The increasing use of artificial intelligence (AI) in trading has raised concerns about its potential negative impact. While AI has the potential to improve trading performance, it can also be detrimental if not used and understood appropriately.
Some trading bot solutions just require a user to fund his account and simply choose which “AI” bot to trade. While it definitely offers the lowest entry route to investments, there are a few red flags that traders need to be aware of.
Red Flag I – Front Running
By simply choosing the bot based on a description on what it does, a trader essentially hands over the critical decision making process of “what to buy”, “when to buy” and “when to sell”. Without visibility on the algorithms and what exactly they do, the bot can simply put the user’s trades at a disadvantageous position. Front running is simply running your own vested trades ahead of other parties’ trades. For example, you will place a buy order earlier at a better price than others. Not only is this practice illegal, but more importantly, it diminishes the users’ capital over time.
Red Flag II – No Real Alpha
One potential issue is that too many traders using the same black-box AI strategy will often generate no real alpha. Alpha refers to the amount of return on an investment that is in excess of what could be expected based on the investment’s risk. In trading, generating alpha is the goal for any traders and investors, as it signifies a profitable strategy. However, when too many traders are using the same AI algorithm, it becomes challenging to generate alpha because the market becomes more efficient. Imagine a thousand traders using the same algorithm to trade the same CFD instrument. The algorithm’s trading signals become less effective as more traders follow them, leading to lower returns.
Red Flag III – Market is Random
Furthermore, AI algorithms are often built using historical data, which means they are only as good as the data they were trained on. If market conditions change, the algorithm may no longer be effective, leading to significant losses.
So, does this mean the end of the road for AI trading? Absolutely not! By using an automated CFD trading software like CFDHero, a trader can avoid the pitfalls highlighted above. With CFDHero, there is no possibility of front-running because the trader chooses which CFD instrument to trade. Generating an alpha is also possible with the “secret sauce” settings that an experienced CFDHero trader can configure for his bot. For new users, he or she can rent a bot configured by other experienced traders from the Bots Marketplace.
As the great Greek philosopher Socrates once said “There is only one good – knowledge. And one evil – ignorance”.
Trade Intelligently with CFDHero.com