Among investors – professionals and amateurs – it is known that investing is not an easy task. To predict the market movements is the gold of the fools. Some believe it is an art. Some believe it is down to math. Whatever you believe in, success in investing is challenging, especially if you do not have a clear strategy to follow.
Investing today can be supported by lots of information available. It can be information about companies, currency, commodity, or any other asset you are trading. And do not take us wrong, you will always trade short- or long-term positions. The holy grail of an investor is to know the right price to buy and sell, along with the right timing to do so.
At London Analytics we have the mission to create technology that helps or even automates the trading process. Our models can analyse, predict, and execute market orders, as well as automatically define the correct strategies behind the investing logic.
Automation can be a precious ally of an investor. Many important funds today are relying more and more on analytics to quickly react to the market’s behavior with the right decisions. What is really important is that reacting only minutes or seconds ahead of the market can make a huge difference in your account balance.
But automation is not the only way to invest successfully. Also getting to a high level of automation is not so easy as only buying some stand-alone piece of technology. To get a better understanding, we have prepared this brief description of the 5 levels of investing automation. It is helpful for you to understand which level you are, and what steps you need to take to reach the maximum level of automation or the optimum level of automation at different stages of your business.
The 5 Levels of Investing Automation are:
LEVEL 1: Position Trading (buy and hold)
This is the fundamental and classical way of investing that most funds, investors, banks, and companies – and also the worlds’ most famous investor - use. It is based on the strategy to find assets that are currently undervalued, buy it, and wait for the rise in price in the long run – if your assumption about the value was right. This approach involves investing in various stocks, commodities, currencies, and ETFs.
This approach offers relatively low risk and high stability. With the inflation working in your favor, the historical data shows it is a safe, and long-term, strategy. Currently, several funds are already abandoning this style and are looking for alternatives, especially supported by data to achieve more gains during high volatility market and crisis times. But not trading anymore as the main way of investing.
LEVEL 2: Manual Trading
Investing and waiting for possible returns is an inefficient strategy, especially if you are looking for short term profits. If in the long run, the assets will go up in price, this is not a steady, straight line. So, the next idea that arises is to optimize the process, while taking in consideration the short-term variation of the assets’ prices. Buy and sell several times making a small profit in each operation. The constant search for opportunities usually is based on fundamental and technical analysis (which we can explore better another time). This investing approach created an entire industry of traders and analysts who professionally buy and sell assets in the search for profits. Operating manually, it can be a hard process to follow multiple diverse assets simultaneously and, usually, traders get concentrated on a small number of assets that they can physically follow. This way of operating comes with a price of losing all other opportunities of the thousands of assets available worldwide that changes in price every minute.
LEVEL 3: Automated Trading
With the growth of IT technologies, an abundance of information and computing power, more and more areas are being automated. And of course, the investing is not behind.
Algorithmic – or AI - trading and quantitative research have a lot to contribute to the trading process. From making automated analysis, automated decision making, automated risk control, the usage of mathematics and statistics, as well as the ability to be connected to the markets and take actions almost instantaneously, gives a significant advantage to automated systems over human traders.
Each trading idea can now be clearly described in a form of an algorithm, and then tested on historical data. This simple process generates a huge amount of analysis and conclusions. However, past results are not the guarantee of future gains, so companies are starting to face the problems of “over-trained” strategies and of the strategies’ limited lifetime. These problems cause huge financial costs as companies begin to create analytical and solutions development departments to create new and new relevant trading strategies. It works well but this approach fundamentally expects the same type of behavior from the markets. The last crisis and the change in people’s habits indicate that it should not be expected.
LEVEL 4: Social Trading
This level presumes the creation of ecosystems that constantly create efficient and profitable trading strategies. That is exactly what Quantopian, eToro, and QuantConnect companies do. The result is a social network and a set of professional utilities for creating strategies. Different individuals create thousands of strategies and can mirror each other. The best of the best is selected from them and then transferred to funds and investment companies, or even individual trader investors. And the quality of the strategies is very superior.
These social strategies are great, as they give more flexibility and brilliantly use the network effect, so it creates more agility for less experienced investors. With Social Mining you are not a sole trader anymore. But you are still relying on other human minds – the best ones, but still humans. The number of qualified strategies can be increased but the data analysis and strategy execution are still slow and manual. The numbers are not challenged.
LEVEL 5: AI Trading
The pinnacle of this process is the application of machine learning and artificial intelligence techniques to the investing process. This is the holy grail that the biggest funds like Bridgewaters and BlackRock are pursuing successfully. The results are non-questionable. But the effort to achieve this level is something that only professionals in AI investing can achieve.
Combining all together is the beauty of the AI technologies: automated analysis, the vision of the entire market, use of strategies mining, and quick reaction. It gives the AI an unprecedented advantage to achieve good and consistent results. On top of that, the AI technologies can be sensitive to the market movements to question the strategies themselves that are behind the investing process and can change it automatically. Now the strategies, analysis, and execution can be automated. At this point, all decisions can be learned by the algorithms to become better over time.
Being a Level 5 you can start trading in a way that the best opportunities can be captured from the market and brought to the investors. But you need to make sure that the right technology is backing you up.
AlphaCube, for example, is an on-line AI-powered trading automation platform that automates the trading process directly into the accounts. It analyses the stock/crypto assets in real-time, generates the investing strategies powered by AI, decides the best long and short positions, defines the best prices to buy and sell, and execute the orders, automatically, 24/7. It can create, validate, and apply one million different strategies each second. A technology that depends on only one resource - computing power. More about AlphaCloud can be found here: https://www.londonanalytics.com/alphacloud.
Bogdan Ivaniuk, CTO, London Analytics Ltd.
Pablo Morales, CEO, London Analytics Ltd.