CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing all your money. Read full risk warning.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

AI Algorithmic Trading: Uncovering Hidden Patterns in Data

AI Algorithmic trading has been all the rage recently. From promises of quick and easy wealth to rumored scams, we have heard it all. In this blog, we take an objective look into the subject.

Filip Dimkovski - Writer for Fortrade
By Filip Dimkovski
Joel Taylor - Editor for Fortrade
Edited by Joel Taylor

Updated June 18, 2024.

a hand touching a button with the letter s on it

In recent years, artificial intelligence (AI) has been a game-changer in financial markets. Specifically, AI is mainly used in algorithmic trading, where traders use intelligent algorithms to analyze vast amounts of data to uncover patterns, gain insights, and execute trades.

Of course, AI is not a crystal ball that'll guarantee success in the market. While it provides valuable insights and potentially profitable strategies, it has challenges and risks.




Understanding AI Algorithmic Trading

In algorithmic trading, AI can help traders make transactions instantly, removing the potential delays caused by human decision-making. Coupling this with the algorithm's power to analyze mass data, AI Algorithmic Trading allows traders to:

» Need help? See our video tutorials and trading courses for beginners



Types of AI Algorithmic Trading

Trend-following Algorithms

Trend-following is a type of AI algorithmic strategy that aims to identify and leverage market trends. These algorithms analyze historical data prices and attempt to identify patterns or trends that indicate the direction of future price movements. This approach is primarily based on the market belief that trends persist over time, allowing the trader to use the momentum and generate potential profits.

Pros


  • Attempts to identify patterns and trends for future price movement
  • Useful for volatile markets (easy navigation of price fluctuations)

Cons


  • Sudden reversals and market consolidations may result in potential losses

» Discover do the Pattern Day Trader (PTD) rules apply to Forex





Trading Range (Mean Reversions)

Trading range, also known as mean reversion, is an AI algorithmic trading strategy designed to take advantage of price movements within a well-set range. This approach is based on the principle that, over time, prices tend to revert to their mean levels. Mean reversion strategies are especially effective in markets with heightened volatility, where prices oscillate within relatively predictable bounds.

Pros


  • Could be effective in volatile markets

Cons


  • Market conditions can change

» Check out our stock trading for beginners guide



Time Weighted Average Price (TWAP)

The TWAP Algorithm divides the order size into smaller increments and executes them at regular intervals, ensuring that the trading activity is spread over time. This, in turn, could minimize the overall market impact and could achieve a price close to the average market price across the period.

Pros


  • Executes trades evenly over a specified period
  • Ensures that the trading activity is spread over time
  • Could achieve an average price—useful in large orders

Cons


  • Can't be used in all cases

» Being successful is about enhancing focus and discipline in your investing



Percentage of Volume (POV)

POV, or percentage of volume, algorithmic trading aims to execute trades based on a predetermined percentage of the trading volume in a given security or market. This approach allows the trader to maintain a consistent market participation rate while minimizing market impact. With the POV algorithm, the traders' positions get automatically adjusted proportionally to market activity, aiming to balance liquidity and market activity.

Pros


  • Maintains a consistent market participation rate
  • Reduces market impact
  • Balances liquidity and market activity

Cons


  • Not effective in highly volatile markets
  • Proper risk management and regular modifications are necessary

» Learn the fundamentals of CFD stock trading



Is AI Transforming the World of Algorithmic Trading?

Integrating AI and algorithmic trading in the financial markets has undoubtedly impacted the financial industry.

Nevertheless, AI and algorithms aren't immune to limitations and risks. The truth is that AI is still in its early stages of development, requiring further research, testing, and regulatory frameworks for its potential to be fully realized. As with all trading strategies, AI algorithm trading requires a cautious and balanced approach to ensure effective results.



Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of the instrument itself