This blog post may contain references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services.
The foreign exchange (FOREX or FX) market remains the world’s largest and most liquid financial market. Basically, the key players are the governments, banks, blue-chip companies and startups.
With the New York Stock exchange (NYSE) accounting for average daily trading of $86.8 billion, it’s the world’s largest stock exchange. Since 1989, the market has been experiencing meteoric rise with a growth rate averaging 18.4%. With high-rate liquidity and huge potentials, more traders are making careers in that space. A stroll through the floor of the world’s leading exchange would give you more insight into what plays out in the FOREX house.
Welcome to the Stock Exchange
Let’s walk down the aisles of this awe-inspiring edifice, where billions of dollars are traded in FOREX every other day. But then, there are traders who are in the driver’s seat of this whole fray, playing a pivotal role in defining the ethos around the complex. By pushing the right buttons on their computers, they return enormous values to the investors, thus putting smiles on the faces of these institutional investors. Yes, they smile at the bank when the right trades are placed.
Walking round a typical exchange, you will come across lots of striking characters. Expectedly, you will meet a trader who would dream, trade and eat calculus. He has no time for anything else apart from looking catatonic at his computer, watching graphs and figures go back and forth. Just behind him, you will see another. Well, this second trader sees trading more like an artist impression, thus using his pen and notebook to take all the important notes. These guys are exceptional, to say the least. Despite their level of expertise, there is a new wave of technology that has invaded their offices, threatening to kick their jobs into obsolescence.
Well, here’s the automated team that is leading the world of innovation through paradigm shift. Meet artificial intelligence (AI), the innovative trading technology that is increasingly transforming the good-old organogram. It uses huge neural networks to recognize data patterns, thus helping investors to place trades. Just the way the computers ended the era of typewriters, A.I. is steadily proving to leave the same streak of creative destruction on the financial market. But is that possible? You cannot say for certain until you have assessed the magnitude of its impact.
FOREX: Human Traders vs. Artificial Intelligence
The points below give insight into the distinction between human traders and A.I.
1. Trading strategy
Humans use manual trading. They observe the market to have a good grasp of it before placing a trade. Conversely, computers (A.I.) can accurately calculate figures, study data patterns and place trades to favor the investor.
Admitted, human beings are naturally greedy. Guess what, many human traders bring their greed to the FX market. From targeting a profit margin of 1%, it will increase to 5% in no time. Sadly, they forget that the market is volatile and speculative. In the end, it leads to huge losses. In contrast, Programmers use strings of commands to code computer programs. As a result, greed doesn’t exist in its lexicon, thus making A.I. way better than greedy humans.
With currency rates rising and tanking with huge pips, it instills fear in human traders. Much as the trader is expected to determine his leverage before trading, fear sets in, leading to procrastination. A.I. algorithms have no idea what fear means. When a definite pattern is established, trading begins at the drop of a hat.
All the characters we earlier identified above at some point will have to deal with lack of confidence. Despite having many years’ trading experience, some of the professional traders remain unsure whether to take a plunge or not. While the human traders battle with confidence, A.I. systems built for trading don’t seem to give a hoot about courage. It just goes ahead to place the trade when a data pattern is determined.
Human negligence is a failing that we can never rule out of every facet of life. Regrettably, FOREX trading is no exception. Negligence always leads to negative consequences. Apart from struggling to forgive oneself, negligence could turn out to be a margin call or huge losses. No doubt, robots don’t have room for negligence. All that is required is to get a competent coder to program the software – that’s all.
More often than not, human beings think they are way smarter than machines. With the freedom associated with making major trading calls, human traders are vulnerable to mistakes because they lack discipline. Well, A.I sophisticated mechanism is all about garbage in, garbage out. This explains why the emphasis here has been using the competent coder to build the system, thus ensuring that indiscipline doesn’t exist within the circus.
Assessing the Impact
If the points above are anything to go by, the place of humans in space is currently threatened. Just like other areas that technology invaded, it left with those ecosystems much better – but not without a few downturns. Oftentimes, programmers consider EA robots before developing automated trading systems. As a result, the system tends to return much better results. In turn, more and more companies keep embracing it ahead of human traders. For instance, studies have shown that over 10,000 hedge funds depend on A.I. for trading. Financial market analysts say that over $3 trillion worth of assets are managed by this destructive technology. According to Financial Times, financial analysts believe that the financial market would grow by 8.7% by 2025 – thanks to the proliferation of trading robots.
Apart from the advantages identified above, A.I. systems have more benefits. For instance, it can trade day and night unlike people who have “working hours.” Also, it can run lots of programs simultaneously, making it perfect for high-frequency trades. You can select trading brokers that use AI systems on sites like TradingGuide.
Wrapping up, despite these advantages, it’s noteworthy that automated trading systems are far from attaining perfection. For instance, it is difficult to trace the actual cause of losses. This makes perfect sense because these programs are written by humans who have different levels of expertise. Moving forward, the proliferation of the market with A.I. systems must be checked as experts fear it could kill the ups and downs that the FOREX market is known for.
Consequently, a need exists for companies not to completely jettison the human trader because having both human and machine traders has inherent advantages. For example, it will optimize information flow, lead to efficient execution and enrich the decision flow. Additionally, A.I.-human synergy will improve efficiency and transparency. For now, Bloomberg noted, some tech-savvy traders use automated systems to their benefit as against seeing them as threats. Obviously, these smart few traders stand out today because they have imbibed the successful trader values, which help them to put the human weaknesses identified above in check.
This piece dissects the impact of artificial intelligence (A.I.) on the FOREX market. Obviously, many startups are embracing the innovative technology in place of human traders, thus sending the signal that it would replace human traders. While many observers perceive A.I.-based trading systems as a threat, human traders consider it a helpful tool. Whichever be the case, the impact of A.I. on FOREX cannot be wished away.
Become an Insider
Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned and has not been endorsed by any of these entities. Opinions expressed here are author's alone
The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur.