Sajidhelp replies to: The future effect of banks using AI software

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Who’s to say the trades will be “short term?” More often than not, the long term predictions are accurate.

I’m just using the information from their website. Their specialty is trade placement; its their clients that are deciding the direction. They were formed in response to the market meltdown of ’87, which was largely caused by inefficient market placement. A good dissection is, again, in Bookstaber.

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As for ATD, they are trading 6% of the US stock markets every day. That is huge volume. They just raised $60 million in venture capital. To raise that much capital, they must have some evidence that their trading technology works.

Hundreds of millions of dollars were lost in a single day on the portfolio insurance programs that caused the ’87 crash. 60 million is, in those terms, small potatoes…

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I don’t believe creating AI for trading forex is difficult. Just look at the EA created for the James16 price action patterns…. those patterns are pretty accurate, and a bank incorporating them into their trading strategies could cause major market changes. For example, can you imagine a 100 billion dollar trade based on a pin bar? I can.

It’s a very different thing for one trader to put a few K on a pin bar compared to a bank putting, say, 100 million. Your trade (or mine) is not going to have a significant effect on market direction. Not even Nick Leeson could do that, though maybe George Soros could
Small traders – and here I include hedge funds up to say 250 million – tend to ride markets, one way or another. It’s analogous to surfing – someone with a board is not really going to change the shape of a wave; someone trying to ride the Titanic onto the beach however will…

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There are other technologies available for accurate forex forecasting as well. A “flexible neural tree” is a second generation neural network that was researched w/ good results on the USD/JPY. You can see the research paper (done by graduate students) by Googling for it.

One should ask why this paper had to be supported by grants from the national Science Foundation of China, rather than from trader’s earnings

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Whether you deny or accept the implications of AI on forex doesn’t really matter. If it happens, it won’t be of any consequence to our opinions.

I think it is worthwhile though (and I think you would agree) to discuss the potentials and pitfalls. From my perspective, trading is littered with corpses of AI based software – and the amusing thing is I am actually playing with something along those lines (using Baysian analysis tools & my Kalman filters). The real problem occurs when people – and here I include such luminaries as the late, unlamented gurus of the previously mentionned LTCM – start believing more in their technology than in their (hopefully) well trained insight and intuition.
Look at it as a simple problem in connectivity – how many neurons can you assign to trading as versus how many nodes a computer can assign? We still win, hands down…
I’m not saying, mind you, that they of no value at all. The big trade block I’ve already mentionned; another good place is for monitoring unusual pairs for possible misalignment. For a small trader, something like the pin bar EA might be useful, until it becomes common to the level of having a significant effect on the market, in which case it will lose any tradable value. You can see similar effets in other market techniques that were hot for awhile until they caught on (such as the correlation based bond spread trades of the late 90’s).
That leaves the algorithm based trader always at a bit of a lag relative to the market – essentially a soft-computing algorithm has to have an already existent history on which to train – and correspondingly it tends to fail to recognize when the trade potential has moved elsewhere. I guess my take on all this would be that since humans are essentially irrational, traders as a group will tend to adapt more quickly (even if individuals don’t) than the more complex structure of traders + programmers + mathematicians…..

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