How Do You Invest Using AI?

Can I use AI for investing?

AI has emerged as an incredible tool for increasing productivity, learning about almost anything, and streamlining almost any digital work process. Today, AI is being utilized across almost every industry. Who could’ve predicted that one of the first AI uses would be writing and making art?

Due to AI’s ability to rapidly process quantities of data incomprehensible to the human brain and generate outputs based on those inputs, it seems perfectly suited to analyzing historical market data and predicting future movements. A lot of what traders do involves analyzing past market data and trying to strategically place trades based on their interpretations, so why not optimize that process with AI?

There are of course drawbacks to using AI for investing, and AI should not be relied on as a complete substitute for human input. It functions more as a pattern recognition system, and is limited in its ability to understand context and adapt to changing market conditions. It can make mistakes, and it can’t predict the future. It does not guarantee profitability.

Nevertheless, AI has multiple uses for improving your trading and investing. We’ll be looking at seven of those uses:

1. Algorithmic trading

2. Personal consultant

3. Robo-advisors

4. Sentiment analysis

5. Stock picking

6. Risk management

7. Portfolio optimization

How to Use AI for algo-trading

Algorithmic trading, or algo trading, involves using computer-programmed instructions to execute trades. The advent and integration of AI has allowed algo trading to evolve significantly. AI can trawl through huge amounts of data, look for patterns, and then make predictions. And this can all be done much faster than by a human.

The instructions given to the algo trading program are usually based on quantity, timing, price, or any mathematical model. The program takes a systematic approach to trades, executing them based on a set of parameters defined by the user, using whichever form of technical analysis is coded into it. As it’s automated, it can be done rapidly with little to no slippage and no human error, at the best possible prices, and with no emotional or psychological influence.

Setting up an algo trading program using AI can be pretty complex, and usually requires at least some coding knowledge. Users creating their own AI algo trading program would need to collect data, develop the model, backtest, design an algorithm, run simulations, and implement risk management.

Using ChatGPT to create an algorithmic trading strategy

Personal consultant

One of the first uses to emerge from AI, and probably the most prominent, is as a language model. AI can answer just about any question a person can think of, and elaborate on it, giving extensive information based on the billions of pages of human knowledge across the internet. This ability makes it an unparalleled tool for learning and getting advice tailored to your needs.

Certain AI tools have emerged that specialize in offering personalized investment advice based on a user’s needs and questions. One such tool, for example, is Magnifi. Magnifi is an AI tool designed to help you invest, by giving advice on decision-making, planning for investment goals, managing your portfolio, and learning while you invest. Drawing from its large database of over 15,000 stocks, it uses conversational AI to guide your investments. It can understand your investing personality, help to build a plan, and recommend an investment path. It can even track and analyze your investments across multiple brokerages.

Magnifi is an AI-powered financial platform designed to make investment research and execution easier

Tools like Magnifi should not be confused with robo-advisors however, as they don’t automatically manage your portfolio for you.

Robo-advisors

Robo-advisors are digital AI platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. Typically, when you sign up with a robo-advisor, it collects information from you about your financial situation and future goals through an online survey, and then uses the data to offer advice and automatically invest your capital.

Unlike personal AI consultants, robo-advisors can actually invest for you. The primary advantage of a robo-advisor is its ability to provide cheap and comprehensive investment management. They can analyze millions of data points and execute trades at the optimal price, manage complex investment portfolios, and monitor your account 24/7.

Robo advisors utilize AI to learn from vast amounts of financial data and improve their algorithms over time. AI has vastly improved robo-advisors’ capabilities in predicting market trends, managing risk, and building personalized portfolios based on your risk tolerance and time horizon. Best of all, AI allows robo-advisors to adapt to changes in market conditions or personal circumstances, making it a truly flexible and personally tailored tool.

We’ve put together a list of the best robo-advisors available today. You can find it here: 12 Best Robo-Advisors in 2024.

Sentiment analysis

The ability of AI to rapidly trawl through billions of sources of data and analyze text, makes it perfectly suited for assessing market sentiment. AI can analyze vast amounts of financial data, market trends, news articles, social media posts, and more, to find valuable insights that a human user might not. It can then continuously learn and adapt in real-time when these conditions change, and then forecast future movements, detect risks, and recommend optimal strategies for investing.

