AI-DRIVEN ALGORITHM-
BASED TRADING
Muhmmed Jasir P T
20220113
CONTENTS
o Introduction
o Traditional Methods for Trading
o Why Traditional Methods Didn’t Work Well ?
o Who Wins in the Market and Why Most Fail ?
o Algorithm-Driven Trading
o Role of AI in Trading
o How AI Algorithms Work
o Benefits of Using AI/ML Methods in Trading
o Challenges and Risks
o Application in Real Markets
o Future Trends
o Conclusion
AI-Driven Algorithm-Based Trading
I N T RO D U C T I O N
o What is Trading? Trading is the buying and selling of financial instruments like stocks, forex, and
commodities to generate profits.
o Why Trading? It enables wealth creation, liquidity, price discovery, and risk diversification in financial
markets.
o AI in Trading: AI analyzes vast datasets, automates decision-making, and predicts trends with high
accuracy.
o How AI Helps: Techniques like Machine Learning (ML) and NLP process historical data, market sentiments,
and global events in real time.
o Real-World Impact: AI systems like JPMorgan's LOXM and Renaissance Technologies’ models drive
efficiency and profitability.
TRADITIONAL METHODS FOR TRADING
Methods Limitations
o Floor trading and direct order o Manual and prone to human
execution at exchanges. error.
o Using technical indicators o Time-consuming and less
(e.g., moving averages, RSI) adaptable to dynamic
and statistical methods for markets
prediction
AI-Driven Algorithm-Based Trading
P R I C E AC T I O N T R A D I N G M E T H O D
AI-Driven Algorithm-Based Trading
T R A D I N G W I T H M AC D
AI-Driven Algorithm-Based Trading
M O V I N G AV E R A G E S
AI-Driven Algorithm-Based Trading
M O V I N G AV E R A G E S
AI-Driven Algorithm-Based Trading
S T O C A S T I C O S C I L L AT O R
AI-Driven Algorithm-Based Trading
S T O C A S T I C O S C I L L AT O R
AI-Driven Algorithm-Based Trading
F U N DA M E N TA L A N A LY S I S
Analysis
Provides a detailed examination of the company's financial health, market performance,
and growth prospects.
It includes insights into trends, industry comparisons, and overall business evaluations.
Peers
Displays a list of companies operating in the same industry or market segment, enabling
comparisons on key financial metrics and performance indicators.
Quarters
Contains quarterly financial data, such as revenue, profit, and expenses, allowing users to
track the company's performance over short-term periods.
Profit & Loss
Highlights the company's income statement, detailing revenue, expenses, and net
profit/loss over a specific period to assess its profitability.
AI-Driven Algorithm-Based Trading
F U N DA M E N TA L A N A LY S I S
Balance Sheet
Summarizes the company's financial position at a given point, including assets, liabilities, and
equity, providing insights into its stability and financial structure.
Cash Flow
Focuses on cash movement within the business, showing inflows and outflows, helping to
evaluate liquidity and operational efficiency.
Ratios
Provides key financial ratios, such as profit margins, return on equity, and debt-to-equity,
which are used to analyze the company's performance and financial health.
Investors
Lists key stakeholders and shareholders, providing information about the ownership structure
and major financial backers.
Documents
Offers access to essential corporate documents, including annual reports, financial filings, and
disclosures, for deeper research and compliance purposes.
AI-Driven Algorithm-Based Trading
WHY TRADITIONAL METHODS DIDN’T
WORK WELL ?
o Cognitive biases and emotional decision-making.
o Lack of adaptability to high-frequency or volatile markets.
o Insufficient data processing capabilities.
AI-Driven Algorithm-Based Trading
W H O W I N S I N T H E M A R K E T A N D W H Y M O S T FA I L ?
Statistics Reasons for Failure
o Around 80-90% of traders fail o Overtrading and lack of risk
due to poor strategies, lack of management.
discipline, and emotional o Ignoring market trends and
biases. not using advanced tools like
algorithms.
AI-Driven Algorithm-Based Trading
ALGORITHM-DRIVEN TRADING
Core Elements Strategies
o Historical Data: Backtesting strategies and o Mean-Reversion: Identifying and
analyzing past market trends to predict trading based on price deviations
future price movements. returning to their average.
o Fundamentals: Incorporating economic o Trend-Following: Using algorithms to
factors like earnings reports, interest ride sustained price movements in
rates, and GDP data. bullish or bearish directions.
o Risk-Reward Analysis: Optimizing position o Statistical Arbitrage: Exploiting pricing
sizing and trade entry/exit points to inefficiencies across related assets or
balance potential gains against losses. markets using advanced statistical
models.
AI-Driven Algorithm-Based Trading
RO L E O F A I I N T R A D I N G
o Order Execution Using Historical Data and Reinforcement Learning:
AI uses historical market data to identify patterns and determine optimal entry and exit points.
Reinforcement learning trains trading agents to adapt dynamically by learning from past trades and
maximizing cumulative rewards, enabling efficient and timely execution of orders in volatile markets.
o Analyzing Market and Global Sentiments Using NLP:
Natural Language Processing (NLP) tools analyze unstructured data like financial news, earnings
reports, and social media to gauge market sentiment. For instance, identifying whether global market
news is bullish or bearish helps refine trading strategies in real-time.
o LSTMs (Long Short-Term Memory) for Time-Series Predictions:
LSTMs, a type of recurrent neural network, excel at identifying trends and forecasting stock prices
based on sequential financial data. They account for long-term dependencies and can predict future
prices based on historical patterns.
o GANs (Generative Adversarial Networks) for Simulating Market Conditions:
GANs generate synthetic market scenarios to test trading strategies under various conditions. For
example, they can simulate market reactions to events like interest rate changes, helping traders fine-
tune their algorithms.
