In An AI-Dominated World
In trading terms, they say the trend is your best friend until it ends/bends.
It's an adage that captures the fundamental challenge of market timing that every trader faces, man or machine.
For me, trading seems as a pure PVP game, which undoubtedly has its fair share of winners and losers.
The zero-sum nature of markets means that for every profitable trade, someone else is on the other side of that transaction.
I think consuming too much information on algorithmic trading and AI advancements has crystallized in my mind that humans will fare better doing something else other than trading as AI has already entered and began to dominate the field.
But then, if you really ask yourself what humans can fare well at besides trading from a purely financial perspective, you realize that our unique advantages is in areas requiring creativity, emotional intelligence, and nuanced judgment.
Interestingly enough, trading is sort of evolving into a less mechanical and more nuanced endeavor. Markets are becoming more interconnected and driven by complex narratives.
Of course, this isn't necessarily a bad thing. Evolution happens in all fields, and adaptation is the key to survival.
Machine Trading
In my view, I'm a bit comfortable handing over many of the mechanical aspects of trading to machines. These aspects don't interest me much in the first place.
What's really interesting to me is how we as humans can reposition ourselves in this new financial ecosystem through leveraging AI to build on our uniquely human strengths.
For example, humans can use AI to analyze vast datasets, identifying long-term trends and anomalies that algorithms will miss and then leverage their understanding of human behavior to interpret market sentiment.
As of 2023, estimates suggest that over 80% of trading volume comes from automated trading systems, with some sources putting that figure as high as 90-95% for certain market segments.
The rest of than percentage is dominated by various forms of quantitative trading, including high-frequency trading, statistical arbitrage, ETF-driven trading, and machine learning-based prediction models.
As A Human Trader
I've been contemplating what this AI dominance means for individual human approaches to markets, like how humans are considering how to adapt their strategy to this new reality.
It's quite noticeable that AI-powered systems excel at short-term pattern recognition and execution, and they still struggle with complex narrative understanding and long-term strategic thinking.
If that's not fixed relatively soon, then this can be viewed as an opportunity.
In that, instead of competing in the microsecond game where you have little to no advantage, you can focus on longer time horizons and more complex analyses.
Also, some areas where human intuition still outperforms algorithms is on geopolitical shifts, regulatory changes, and emerging social trends. Investments based around those require a deep understanding of context and foresight, which AI currently lacks.
I think in practice, the line between trading and investment is becoming increasingly blurry.
Because short-term trading strategies increasingly rely on long-term data analysis, and long-term investments are often influenced by short-term market fluctuations, to a certain degree.
That's why, I try to not make a distinct separation of them in my mind. Trends are simply patterns at different time scales, which in itself are becoming hard to understand.
Of course, I'm more than happy to let machines handle the stressful, mechanical parts of trading.
This creates more room to focus primarily on finding unique insights and understanding deep market psychology. I believe humans still excel in these areas, for now.
Thanks for reading!! Share your thoughts below on the comments.