The Online Investing AI Blog

This post is the first in a series of expert profiles that will give readers a better understanding of Automated–or Algorithmic–trading, as well as other trading technologies.

Our series starts with Ben Gimpert. Ben is a professional software developer and an expert in algorithmic trading. He offers keen insight to the current state of trading technology–and where it’s heading.

You can learn more about Ben and his technology at his site, Something Modern Logic.

What are some of the biggest challenges for Automated Traders and developers of Automated Trading systems?

The distinction between automated trading system developer and automated trader can be a blurry one. Where we draw the line hints at what I believe is the most difficult problem. Most trading systems, automated or otherwise, output time-sensitive signals that should be realized in the market. (i.e. “Go long S&P futures, and short volatility on gold right now.”) If a human trader manages the position once the entry is signaled, then the strategy will struggle with your typical human mental biases.

Managing the entire lifecycle of a trade with software is the primary difficulty and opportunity in automated trading. This means coding up more than a signal to enter a trade. Your automated system should specify precise position sizes, as well as stop-loss and take-profit levels. The risk and money management logic behind these decisions should look at a market’s volatility, the level of account equity, and important minutiae like contract multipliers and broker fees.

Ironically an automated trading system need not actually use a broker’s API! For example, a system that puts on a lot of risk might adversely signal the market with an exchange limit order. Instead a good automated trading system would specify a precise stop-loss and take-profit level that the human trader calls in as market swings. The real work in automated trading is in specifying the exact position size, stop-loss level, take-profit level, and maximum holding period — in addition to the entry signal. Next to those calculations, talking to the API is easy!

Is there room for small operators in the Automated Trading space or do the big banks and hedge funds have things wrapped up?

Absolutely. This is probably the most common myth in trading. “How can the little guy win, when a thousand overpaid MBAs are already working on this?” The assumption is wrong because investment banks and hedge funds are simply not that hip! As someone who spent years working in the trenches on trading floors in London, the average level of software engineering and artificial intelligence expertise is shockingly low. Bankers and hedge funds pay well because of the barrier to entry (jargon), because of the environment (hyper-competitive), and because of the exhaustion (long hours). The bonuses ain’t for elegant and efficient systems! The credit crisis has made this point more loudly than I ever might. Like any large organization, investment banks and hedge funds are bureaucratic and resistant to change.

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In 1997 chess grandmaster Gary Kasparov met the Singularity. And the Singularity won.

In 1985 Kasparov easily beat a chess-playing computer, even though he resorted to a trick to out-Kasparov the machine’s Kasparov program. Eleven years later, though, the chess legend struggled with Deep Blue, a computer with even more powerful processing power. But even Kasparov couldn’t compete with Deep Blue once its development team doubled the processing power a few years later.

Kasparov was beat, but he drew new lessons from the run-in that he details in New York Review of Books. These lessons might help you become a smarter–and less anxious–trader.
According to Kasparov, the exponential gain in technology didn’t ruin the game; it actually had some surprising aftershocks.

Read more…

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Sid Caesar said that comedy has to be based on truth. You take the truth and you put a little curlicue at the end.

The truth is that the Singularity is happening all around us. Technology is increasing rapidly. So, according to comedian Lewis C.K., is our human ability to complain.

I was thinking recently about how I used to turn the channel of the television manually. With a little  knob. Inevitably, the channel turner would break off and we would channel surf with a pair of pliers.

But, over the years, I forgot how much of a pain that was.

After I watched this, I don’t think I’ll mind much that when I’m lying on my couch, sometimes my remote has to be in a certain angle to switch channels.

(Note: The embedded video doesn’t work, so please click on the link to watch the video on Youtube. Damn technology…)

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There’s an unsettling feeling when you watch artificial intelligence at work: it doesn’t look artificial at all. It seems natural.

I have to admit all those scary images of robots taking over the world haunt a corner of my mind. Another unsettling behavior is the spooky parallels between the AI trading and human-driven trading.

There’s something called “over-training” when an AI trading system is actually limited from trading effectively because it has too much data.

Does this sound familiar? In my own investing-trading experience, I’ve found that I can over-think a position. This can lead to over-trading. You second and third and fourth guess your trades based on the stream of information coming at you from all directions and your own internal mood swings.

So, what does AI teach us about how to avoid our own over-training?

Read more…

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For years, during the late 1980s, I was a disc jockey.

The shifts ranged from six hours to 12 hours, six days a week. During that time, I had a stack of records from the list of top 40 songs to play. I would play about two songs from the top 40 list.

And then I would mix in an “oldie,” a non-current selection from a library of a couple hundred songs.

Over. And over. And over.

Day in. Day out.

Now, there are entire eras of music that I used to love that I can no longer listen to. I’m sick of those songs. Lynyrd Skynyrd is ruined. I can barely listen to a couple of Led Zep songs without wanting to reevaluate my lunch.

Had AI been around I might not have had such a bad reaction.

A group of University of Granada students have created, Immamusys.

