Automatic Trading Platforms | Say What?

bycoachgrant

792 followers

7 months ago

Well, well automatic trading platforms eh? Powered by AI huh?

It is true that AI is making life easier, more efficient. I watch, sometimes with some amusement, the chartists predicting the value of an asset based on the historical performance of it's share price as reflected in the "charts". The charts can give you an estimate of the future behavior of a share price based on past behavior. In line with this understanding, I can see that AI may well be better able to assess the probability of a future event based on an analysis of past events.

That is all the chartists do, after all, is make predictions based on probability. Some of them are pretty good at it. Some of them make full time incomes day trading. But an assessment of probability is just that, an assessment of probability. It is not a guarantee.

Some of the advertising out there right now promises the moon based on a small initial investment. But it is good to remember the lesson from Equity Markets 101. For every winner there's a loser.

So while AI may be a better predictor of future events based on it's superior ability to assess the probability of a future event, the ability to assess the impact of an interdiction of a new factor in the market is much harder to assess. There are some events that may be entirely unforseen and impossible to predict.

Experienced traders understand probability and a term used in statistics "expected value". EV is a way to express the anticipated monetary return from an investment based on the probability of that outcome being realized. In simple terms, if you invest 100 dollars and the probability of realizing a historical rate of return of 8% annually is 70%, your expected value of profit would be 100 x .08 x .70 or $5.60. Unless the probability of an event occurring is factored in, it is impossible to measure the expected yield.

Furthermore, in a market that is turning down, the probabilities that affect your rate of return change, sometimes quickly and dramatically. Even the Reichmann's got slaughtered with their Canary Wharf project when the real estate market went south, and fast, in the early '90's.

The Reichmann family was the investor most severely affected by the initial Canary Wharf failure. They lost not only Canary Wharf but also most of their office buildings and equity in Canada, the United States, and Britain.

One has to know how to measure these new probabilities. The lesson from the rise and fall of the Reichmann family empire is one of the dangers inherent in overleveraging. But, beyond that, the point here is that even the Reichmann's failed to forsee the sudden and disastrous turn of events that unfolded in 1990. That 30% downturn seemed to unfold virtually overnight.

And yes, AI is probably better able to manage all predictions better than humans. However, it must be remembered that past behavior is never a perfect indicator of future behavior.

Moreover, a maxim in the world of the stock-broker is 'leave some for the next guy' meaning that you should never invest and expect that you are going to be able to sell as the stock price hits it's peak. Sell early to increase your chances of realizing profit and minimize your chances of loss. And never invest more than you can afford to lose. As to whether this stock market wisdom is programmed into these automated trading platforms is hard to tell.

Many of these trading platforms deal in the trading of cryptocurrencies, an extremely volatile market. I'm sure there will be a whole host of suckers who fall for the hype. Remember what P.T. Barnum said!

But for the inexperienced who have ears to hear, day trading in any sort of asset should be approached with a robustly healthy degree of caution. If you don't know what you're doing, as with many things in life, you could get burned...badly. In short, don't put the family farm up as security thinking that AI is going to lead you to a financial 'promised land'. You may find that the outcome is quite the reverse of what you hoped or expected.