We’re investors, so when we think about the most exciting application for artificial intelligence (AI) we can’t help but think of using AI to tell us how to make money in the stock market. The idea of automated trading has been around for a long time now. Also known as algorithmic trading, the use of automation to trade takes the human bias out of the equation which is what oftentimes leads to losses. Human emotions like fear and greed ensure that the majority of us will never have a successful career in trading because we cannot keep our senses about us when dealing with a stock market that is so irrational.
If we could just take the power of machine learning and let it loose on the stock market then we would be certain to generate alpha. If we’re going to have a go at this business model, we’ll need funds for two reasons. The first use of funds will go towards buying the computers and human talent we need to build and develop our algorithmic trading system and the second use will be the actual money we will use to invest in order to generate profits.
The first thing you need to know here is that some of the most prominent hedge funds in the world are already using machine learning for algorithmic trading and have been doing so for quite a while now. 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 for over 20 years. Why are we not surprised that using artificial intelligence for algorithmic trading can produce the best returns ever recorded?