Since the 1990s, artificial intelligence (AI) researchers have
predicted that AI would change the forex market. In 1991,
MIT Sloan Management
published a groundbreaking article titled Managing Foreign Exchange for Competitive Advantage. This article emphasized
the role that computerized models would play in the foreign exchange market. A follow-up
published by the University of Cambridge 14 years later. This article brazenly
claimed that AI was going to change foreign currency
These bold claims have gradually come to fruition over the past
13 years. It has been over a decade since the University of Cambridge published that
article. However, it is clearer than ever that the foreign currency market
depends on AI.
Machine learning and predictive analytics are the new frontier of forex trading
Financial traders have used AI for years. However, it has
become more important these days. Advances in big data have changed forex in
ways that we never predicted.
Forex traders are becoming increasingly dependent on
predictive analytics and big data. Karthik Krishnan
wrote about some of the applications in TG Daily. More sophisticated
AI algorithms are capable of collecting data in real time
and making very accurate short-term predictions. These algorithms have proven
to be very useful with scalping trading.
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Predictive analytics and machine learning algorithms are
also useful for making longer-term predictions. However, there is a larger
margin of errors with these models.
The problem is that there is more uncertainty over longer
time intervals. You need to account for a much larger number of variables,
because more events could trigger pricing changes. You also have to account for
the probability that any of those events will actually occur.
AI has made substantial progress over
the past 20 years. When the University of Cambridge published its article, it could
not make such predictions. Modern predictive analytics tools can predict price
patterns over a period of weeks or months, because they can account for
numerous variables that influence trends. They can even simulate these trades
with demo accounts.
There are other ways that big data and AI are helping forex
traders. AI has also helped forex traders minimize their
risk during turbulent markets. One of the ways this has been done
is with stop loss orders, which
are AI algorithms that automatically sell assets after their prices fall below
a certain level.
AI trading is actually starting to
reduce the turbulence in the market. When traders monitor their trades
manually, they are more likely to make decisions based on emotion. This can
lead to market panics that cause erratic price movements.
This is not such a concern with AI trading. AI algorithms
do not make decisions based on emotion. They depend on objective data points
that indicate future price movements. As a result, the market will become far
less volatile as more people use AI platforms to manage
Forex is more dependent on AI than ever before
The forex market has changed considerably over the years and AI is one of the biggest reasons for its evolution. It has
given birth to predictive analytics models and machine-learning capabilities
that have helped forex traders gain a huge advantage that was not previously
available to them.
This is going to help
minimize market volatility and help traders make more successful trades in the
near future. The University of Cambridge predicted this in 2005 and it is finally
being proven right. AI is probably going to have an even bigger impact in the
coming decade, leading us to wonder how the role AI will further play in the future of forex.