You can program an AI to follow specific company fundamentals and track sentiment surrounding it through social media. You could use AI to look for trending topics across multiple news sources to gauge market sentiment regarding specific industries or stocks. Being able to quickly analyze a massive range of information can help you make more informed investment decisions more effectively than if you simply followed social media and news feeds manually.

Stock picking

AI’s mass data analysis can also be used for picking the best stocks to invest in out of a selection of tens of thousands. Although this use case for AI is still relatively new, it’s being marketed to both retail and institutional investors by companies like Danelfin and Boosted.ai. They claim their AI tools are capable of outperforming the S&P 500, despite even stock experts not being able to do so.

AI can be used to find stocks for your portfolio

The way their tools work is by choosing and rating stocks and ETFs. Danelfin’s mission is to “democratize the use of artificial intelligence to help everyone make better investment decisions.” Their platform uses analytics to give users scores out of 10 for stocks and ETFs that are generated by AI, even offering a free option. It uses 600 technical indicators, 150 fundamental indicators, and 150 sentiment indicators, and rates each asset based on the analysis.

However, financial experts have cast doubt on the abilities of tools like Danelfin’s AI stock picker. They say AI stock pickers will naturally perform well during preferable market conditions, but the real test will come when there’s a market downturn. Due to the recent successes seen across the world’s stock markets, that observation holds weight. Onlookers might have to wait until the global economy suffers a change in direction to really be able to gauge the success rates of AI stock pickers.

Risk management

Firms have increasingly been turning toward AI as a means to manage risk when investing. By analyzing vast amounts of data to identify patterns and trends, AI can execute trades automatically based on predefined risk parameters, such as stop-loss orders, to minimize losses. Additionally, AI algorithms can continuously monitor market conditions in real time and adjust trading strategies accordingly to mitigate risk.

AI for risk management can be implemented into many of the other AI tools mentioned in this list. For example, an algo-trading tool might use AI to determine the optimal stop-loss limit order, while a market sentiment AI model could give indicators telling you when to sell.

Portfolio Optimization

Optimizing your portfolio for diversification and risk is crucial when investing. AI has helped portfolio management to significantly evolve with the use of new AI-driven technologies. AI tools trained on historical data can use machine learning to forecast asset prices, analyze market trends, and optimize your portfolio. Natural Language Processing models can interpret human language to extract key information, understand sentiment, and allocate your portfolio accordingly. Deep learning models, such as “recurrent neural networks”, can be used for predictive analysis or pattern recognition to help achieve ideal portfolio allocation.

Best Stock Brokers

1

9.4/10

Go to broker

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.

Minimum deposit:

From $100

Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA.

Pros/Cons

•High level of reliability ensured by the licenses of respected regulatory authorities and participation in the compensation funds.

•Wide selection of assets quoted at stock exchanges in the UK, U.S., Australia and Asia.

•An opportunity to combine active trading with social trading and passive investing.

•Zero-fee trading of a number of stocks.

•Access to ready-made diversified asset portfolios with various risk levels.

•Provision of leverage, educational materials on various markets and user-friendly trading platforms that can run on any device.

•Zero fees for portfolio management, depositing funds and account maintenance.

•High minimum deposit for users of a number of countries.

•No live chat on the website for quick connection to customer support.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.
Via eOption's secure website.

Minimum deposit:

$1

Review

The eOption broker (eoption.com) is an American stockbroker headquartered in Glenview, Illinois. It has been operating since 2007 and is a member of FINRA (CRD#: 7297/SEC#: 8-21765) and SIPC. It specializes in options trading and also acts as an intermediary in trades involving the popular securities classes. The company offers low trading commissions, super-fast execution of orders, and modern platforms with an advanced set of analytical tools. In 2020-2021, eOption was recognized as the best options broker by several resources such as Investopedia, The Tokenist, Benzinga, Investormint, and NerdWallet.

Pros/Cons

•Low commissions for options trading — $0.10 per contract plus $1.99 per trade.

•No minimum deposit requirements for cash trading accounts opened by US residents.

