The Online Investing AI Blog

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The whole philosophy of using machine learning and artificial intelligence in investing is that machines can make trades quickly and without being burdened by emotions.

It’s the last bit that I’ll talk about today. Emotions — like fear and greed — skew the decision-making processes of the investor, causing him or her to but too high or sell to low based purely on feelings. A good example: you would probably pay more for food if you’re hungry than if you just had a big dinner.

Therefore — and this conclusion is inescapable — machines that do not have emotions can trade better.

Except, this logic is totally wrong. Well, not wrong. But it forgets the most important variable. The market and the economy runs on emotions. Even if every investor was an emotion-less cyborg, the rest of the economy, which underlies all stocks and commodities, runs on desires and emotions.

A successful investment system can not possibly rule out emotions. In fact, the most successful investment system would totally understand emotions, but not ruled by them. This system would understand how desire for something quickly turns to the desire to not lose something — fear. Likewise, it would be able to sense when the momentum of fear turns into a buying opportunity. It could sense that the greed in the real estate market was becoming too frothy, or that the fear of a recession was starting to bottom out.

In short, the best investment system understands emotions. It just isn’t ruled by them.

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Investing, Money, Online Investing AI AI, artificial intelligence, emotions, fear, greed, human, Investing, loss, machine learning, markets, predictions

Photo Courtesy Creative Commons

Humans can do a lot of things better than computers–but that list is shrinking.

Once, investing and trading solely belonged to humans. Computers were number-crunching machines that helped investors and traders make decisions.

Then, algorithmic trading came along. Trading strategies designed and maintained by computers saw more and more action in the market. Although,there were always people nearby monitoring those trades.

Now, computers have taken another step toward mastering the market.

At a recent conference in Barcelona, Spain researchers released their findings that showed computer model trading agents beat human traders and other computer trading systems.

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Accelerating Technology, Investing, Online Investing AI, Success AI, algorithm, computer, emotions, fear, greed, human, Investing, Money, Success, trading

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Conservatives, who tend to favor the market, often make the  case that they’re better investors and their policies are better for the economy. Liberals say they’re better investors because they are more globally aware than conservatives. They say they distribute wealth and that’s good for the economy.

So, who is right?

Neither.

To become the complete investor, you have to shrug off all  ideologies. When you trade or invest, ideologies can cloud your judgment.

Here’s how it works:

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Great Books, Investing, Money, Online Investing AI, US Economy books, conservative, covel, emotions, Investing, liberal, Obama, politics, trading, trend following

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Investing, Money, Success behavior, buying, emotions, failure, Investing, loser, manias, markets, Money, selling, stocks, Success, winner

Recently I discovered Texas Hold’em Poker on Facebook. I never really enjoyed playing poker very much, but to my surprise it is pretty interesting. Why? Because the more I play poker the more I realize how it is like trading.

Image courtesy Joe King

As I play, I immediately relate many things I have read about trading to what is happening in the game. It seems that many the information in books about trading is totally applicable to poker.

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Automated Trading, Great Books, Internet, Investing, Money, Success bet, emotions, facebook, failure, fun, gambling, games, Money, poker, position size, risk, risk management, Success, texas hold'em, trading

Pic @ Flickr Creative Commons

I’m in with the in crowd, I go where the in crowd goes

–Dobie Gray

We all want to be part of Dobie Gray’s in crowd, don’t we?

It’s a good feeling to be accepted and popular. Being popular improves our self-esteem and sense of value. We also feel we’re right in the decisions we make when the crowd agrees with us.

Does that extend to the stock market? According to a study published last week in the journal Current Biology, the answer is “you betcha.”

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Investing, Money, Online Investing AI, Success, US Economy emotions, finance, fundamental, indicators, psychology, science of trading, sentiment, stock market, technical

lrargerich@Flcikr

Terrance Watanabe had it all.

He owned THE most successful import-export business in America. He had the big house and the nice cars.

He sold his business in 2000 for an enormous sum of money–experts expect it was in the hundreds of millions–and possibly the billions of–dollars.

Bucking the common stereotype of the rich CEO, Terrance never became a snob. He started a philanthropy and was known as a big tipper.

Yep. Terrance had it all. Including a huge gambling problem. The Wall Street Journal reports he lost nearly $127 million in a now legendary alcohol-fueled gambling binge. Before we get all high and mighty judging Terrance’s idiocy, we should take a step back and wonder what lessons we can learn from Terrance’s fall.

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Investing, Money, Online Investing AI, Success casino, debt, emotions, gambling, Money, odds, problem, trading, Wall Street Journal

The market is run by emotions. It’s also ruined by them.

Despite what the financial world wants to think–and especially wants us to think–most financial decisions, from the casual investor to the commodities trader at Goldman Sachs, are emotional trades. It’s a gut feeling, or instinct, that prompts the trades.

And, in a way, that’s OK. After all, if most people invest with emotions, that should put you right in the pack of the trading action. It’s when investors become blinded by their emotions that things go awry. They fall behind the pack. They bet too much. They sit on the sidelines too long. They hold when they should fold, and fold when they should hold.

To avoid this, you need to know which emotions are most likely to mislead your investment actions Here are the seven most deadly emotions for investors.

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Accelerating Technology, Automated Trading, Business Strategy, Internet, Investing, Money, Online Investing AI, US Economy emotional, emotions, fear, greed, jealousy, market, paranoia, pride, worry

As Automated Trading become more and more popular, it’s interesting to hear people’s ideas and opinions on the matter. Some people think that they have to be perfect in order to be useful. Or, they think that they have to make money on every trade to create value for it’s owner. Or, the Automated Trading systems must correctly determine the direction of the market on a consistent basis.

That kind of thinking is silly when you take a moment to consider it. What trader makes money on every trade? Is it possible to have more losing trades than winning trades and still make money? Absolutely. If your winning trades make more money on an average per trade basis, then it is possible to have more losing trades and still make a profit.

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Automated Trading, Investing, Money Automated Trading, emotions, human trading, Investing, investors, Money, stocks

Brain's neurons at work.

People change when they’re in love. They talk different. They act different. They even walk different.

Scientists say love can change your brain.

And so can money.

Jason Zweig’s book, Your Money And Your Brain, which I mentioned yesterday, offers lessons in neuroeconomics, a cross between neuroscience, economics, and psychology.

This science is a quest to find how your brain reacts to financial situations.

It might also help you get rich.
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Accelerating Technology, Automated Trading, Great Books, Investing, Online Investing AI Automated Trading, brain, emotions, Jason Zweig, neuroeconomics