How AI is fundamentally disrupting stock market analysis for everyday traders

Want to know more about the revolution in stock market forecasting by Artificial Intelligence (AI)?

Pattern recognition for stock price is one area in which AI excels. As an investor, if you know a chart patterns “head and shoulders” or “cup and handle”, then you have an edge.

These are trend lines that tell you how a stock is going to act in the future. But they are hard to come by, and hard to acquire. And this is where AI steps in.

What is happening to stock market forecasting by AI will be discussed in this blog. And we’ll see how it plays out in the technology, in the data-mining and for investors.

#1 AI seeks out hidden patterns no man will have time to search

Suppose that you could look at each tick in the stock exchange over a decade, trace the exact path that the smallest of trends travels like a feather across world assets, and sift signals from fuzziness in an ocean of data. No man is enchanted by that power, of course. But more and more machines are.

AI algorithms can leverage the latest machine learning techniques and apply it to hundreds of thousands of years of historical market data to uncover so many layers of correlations and movers that no human would ever notice, let alone avoid mistakes.

The algorithms are, in other words, the likes of bloodhounds, tirelessly sniffing the air for the faintest hint of a predictive pattern in billions of data points.

Example: You could go back to 50 years of daily S&P 500 price action and find a very certain type of double bottom formation immediately prior to surge – the volatility is already lower and volume has been pulled to near record lows – and that this double bottom appears as a precursor to surge.

You could never, as a retail trader, go through so much fine-grained information, and store so many patterns in your brain. But AI is unbound by these cognitive limitations and can bring market intelligence to the scale, scope and breadth we cannot even imagine.

And the best part, is the AI always generating an enhanced version of itself. The AI learns how to spot those ultra-high probability chart patterns, which are always able to predict the direction of price in the future, by repeatedly backtesting and perfecting its pattern recognition algorithms with data inputs.

Algorithms in a sense learn about the mechanics and “secret sauce” of financial markets.

#2 Elevate your analysis with AI data power

What if, you could boost your own intuition – in meaningful ways – through the mass-data processing and pattern-finding power of AI? Well, that now has a shot.

The best quantitative trading firms already employ smart algorithms for performing hyperscale market analysis and backtesting. But over the past couple of years, even retail trading platforms have started to incorporate AI analytics to see if it could make individual traders successful. AI doesn’t replace the human, it’s a friend – doubling your intelligence.

Your trading system, for example, could filter decades of earnings history for a breakout after cup-and-handle on one or more dimensions to find profitable trades. Or it may be that the price action reverses after 7-10 day rising wedge patterns on super-liquid mega-caps if the RSI moves into overbought territory.

The AI sucks in you so terrifyingly with informational advantage because they have calculated those pattern probability probabilities in fine detail, and you can then trade off chronic high chance chart formations with exponentially greater confidence. As if you’d got an army of 24/7 data scientists crunching market data for you.

#3 Solve ambiguity with AI’s science of the deduction

Let’s face it: you cannot predict how financial markets will perform with any semblance of accuracy. Price movements vary with the activity of millions of investors with different reasons to be in the market. 

When you don’t know the interplay of all the variables, that can seem almost impossible to make sense of.

And that’s where AI analytics comes in. It can be able to cut through and all the conflicting stuff, and see the primary repetitive chart structure that is driving the price.

An AI algorithm for instance could predict that based on the Nasdaq index 7-10 day consolidations which break out of a triangle pattern settle at the downside 60% of the time. A mere step, and the probability that a chart pattern that was impenetrable becomes quantifiable.

When you spot such statistically relevant structures, AI allows you to trade from a logical, data-driven point of view, rather than speculative one. Years go by and you gather unwavering proof that prices repetitively bounce around some repeating technical contours. The market moves from unfathomable to scaled, comprehensible and predictable.

The limitation

There is so much to love and hate about AI. Here are two limitations.

• AI relies on high-quality data: The forecasts will be wrong, if the data is incomplete or not real-time. Good data is the main factor in AI prediction.
• Overfitting: Overfitting is when the AI learns the training data too fast, with noise and outliers. That will make your data do bad on new unvisible data. Model training has to be proportionate so as not to fall into this bind.
• Market Risk: There is no security in stock market. Devastating conditions upset even the best AI simulations. AI could re-model, but it might not be very good at predicting ‘the big things’, such as the economic crash or the geopolitical wars.
• Compliance Issues: As AI penetrates finance, regulators are observing. Not everyone can abide by the rules and they could limit how some AI applications can be applied to stock market predictions.

Artificial Intelligence will run through every seam of the financial system. Our time will be coming close, where we’ll also have AI-driven algorithms that can spot more lucrative trades quicker and more precisely than any human trading analyst could ever hope to.

To harness AI in your use case, by extracting value from massive datasets, then you have a sustainable advantage which will enable you to outperform your competition without any limitations. AI could be the next great opportunity for you to become an expert in trading with all new level of insight and accuracy.