•FINRA membership and the protection of clients’ funds are available through Securities Investor Protection Corporation (SIPC).

•Access to professional trading platforms such as DAS and Sterling Trader Pro are developed by third-party software developers for the proprietary eOption terminal.

•An affiliate program with high rewards.

•Compensation for commissions for funds or assets from other brokerage firms and institutions transfer.

•Prompt support by phone and online chat in the trading platform during company business hours.

•The narrow range of choice of investment solutions to generate passive income.

•You cannot trade Pink Sheet and Bulletin Board stocks.

•There is no online chat on the company's website.

Study Review

3

9.1/10

Study Review

Minimum deposit:

$250

Review

The Ally Bank broker is part of Ally Financial Inc., which is an American holding company. The original company was created in 1919 by the General Motors automobile corporation to conduct activities with its auto parts suppliers and associated automobile dealerships. In 2014, Ally started offering banking products, and since 2017, it has also offered brokerage services. Currently, it operates solely as an online bank and brokerage firm and has no physical branches. It does, however, offer favorable terms of cooperation at consistently competitive rates with professional round-the-clock support. The company's services are used by more than 8.1 million customers globally.

Pros/Cons

•It has official licenses for banking, dealer, and brokerage activities from reputable US regulators.

•A wide range of assets is available such as currency pairs, metals, securities, and options.

•There is an opportunity to invest in diversified portfolios for passive profit.

•The company works only with US tax-paying residents.

•On the broker's website, there is no training on trading in various financial markets, nor is there a Forex glossary of terms.

•There are high commissions for withdrawing funds and the company does not compensate customers in any way.

•Only registered users can ask a question in the online chat.

•There is a time-consuming procedure for opening an account, which in some cases takes up to two weeks.

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How is AI used in investment decision-making?

In the past, even before Generative AI’s introduction in recent years, AI played a big role in investment and was used for algorithmic trading and quantitative strategies to guide investor decisions. Today, AI’s role has gone much further, and is used to handle data analysis, predict market trends, assess market sentiment, and tailor investment strategies to investors. The use of AI is democratizing investing, as anyone with some capital and access to AI tools can get professional financial advice and personally tailored portfolio management.

However, AI comes with limitations and does not guarantee a profit, no matter what some firms might tell you. AI for the most part uses quantitative data and pattern analysis, but can’t predict the future and determine events that can influence markets. It can streamline trading and investing, executing trades much faster than a human could, and analyze huge amounts of data that a human couldn’t. But AI is still fallible.

Benefits of using AI in investing

• Tailored: Any investment advice that an AI model gives will usually be tailored specifically to the individual investor. Picture an online investment expert that writes articles – they’d be publishing the same advice to all readers. An AI advisor on the other hand, can take into account your risk tolerance, capital, time horizon, and more, to give personalized advice suited to your needs

• Speed: AI systems can scan, analyze, and interpret huge amounts of data in seconds, and then recognize patterns or trends instantly. A human could never achieve the speed that an AI could. The speed of AI reduces the risk of missed opportunities and ensures the best possible prices when investing

• Emotionless: When trading or investing, it’s easy to give in to emotions like fear and greed. But unlike humans, machines don’t have feelings. When using AI for investing, its decisions are based on market conditions, technical analysis, market sentiment data, and the parameters you program into it. This means AI won’t go “chasing losses” or giving into “FOMO”, and sticks to hard, cold data

Why not use AI in investment decision-making?

• Limited flexibility: Many AI models used for investing are machines with programmed instructions. Because of this, they can’t change their operations. For example, robo-advisors follow a set of rules given to them by their users and can’t adapt on their own accord. This can be limiting when compared to working with a human advisor

• Lack of regulation: Regulating new technology takes time, and AI is still in its infancy. As regulators are struggling to keep up with the development of AI tech, use of AI in the investment sector could pose risks

• Technical vulnerability: Vulnerability to technological glitches or cyberattacks presents a systemic risk in AI-driven investing. Malicious actors could exploit vulnerabilities in AI algorithms or infrastructure, leading to data breaches, manipulation of market data, or disruption of trading operations. Technical failures or glitches in AI systems could also result in unintended consequences or financial losses for investors