AI-Driven Algorithm-Based Trading
HOW AI ALGORITHMS WORK
o Data Collection:
AI gathers historical and real-time data, including stock prices, trading volumes, and market news, to build a
comprehensive dataset for analysis.
o Feature Engineering:
Key trading metrics like volatility, trend strength, and moving averages are extracted from the data to help AI models
identify actionable patterns.
o Model Training:
Supervised learning is used to predict price movements, while reinforcement learning trains AI agents to optimize
strategies through trial and error
o Decision Execution:
The AI system executes trades automatically when predefined conditions, such as price thresholds or trend patterns,
are met..
Real-time data Automated trading software Real-time reports
Real-time data flux Real-time data Capital liquidity Profit
Price data mining management
Capital and Low-latency data Capital risk Capital exposure
liquidity data management management
Fundamental data Historical data Trading orders Dashboard
& news mining management
Other data Usual reports
Data warehouse
Historical price Machine
Data validation Online analytical
data learning and
processing
algorithms
Enterprise resource Data marts optimization
planning data Data transforming Data visualization
Customer relations
Data cleaning Alerts and signals
management data
Other external
Data aggregating Other reports
data sources
AI-Driven Trading Block Diagram
BENEFITS OF USING AI/ML METHODS
IN TRADING
o Speed and efficiency in data processing and decision-making.
o Real-time adaptability to dynamic markets.
o Risk mitigation and improved accuracy.
o Example: Renaissance Technologies achieves consistent profits using AI
AI-Driven Algorithm-Based Trading
20
CHALLENGES AND RISKS
Key Challenges Market Risks
o Data Quality: Poor-quality or incomplete o Black Swan Events: Unpredictable
data can lead to inaccurate predictions events like the COVID-19 pandemic
and unreliable trading decisions. can disrupt market predictions and
strategies.
o Overfitting: AI models trained on specific
datasets may perform well in simulations o Unexpected Volatility: Sudden market
but fail in real-world, dynamic markets. movements, driven by global news or
economic events, can cause AI models
o Regulatory Concerns: Compliance with
to underperform.
evolving financial regulations poses
challenges for AI-driven trading systems. o Systemic Risks: Heavy reliance on AI
could lead to cascading failures if
multiple systems behave similarly
during a market crash.
AI-Driven Algorithm-Based Trading
A P P L I C AT I O N I N R E A L M A R K E T S
o High-Frequency Trading:
Firms like Citadel Securities leverage AI to execute thousands of trades in microseconds, exploiting tiny price
differences for consistent profits. AI ensures precision and speed that far surpass human capabilities.
o Robo-Advisors:
Platforms like Betterment and Wealthfront use AI to automate portfolio management, offering personalized
investment strategies and rebalancing portfolios based on user goals and market conditions.
o Cryptocurrency Trading:
AI models analyze the high volatility of cryptocurrencies like Bitcoin and Ethereum, predicting trends and optimizing
trades in real-time to navigate this unpredictable market.
AI-Driven Algorithm-Based Trading
FUTURE TRENDS
Innovations Emerging AI Techniques
o Quantum computing for faster o Reinforcement learning for evolving
simulations. strategies
o Blockchain integration for secure and o Ethical and regulatory considerations
decentralized trading. for transparency
AI-Driven Algorithm-Based Trading
CONCLUSION
o Transformation of Trading: AI and algorithms have revolutionized trading by improving efficiency, precision, and
decision-making capabilities.
o Enhanced Profitability: Data-driven strategies powered by AI consistently deliver better risk management and higher
returns.
o Adaptability to Markets: AI's ability to analyze vast datasets in real time ensures quick adaptation to dynamic and
volatile markets.
o Importance of Ethical Practices: Transparent and responsible use of AI is essential to address biases, regulatory
compliance, and systemic risks.
o Innovation for the Future: Continuous advancements in AI, such as quantum computing and reinforcement learning,
will shape the future of trading strategies and market dynamics.
AI-Driven Algorithm-Based Trading
REFERENCES
o "Artificial Intelligence Applied to Stock Market Trading: A Review": This paper presents a systematic review of AI applications in stock market investments, analyzing 2,326 papers from 1995 to
2019. It categorizes the research into portfolio optimization, stock market prediction using AI, financial sentiment analysis, and combined approaches.
https://www.researchgate.net/publication/349189858_Artificial_Intelligence_Applied_to_Stock_Market_Trading_A_Review
o "AI-Powered Trading, Algorithmic Collusion, and Price Efficiency": This study explores the integration of AI in trading, examining its effects on market power, information rents, price
informativeness, market liquidity, and mispricing.
https://tinyurl.com/mv3x4ccx
o "Deep Reinforcement Learning for Quantitative Trading": This research introduces QTNet, an adaptive trading model that autonomously formulates quantitative trading strategies through an
intelligent trading agent. It combines deep reinforcement learning with imitative learning methodologies to enhance performance in volatile financial markets.
https://arxiv.org/html/2312.15730v1
o "A Case Study on AI Engineering Practices: Developing an Autonomous Stock Trading System": This paper provides insights into AI engineering practices by detailing the development of an
autonomous stock trading system. It discusses challenges encountered and solutions applied during the development process, offering valuable lessons for practitioners.
https://arxiv.org/pdf/2303.13216
o Varsity by Zerodha
https://zerodha.com/varsity/
AI-Driven Algorithm-Based Trading
Q&A
AI-Driven Algorithm-Based Trading
MY WORST INVESTMENT HAS BEEN MY
HEALTH. I WOULD ENCOURAGE EVERYBODY
TO INVEST THE MOST
IN THAT…
— Rakesh Jhunjhunwala
THANK YOU
