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  /  Artificial Intelligence   /  Using Machine Learning in Investments and Stock Trading
machine learning, Artificial Intelligence in Investments, AI in Stock Trading, Machine Learning, Stock Market, Artificial intelligence

Using Machine Learning in Investments and Stock Trading

Contribution of Machine Learning in Investments and Stock Trading

While humans remain a big part of the trading equation, artificial intelligence (AI) and machine learning play an increasingly significant role in investments and stock trading. A recent study by U.K research firm Coalition reveals that electronic trades account for nearly 45% of revenues in cash equities trading. And while hedge funds are more reluctant when it comes to automation, many use AI-infused analysis to get investment ideas and build portfolios.


Machine Learning in the Stock Market

Machine learning (ML) is one of the types of artificial intelligence. ML is the development of a rule-based approach to AI. The main difference is that in artificial intelligence, the whole process is analyzed and stored. In ML, only the output of specific processes is stored.

Using machine learning, we can get solutions to complex problems of stock trading. Besides storing the results, it also notes the parameters taken into consideration while making a decision. ML typically stores the outcomes and the parameters that gave those outcomes, following this way, it provides results in the stock market.

Let’s see how AI trading and ML in the stock market is impacting stock trading:

Disruptive technologies such as artificial intelligence and machine learning mainly evaluate the factors behind the existing stock trends by using neural networks and other learning methods. These factors or predictions are used to speculate the future cost that helps investors invest in particular trade/stock.

The available facts make the decisions taken by these technologies. They do not make decisions based on sentiments like hope, luck, and superstitions. When the investment choice is chosen based on facts, it traditionally yields 100% of profits.

Besides, we need to ensure that those technologies are appropriately used when deployed. So if you need to use this, you have to be aware of maths and computer programming. The trading companies are recruiting people who possess excellent computer programming, coding, and maths skills.


Applications of Machine Learning in Stock Trading

Prediction of Stock Prices

ML stores data in the database and delivers results using the historical data present. The stock prices that have to be predicted are called target variables. The historical data that is used to predict these target variables are called predictor variables. To predict these, machine learning uses the algorithms that use the predictor variables to anticipate the result for target variables.

Trading at High Frequency

Machine learning uses algorithms to deliver results. High-frequency algorithms came into the picture that analyzes various thousand trades in a day. They analyze the trades and offer traders the information that is required to invest in a market, in case the investment bankers or traders need to analyze several financial markets to execute large orders.

Pension funds, investment banks, and mutual funds currently use these algorithms. In 2019-20, U.S trading obtained almost 60% to 70% of profit using high-frequency trading algorithms.

Detection of Frauds

Most of us fear being subjected to fraud when it’s about trading. We always want to ensure whether the amount we are investing in is safe or not. ML helps to identify the frauds in the market.

As machine learning stores large amounts of data and scan through that data, it can predict if any data is out of the box or unusual. Using this information, traders can easily crack the frauds in the markets.

Many leading companies like Renaissance Technologies and Citadel are using machine learning in their investment decision making.