The developers say, by using Artificial Intelligence, the software they created can produce original, copyright-free and emotion-inspiring music that can change continuously.  No more six-hundred repetitions of Freebird!!!

But the lack of classic rock is just the beginning of AI’s capabilities.

Read more…

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As artificial intelligence–or machine intelligence–makes strides to become a powerful tool of the future, it’s interesting to read this article from a Wired blog.

Scientists are using AI as a tool to unlock the mysteries of symbols found in the Indus Valley. This 4,000-year-old script may represent a spoken language. But linguists have found the script so hard to decipher, they weren’t sure if it was just a bunch of pictures.

It wasn’t…

Read more…

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According to a report from the Next Big Future, a sentience driving software not only saves money and fuel when it operates a car, it’s also safer. And it may be on the market by 2012.

The software was tested in a vehicle in real world conditions near the Transport Research Laboratory in England. (I hope I don’t have to drive on the left side of the road now.)

The system, which uses GPS-equipped smart phone to determine its position and wireless links to control the vehicles acceleration and braking, saved anywhere from 5-24 percent on fuel, researchers said.

So how much would this incredibly smart software cost? They’re saying about $30 to install.

Read more…

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One lie that the financial industry and its legions of wizards rely on is that only a professional trader can time the market. Of course, that should read: Only a person employed by a financial house can time the market.

In fact, when an ordinary person tries to time the market, these wizards label such behavior as “risky” and “dangerous.” When they do it, it’s called, “shrewd” and “audacious.”

I don’t need to offer proof that this is untrue. Look at the current market and the long line of fallen one-time industry wizards. That’s proof enough.

The truth is it’s difficult to time the market… and yet, incredibly easy. How can that be? Humans are emotional creatures with all the good and bad that comes with it. A hardcore, disciplined investor who sits on Wall Street, or is shouting in the pits at the stock exchange, suffers the same pangs of greed and fear–just like you. Maybe they’ve been able to deal with the emotions better than an untrained investor, but they discount their own frailties at their own peril. Maybe that’s what happened. People who don’t think they’re being greedy, may be the greediest of them all. People who don’t believe they are afraid, are, perhaps, the most fearful.

So, when the financial wizards tell you that you can’t time the market, they may be right. But, they are incapable of such money mastery, too.

Read more…

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According to an article in Technology Review, European scientists have created a silicon chip that comes close to the human brain’s “structure and function.”

In fact, in some ways, it exceeds the performance of the human brain.

The prototype was created by scientists at the Heidelberg University of Germany. The design features 200,000 neurons that are linked to 50 million synapses.

Researchers say that the chip works 100,000 times faster than a brain.

While the jury is still out on how the performance of the prototype will hold up, it’s a sign that AI researchers are getting close to that threshold where computer intelligence will match or beat human performance, at least technically speaking.

Other hurdles remain, but the trek to the Singularity continues.

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In order to turn investing accounts into sizable fortunes, investors need three things: compounding interest, good returns, and dependable returns. For the non-accredited investor, those three ingredients in the wealth-building recipe have remained unrealizable. Until recently.

Wealthy investors turn to financial managers and form entities, such as hedge funds or private equity groups, to max out returns and increase compounding. These financial managers are tasked with growing the investors’ pool of money and, until recently, they were very successful.

The hedge fund concept is not applicable to the majority of investors who don’t meet the Security and Exchange Commission’s (S.E.C.) rules on an “accredited investor.”

According to Wikipedia, the rules on accredited investors states:

In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year.” This rule came into effect in 1933 by way of the Securities Act of 1933.

The little guy and gal are supposedly protected by the designation, but in the regulatory world of unintended consequences, the wealthy have more opportunity to increase their wealth through better returns that can compound at an enormous rate.

What do the little people get? Mutual funds.

The performance of mutual funds are limited. First they are large funds that have limited investment opportunities, so their returns have been diminishing. To make up for low returns, mutual fund companies generally charge higher maintenance fees. (Sarcasm only slightly intended.)

Retirement accounts aim to protect investors from the biggest threat to compounding their investments: taxes. These accounts–401Ks, IRAs, and the like–have been very successful for businesses who are ensured a ready supply of labor because so few people ever retire early on the meek gains in their accounts, which are usually held in mutual funds and index funds. (Sarcasm totally intended.)

Automated Trading may be one solution for non-accredited investors who want to turn their investment accounts into wealth-building accounts.

Automated Trading systems trade numerous asset classes: currencies, stocks, options, and commodities, just to name a few. They are much more nimbler than mutual funds. And because the moves are usually originated by knowledgeable traders or trading systems, they are primed for high returns.

The major setback with human trading is that, since most are based on faulty human emotions. Automated Trading systems, also, may be based on simple, imperfect trading systems, the accounts are risky. It’s a legitimate criticism and one that can be addressed through education and improved technology.

At Online Investing AI, we want to address that shortcoming. We are introducing advanced technology that won’t rely on human traders to misread market signals or follow faulty mechanical trading methods that only work for short time periods.

By adding advanced technology, Automated Trading systems can be improved to become a better choice for working men and women who want to build wealth and gain financial freedom.

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