Right now, there’s a trading ‘arms race’ in using artificial intelligence (AI) to generate profitable trades. The financial markets are a data rich environment which lends itself very well to the analytical power of AI, however finding winning trades is far more difficult than simply asking ChatGPT to find a trade. In this article, I’m aiming to shed light on the complexities of AI-based trade selection and explain how we’ve made this work for at EWO trader, both for us and subscribers.
The Role of ChatGPT and Similar Models:
ChatGPT, like other large language models, is designed primarily as a human interface. Its proficiency lies in understanding natural language and performing tasks based on the provided instructions. However, it’s essential to recognize that its capabilities are not automatically extended to complex domains like financial trading. In other words, ChatGPT does know anything more about trading than what you can read on the internet, so don’t expect it to outperform the market.
A.I. in Financial Markets:
At EWO Trader, we have been at the forefront of AI-based trade selection for nearly five years, offering AI-based trade alert services since 2021. Unlike models like ChatGPT, our AI models do not rely on general language understanding. Instead, they are focused, purpose built algorithms developed by our team of experienced developers and data scientists, all of whom have extensive trading experience in their own right.
The Importance of Purpose-Built Algorithms:
Our trade selection models are purpose-built by experts with extensive trading experience. This is a crucial distinction from models like ChatGPT, which do not possess domain-specific knowledge. Purpose-built algorithms are designed to analyze financial data, identify patterns, and execute trades based on well-defined strategies.
The Power of Specific Market Scenarios:
We’ve found it most effective to build AI-based trade selection around specific market scenarios. A good example is our model that focuses on identifying trading opportunities in stocks that have recently experienced bad news. This bad news could be in the form of a disappointing earnings announcement or any other event that has led to a significant price drop in the company’s shares. By targeting such identifiable instances, we can construct specific models that search for these opportunities and assess the likelihood of a stock performing in a certain manner following one of these events.
For instance, in this particular model, we concentrate on finding stocks that are likely to trade within a sideways range after the bad news. This approach allows our traders to develop income strategies that profit while the market moves sideways.
The Crucial Role of Data Preparation:
Behind the scenes, a significant amount of work goes into building a successful AI trading approach, and data preparation plays a pivotal role in this process. At EWO Trader, we invest substantial time and effort into creating various data series that are not readily available for our models. Additionally, we meticulously examine the correlations between different features and inputs of our model to eliminate unintentional biases that may skew results.
For example, we intentionally withhold the symbols of the stocks from our AI models. This deliberate omission ensures that our models do not inadvertently favor specific stocks. If, by chance, one particular stock, such as Apple, had several winning trades during the data period provided, our AI model could erroneously conclude that Apple is an ideal trading strategy. By anonymizing stock symbols, we prevent this potential bias and ensure our models focus on genuine trading patterns.
The Proof is in the Pudding:
At EWO Trader, we’re putting principles, and nuances, we’ve learned after many years of working with AI into practice with our ‘EWO Level-3’ trade alerts service. This service now utilizes multiple AI models to select trades based on specific market scenarios and data-driven analysis.
In 2023, our subscribers witnessed remarkable trading results that underscore the effectiveness of our AI-based approach. The ‘EWO Level-3’ trade alerts service didn’t have a single losing month throughout the entire year of 2023 generating 81% winning trades and a hypothetical 104% return on account. This consistency is a testament to the power of AI when harnessed correctly. While no trading strategy can guarantee continuous success, our AI models have demonstrated remarkable resilience in various market conditions.
The Essential Human Factor:
However, it’s essential to recognize that while AI can excel in identifying trading opportunities, it doesn’t replace the need for human expertise in entering, managing and exiting trades profitably. The financial markets are dynamic and influenced by a multitude of factors, including economic events, geopolitical developments, and unforeseen market sentiment shifts. Having the practical experience in navigating these events is crucial in ensuring that the advantages generated by AI-based trade selection are maximized and protected.
In conclusion, AI-based trade selection is a powerful tool for traders seeking to enhance their profitability. At EWO Trader, we’ve demonstrated that by utilizing purpose-built algorithms, targeting specific market scenarios, and investing in rigorous data preparation, AI can consistently deliver outstanding results. However, it’s crucial to remember that while AI can guide the way, nothing replaces the real-life experience and expertise that traders bring to the table. By combining the strengths of AI with human knowledge, we can navigate the complexities of financial markets and strive for continued success.
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