Why A.I. Based Technical Analysis is a Game Changer
We’ve just announced the release of our first trade alerts strategy that selects trades using A.I. Needless to say, we are very pleased and excited to be heading down this road. In fact, the results are so far in advance of what we’d expected when we started this project, that it has opened our eyes to the future of technical analysis.
Technical Analysis is the study of the price and volume trading action of an asset (be it a stock, crypto, forex or otherwise) with a belief that patterns visible in the data, typically viewed as a chart, will alert the analyst to possible future movements in the asset price. The belief is that regardless of the motivation for the supply and demand created for any asset, the patterns made by people buying and selling are very similar and can be identified as such. Therefore, if you can identify a common repeating pattern then you can have an expectation of the typical outcome from that pattern repeating.
Technical Analysis is a prime method for most short-term traders because the financial information published by a listed company comes only quarterly at best and often weeks old by the time it is released. This is nowhere near timely enough for traders who are buying and selling in just a matter of days or weeks, so technical analysis offers a more current form of information for this type of trading.
When we first started this project to use A.I. in our analysis, the intent was just to improve our trade selection so that we could improve overall results. To begin with we were really just thinking of it as a sophisticated back test or system test. However, along the way we came to understand that artificial intelligence is going to dramatically change technical analysis for those in a position to apply the technology.
You see as humans we can process only a limited amount of information. Technical analysis typically look at charts of the stock price with a few of their favourite indicators and that’s about it. They may also look at some group sector rotation and other market breadth type of information… but that’s about it. And the available number of these indicators isn’t very diverse so in effect you have literally tens of millions, or even hundreds of millions, of people all doing the same thing and coming up with similar signals. It therefore becomes very, very difficult to get any edge trading like this. As more and more traders use the same limited set of tools they are all coming to the same answers.
However, with the power of artificial intelligence the analysis that you’re able to bring to bear is not only far sophisticated, but also far deeper than anything a human is going to be capable of.
The A.I. can take advantage of sophisticated statistical analysis far in advance of anything that a human can do with a chart. In addition, it can also consider far more extensive data inputs than a human.
To give you an example, the A.I. algorithm that we’ve built for our new Time Strategy looks at over 300 different points of data that it can consider in real time. The intention for this algorithm is to look for stocks that are likely to trend sideways in order to allow us to establish options positions to benefit from time decay. In order to achieve this, we developed a series of models that asked the A.I. to identify these stocks in a number of independent and completely different ways. Each of these linear machine learning models then feeds into a separate Neural Network that ultimately provides output identifying the highest probability trading opportunities.
As you can see, this is a total game changer … A.I with this capability is going to outperform a trader using a piece of charting software every day of the week.
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