By Hemant Sood
New-age technologies such as artificial intelligence (AI) and machine learning (ML) are proving to be game changers for several industries. Many businesses have adopted them and moulded them according to their requirements in a bid to procure the maximum benefits. As these technologies are maturing, market players have understood that the capabilities of predictive analytics are a perfect fit for complex areas of human activity. In this context, algo trading in the stock market has emerged as a crucial playground for participants to utilise the power of ML and AI.
The Indian stock market is known to be volatile, dynamic, and non-linear. There are several factors, such as geopolitical situations, unexpected events, economic conditions, and more, that impact the markets, making them a complex place to sustain. However, as algo trading has become popular, it has revolutionised the way traders and investors approach the stock market. With the swift integration of AI and ML, it has huge potential to enable predictive analytics for stocks.
Algo Trading Unleased: The Role of AI and ML in Predictive Analytics
Algorithmic trading, or algo-trading has gained ground recently as it can quickly process enormous amounts of data and execute trades, enabling traders to profit from market opportunities. This phenomenon began around 2010, when institutional investors and brokers were the only ones using it. However, retail markets now have broad access to algo trading platforms with API solutions thanks to recent technological breakthroughs. As a result, algo trading is today widely used by traders and investors in India to execute deals more quickly and effectively and to take advantage of market opportunities that may be challenging to discover manually. As per a joint report of DEA-NIFM, more than 80% of the algorithmic orders are generated from colocation at both exchanges (NSE and BSE).
To interpret the financial market, using data to calculate price changes, identify the reasons for price fluctuations, execute sales and trades, and stay updated on the constantly shifting market, AI/ML-powered algorithmic trading can be highly efficient. Furthermore, AI/ML trading can be leveraged in a variety of forms, including automated, algorithmic, high-frequency, and quantitative trading. In addition, predictive analytics is also made possible by AI/ML technologies, referred to as automated trading, which is created when a trading system is shaped using the technical analysis of quantitative trading in conjunction with automated algorithms built on historical data.
ML and AI algorithms excel in this arena by ingesting vast datasets, identifying patterns, and making predictions based on statistical models based on this historical data. The amalgamation of AI and ML in algo trading can help traders enable predictive analytics for stocks. With the help of this powerful integration, traders can get insights into the markets, generate data-driven predictions, and learn significant developments in the market based on trends. As a result, traders can procure several benefits from the stock markets.
Potential benefits
Get accurate market insights: An AI/ML algo trading system can gather data to identify market fluctuations using sentiment analysis, which is a method of gathering text and linguistics and utilising natural language processing (NLP) to identify accurate patterns within arbitrary information.
Ensure risk management: predictive analytics models can incorporate efficient risk management strategies, which can help traders protect their portfolios from significant losses.
Enable market adaptability: The AI/ML models can adapt to changing market conditions and learn from historical mistakes, improving their predictive accuracy over time.
Gain market edge: AI and ML in an algo trading system can be leveraged to automate some of the laborious repetitive processes that were previously done manually. Additionally, AI systems have the ability to continuously watch the stock market around the clock. As a result of their wider reach, traders gain an added advantage.
Elevate your decision-making.
Success in the stock market is dependent on a number of variables, but making the correct decision at the appropriate moment is the one that matters most. Therefore, with the power of predictive analytics at their disposal, traders can gain an advantage in the market and make smarter selections. Furthermore, when amalgamated with the speed of algo trading, the combination can be lucrative for long-term sustenance in the stock markets. Algo trading that combines AI and ML can examine enormous amounts of data, use complex algorithms, and make data-driven decisions. As a result, it offers a myriad of advantages in terms of accurate market insights, risk management, and market adaptability, which collectively ensure an edge in the markets.
These benefits complement the advantages of algo trading, which is further anticipated to grow with a blend of these new-age technologies. The algorithmic trading industry is predicted to upsurge from USD 15.77 billion in 2023 to USD 23.74 billion in 2028, at a CAGR of 8.53% over the forecast period (2023–2028), according to research by Mordor Intelligence. This data showcases that the traders will explore more opportunities in the domain to navigate through volatile market circumstances and earn lucrative returns.
The author is founder, Findoc
