If you’re an average retail investor who just saw a 60-minute special on artificial intelligence (AI), you probably thought to yourself “why can’t we use AI for stock trading“? Then maybe you plugged the phrase “artificial intelligence stock trading” into Google and this article popped up. We’re going to answer your question and hopefully we’ll all learn something along the way.
There are really three questions to ask here:
Yes, we’ve written before about at least three hedge funds using AI to generate superior returns for their investors. Take as an example the hedge fund Renaissance Technologies which is said to have “the best physics and mathematics department in the world“. The Medallion Fund at Renaissance, run mostly for employees of the company, has one of the best records in investing history having returned +35% annualized over 20 years. That means that if you put $10,000 in the fund back in 1997, you’d have $4.04 million in your account today. So yes, other people can use AI for stock trading and they’ve used it to realize one of the best returns in the history of investing. Is that what you were hoping to get a piece of?
For now you’ll need to try to get into one of the hedge funds we covered that are using AI effectively. Of course past performance is never indicative of future results. You also have to wonder, “just what’s keeping anyone from using AI for stock trading in much the same manner as these hedge funds do“? The answer is, nothing is stopping anyone from starting a company that uses AI for stock trading.
In August of last year we wrote about 6 companies that are using artificial intelligence for generating alpha through algorithmic stock trading. One of these companies, Sentient Technologies, can simulate 1,800 trading days in just a few minutes and is pitting trillions of virtual traders against each other in a giant game of evolution. It’s run by an Apple guy who worked on Siri and he’s not saying anything about the returns he’s generating. While Sentient is being secretive, firms like Numerai are paying data scientists in bitcoin for their contributions to an AI hedge fund which has now crowdsourced billions of equity price predictions. Their big news was when some anonymous genomics scientist going by the name of NCVSAI racked up $13,000 in rewards and then cashed out. Let’s hope that individual went and started their own hedge fund.
This brings us to our second question.
Yes, you can use artificial intelligence (AI) for stock trading but first you’re going to need a better understanding of what this entails. “Cognitive computing” is defined as simulating human thought processes by using computer models. That’s pretty much what AI is all about, but we need to separate computing out between software models and hardware models. Google’s Tensorflow is a “cognitive computing framework” that is completely built out of software and could be run on any desktop computer. Google has also developed their own hardware chip that is optimized for Tensorflow and we identified a whole slew of startups that are looking to build hardware that is optimized for cognitive computing. So before you go using AI for stock trading, you need to answer three basic questions.