between when the spread widened and the next trade occurred. This led him to realize that market makers were buying and selling stocks for their own accounts. By buying stocks when the spread widened lower and quickly printed the next trade, he consistently made profits.

Machine learning takes this approach to a new level. Rather than relying on human selection, the process begins by suggesting a desired outcome, such as finding a reliable stock-picking method for 30-day holding periods. The AI program then analyzes an endless combination of indicators to determine an effective system.

An example of successful machine learning is Project An-E, which predicts market moves and identifies winning stocks. TradeSmith, an investment research company, loaded over 100 variables into their machine-learning program and achieved strong predictive abilities over the short term. These variables include macroeconomic data, fundamental data, and technical data.

The fascinating aspect of machine learning is how it can create unconventional strategies. In chess, AI-powered programs employ strategies that human players may find bizarre. These strategies, which involve sacrificing key pieces, often lead to victory. Similarly, in finance, machine learning can discover innovative approaches that human traders may overlook.

Machine learning and AI have tremendous potential to transform the finance industry. By leveraging this technology, investors can improve their trading success and navigate the market more effectively. With the ability to analyze vast amounts of data and generate unique strategies, machine learning offers a new paradigm for making informed investment decisions.

LeackStat 2023