Can AI Beat The Market?

Artificial Intelligence (AI) has revolutionized various industries, and the stock market is no exception. With its ability to analyze vast amounts of data, recognize patterns, and make data-driven predictions, AI seems to have the potential to be effective in trading the stock market. In this article, we will explore how AI is transforming the world of stock market trading.

Before we begin, we need to establish a clear distinction between generative AI and predictive AI. In the past few months, ChatGPT has become the common buzzword and has been the beachhead to direct the masses to the potential of AI. However, generative AI is not modelled to trade the market as it is based on LLMs (Large Language Models). Its use is confined to generating content. For example, financial institutions are using generative AI to generate clients reports. But asking it to process millions of data points real time is not what generative AI is built for.

That would be the domain of predictive AI.

One of the key advantages of predictive AI in stock market trading is its ability to process and analyze enormous volumes of data at incredible speeds. AI algorithms can examine historical and real-time market data, news articles, social media sentiment, and other relevant sources. By identifying patterns and correlations that human traders might miss, AI systems can generate predictions about stock prices and market trends. This enhanced data analysis enables traders to make informed decisions based on objective information, reducing the influence of emotions and human biases.

However, the downside to creating strategies from millions of data points is “curve fitting” as it is commonly known in quant trading. In addition, experienced market traders will know for a fact that the market moves in a random fashion. So, an AI model that works in the last few months may just break during outlier events or moments of extreme volatility.

In terms of real world performance, the Eurekahedge index of AI hedge funds has underperformed other funds by about 9% over the last few years. The AI Powered Equity ETF has also lagged the S&P 500 index by about 50% over the same period. Often times, when an AI model fails, it is often very hard to explain why.

At the end of the day, a trader just wants to make profits. Using a tried and tested stock trading bot software would be a key consideration. At StockHero, there are many bots in the Bots Marketplace with high Win/Loss ratio. A new trader may want to sign up for StockHero and explore the Bots Marketplace.