- Written by JaynAmy
Since the 1990s, artificial intelligence (AI) researchers have predicted that AI would change the forex market. In 1991, MIT Sloan Management Review 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 article was published by the University of Cambridge 14 years later. This article brazenly claimed that AI was going to change foreign currency markets.
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 their trades.
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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.