The Next Big Change in Forex Trading

The Next Big Change in Forex Trading –  will be (AI) Artificial Intelligence. And it’s already started.

“Look at you, hacker: a pathetic creature of meat and bone, panting and sweating as you run through my corridors. How can you challenge a perfect, immortal machine?” - Ken Levine

Forex trading platforms have always been at the cutting edge of using the latest that the Internet and computer software technologies have to offer – ever since the introduction of broadband and high-speed, fibre optic cables first came to be the norm: from domestic use to businesses, which was not so many years ago. Today many businesses can now be run from home: with teams of people, from different cultures and countries, in real time, who will probably never, ever meet physically each other face-to-face – share a drink or a joke around the company’s copier and/or the coffee machine. Such is the wonder of the Internet.

Gone are the days when traders gathered at exchange floors and yelled their orders. Almost 99% of the traders use electronic trading platforms now. From expensive full-service brokers to discount brokers, from Manual ordering to Algorithmic trading, from Tape readers to robust Charting platforms: many things have changed today.

However, there is now something far more sinister being developed. And, it is both as exciting as it is (or at least should be), frightening. Welcome to the rise of AI or rather…Artificial Intelligence. Artificial Intelligence is going to be the next big change in forex trading – the next big disruptor and…and it has already started.

Artificial Intelligence

Artificial Intelligence and machine learning, is going to be a fundamental part of the next generation of forex trading and these will be totally devoid of any human-like sentiments and they shall replace any form of (human) manual overrides and interventions.

These machines shall learn to overcome the risks of the (human aspects of sentiments) associated with executing trades – these machines will learn from every single trade they will execute. Thus, these machines will become as ruthless as they will become aggressive. They will take no prisoners in their decision-making processes and algorithmic ways of thinking.

There are also several more very important advantages that these machines will have over us human beings…they will not need to sleep, have vacations, have rest breaks, lunch breaks, coffee breaks and   cigarette breaks – nor will they even have to go to the toilet. In short…these machines will be ruthlessly manning their trading terminals 24/7 – without a break.

The rise of Artificial Intelligence into our daily lives – the Internet of things

Today the we now have “Siri,” from Apple, “Cortana,” from Microsoft and “Google Now,” from Google Inc + the latest addition to this – Amazon’s “Alexa.” All, of which, have been in development since the late 1950’s, and these are just the tip of the iceberg, which now support our daily lives on practically all of our mobile devices.

How could Artificial Intelligence change forex trading or even the stock markets?

According to AtoZForex, “Wall Street watchdogs and exchange operators are also seeing potential for utilizing AI for market oversight. Bill Nosal, a Nasdaq business development executive, who is overseeing its artificial intelligence effort commented: “We haven’t really let the machines loose, as it were, on the surveillance side.” These institutions hope that AI can help catching the misbehaviour of wrongdoers more quickly than the current system.”

Could AI help curb rogue traders and cheating on the market?

Beyond a doubt, AI could assist the Wall Street watchdogs in solving and, even preventing, complex issues, such as “Layering,” which involves orders being quickly sent to exchanges after which they are cancelled, with the aim to move stock prices artificially. Tom Gira, an executive vice president of FINRA, even mentioned that AI could sniff out new types of scams or fraudulent trades:

“The biggest concern we have is that there is some manipulative scheme that we are not even aware of. It seems like these tools have the potential to give us a better window into the market for those types of scenarios.” (Source: AtoZForex – 26/10/2016)

Could Artificial Intelligence ever completely replace human forex traders?

Regarding that rather rhetorical question…I would suggest, probably not and there are a multitude of reasons for that – in fact far too many for me to go into detail here.

However, what I do envision is something like this. We will probably still have people successfully trading fundamental models and both the machine learning as well as other strategies will be designed and implemented by humans. Most likely fundamental models will in, the future, be augmented/combined with ML/AI elements and the two will converge.

I would, however, also suggest that machine learning has already changed the financial markets, since there are firms and individuals that have successfully implemented machine learning-based, automated trading strategies. These models can capture complex, non-linear relationships between factors that are hard to spot for humans.

On Trade Automation

With the advent of Algorithmic trading system, we have seen a lot of automation in trading from last decade. This trend will continue at a faster pace. Tele-callers at your broker contact centre may be replaced by intelligent robots. Your trading terminal may start understanding voice and gesture commands.

People would start selling automated trading systems and the traditional advisory services would lose its sheen. Big hedge funds would start employing trading bots instead of humans. This list is endless and all is up to your imagination.

On changes in trading hours

This is surely going to happen very soon, because the current 6~ hours trading time is not adequate for full-time traders. As the trading becomes more automated in coming generation, there is a high possibility that exchanges would start allowing 24 bar 7 trading especially in the derivative segment. The same happens in forex market today. This would increase the trading volumes which will benefit both brokers and exchanges.

Could there be more derivative products, as a result of Artificial Intelligence?

In almost every Stock exchange around the world, the majority of trading happens on derivative segment like Futures and Options.

These products offer more flexibility as compared to the underlying securities. We should witness addition in the number of derivative products in the coming generation. How about real estate derivatives or second order derivatives?! There may also be derivatives expiring weekly or categorization of these products based on risk.

Therefore, I think that there will, indeed, be many more derivative trading products appearing over the coming years, as the Artificial Intelligence software improves and matures. To my mind this would be not only an entirely logical conclusion, but a continuum to the next level(s) of forex trading.