Artificial intelligence (AI) has the potential to revolutionize the trading and investment worlds. Evaluation firms, brokerages, wealth management companies, and independent traders continue to embrace emerging AI technologies at accelerating rates. AI trading bots represent one of the most prominent examples.
This guide explores the fast-changing world of AI trading tools and their capabilities and limitations. It also covers legal and ethical considerations and the relationship between AI trading technologies and firms.
The World of AI Trading Bots
Trading bots are specialized computer programs that use machine learning to analyze financial markets. They detect markers that signal trading opportunities and can then open and close positions on the behalf of investors. Trading bots also place, manage, and monitor trades around the clock.
What’s more, AI bots can optimize profits, minimize losses, and help investors take advantage of quick-strike opportunities that human traders may miss. AI trading also offers investors and traders other important advantages, such as:
- They remove bias and emotion from trading decisions, reducing investor risk.
- Bots can analyze and process huge quantities of market data at instant speed, vastly outperforming human capabilities.
- AI bots can efficiently spot key market signals and indicators that human traders may not notice.
Both institutional and retail investors use AI trading bots for many different trading applications. They are most common in the stock, cryptocurrency, and foreign exchange (Forex) markets. Observers frequently describe trading bots as revolutionary tools with the potential to democratize financial markets, improve investor returns, and reduce trading risks.
Legal Challenges and Ethical Considerations
AI trading bots are currently legal in the United States and other major international jurisdictions. Still, traders should consider multiple legal challenges and ethical considerations related to their use. These include:
Compliance
While trading bots are legal, investment firms and traders are responsible for ensuring that they’re used in a compliant manner. Compliance issues cover topics such as data privacy, algorithmic trading laws, and prohibitions on market manipulation.
Failure to comply with applicable laws and regulations can result in financial or criminal penalties and reputational injury.
Market Conduct Ethics
Multiple ethical questions and considerations impact the use of AI bots in investing and trading. For instance:
- To what extent should investment and wealth management firms automate their oversight of client holdings?
- Should investment firms be required to disclose their use of automated technologies to clients?
- Should institutional users be compelled to reveal their trading algorithms to market regulators? To the general public? Why or why not?
Regulators in the U.S. and other countries have already introduced governance standards regarding AI trading technologies. But new and potentially more complex ethical questions will likely emerge as underlying technologies continue to develop and advance.
Technical Limitations
AI trading bots have inherent limitations. Investors must consider these as they decide whether to use them and to what extent.
While AI technologies remove human biases and emotions, this comes with a trade-off. Computer technologies lack the intuition that drives the success of many human traders. They also can’t yet replicate human judgment when it comes to factors such as emerging news, market sentiment, and experience.
In addition, trading bots can behave unpredictably, especially during volatile periods. Traders must factor in this capacity for unpredictable behavior when deciding how much money to entrust to automated trading.
Finally, when building trading bots, programmers will sometimes overrepresent the importance of historical trading data. AI trading bots are then less able to react to emerging trends, new information, and psychology-driven market action.
The Enigma of Evaluation Firms and AI Trading Bots
As the name suggests, firms practice proprietary (“prop”) trading. Prop trading occurs when a financial institution lets its traders use the firm’s capital to conduct their own independent trading operations in exchange for a percentage of the trader’s profits.
At present, the overall relationship between firms and AI trading bots remains highly ambiguous. Some evaluation firms allow trading bots and other computerized tools like Expert Advisors (EAs), as long as all trading activity remains legally compliant. Others restrict their use or prohibit it altogether.
Traders considering partnerships with firms can struggle to get clear answers regarding the firm’s policies on the use of trading or EA bots. Consulting firm representatives can help, although they sometimes offer vague or conflicting answers.
Traders should also consider the level of support the firm provides for automated trading technologies. The availability of strategic support, guidance, and resources is highly variable. A lack of access can negatively impact trading performance.
The Funded Trader’s Perspective on AI Trading Bots
The Funded Trader (TFT) allows the use of EAs and AI trading bots, but only under limited conditions. For instance, participants in trading challenges can only use self-created bots. Third-party applications aren’t permitted. This policy makes each trader’s success reliant solely on their personal skills.
You can find more information, answers to frequently asked questions, announcements, and additional resources on TFT’s Discord community.
Navigating the Prop Trading Landscape
Traders should consult prop trading contracts to see how the issuing firm deals with AI trading bots. Some firms have policies that prohibit prop traders from using EAs and other automated trading technologies. Others impose restrictions that limit the practicality of these tech tools.
If you choose to use trading bots, it’s crucial to learn how to recognize and avoid fraud such as a Forex EA scam. For instance:
- If it sounds too good to be true, it probably is.
- Research and scrutinize every aspect of the terms and conditions before you sign up for an AI trading system.
- Read testimonials and consult trusted, neutral third-party sites for user reviews and professional assessments.
- View AI trading platforms that don’t offer free trial periods with suspicion. Most reputable providers are happy to give prospective users free, limited-time trials.
Traders can also avoid scams by building their own trading bots. Although, this approach requires advanced software development and programming knowledge.
Finally, assess the following factors as you consider various AI trading platforms:
- Is the bot optimized for your preferred trading strategy or strategies?
- Is the bot suitable for a trader of your experience level?
- Does the bot have the right integrations?
- Does it have comprehensive backtesting capabilities?
- Is it secure?
- Does it require any upkeep that could cost you time or money?
Take your time when comparing bots and features, as their details and performance profiles can be complex. Seasoned traders also recommend trying out multiple automated trading platforms to see which one best matches your personal style.
Test Your Trading Skills With TFT
AI trading bots have powerful capabilities and appealing advantages, but they also carry risks, limitations, and downsides. In addition to applicable laws, regulations, and firm-based policies, traders must carefully weigh all relevant factors regarding a bot’s functionality profile before using one.
Practice is critical to trading success, bots or no bots. If you’re confident in your trading skills and want to put them to the test, enroll in one of The Funded Trader’s challenges.
