What Are AI Powered Trading Algorithms?
AI powered trading algorithms are computer programs that use artificial intelligence to buy and sell stocks, currencies, cryptocurrencies, commodities, or other financial assets automatically. Instead of a human sitting in front of a screen and clicking “buy” or “sell,” the AI makes those decisions on its own, often thousands of times per day, and usually much faster and without emotions.
How They Work (Simple Version)
- Data In
The algorithm constantly receives huge amounts of data: current prices, historical prices, news headlines, social media sentiment, economic reports, interest rates, weather (for agricultural commodities), and even satellite images of parking lots or oil tankers. - Learning and Predicting
The AI looks for patterns in all that data that humans would never spot. It tries to predict what will happen next: “Will this stock go up in the next 5 minutes?” or “Will the euro get stronger against the dollar tomorrow?” - Decision and Execution
When the AI thinks it has an edge, it sends orders to the exchange automatically: buy 10,000 shares, sell 500 Bitcoin, etc. These orders can happen in milliseconds. - Feedback Loop
After the trade, the AI checks if it made money or lost money and adjusts itself so it gets better over time.
Main Types of AI Trading Algorithms
High-Frequency Trading (HFT)
- Trades in tiny fractions of a second
- Makes money on very small price movements
- Needs super-fast computers located right next to the exchange
- Some HFT firms make thousands of trades per second
Machine Learning / Deep Learning Models
- Uses neural networks (similar to the human brain, but simplified)
- Can find extremely complex patterns
- Common models: LSTM, Transformer, Reinforcement Learning
Sentiment Analysis Bots
- Reads news, tweets, Reddit, earnings call transcripts
- Figures out if people are bullish or bearish about a company
- Trades based on mood of the market
Statistical Arbitrage
- Looks for temporary mispricing between related assets (e.g., two similar stocks)
- Buys the cheap one and sells the expensive one, betting they will converge
Reinforcement Learning Traders
- Treats trading like a game
- Gets “rewards” for making money, “punishments” for losing
- Learns the best actions through trial and error (mostly in simulation first)
Portfolio Management Robots (Robo-Advisors)
- Not as aggressive as the ones above
- Used by regular people through apps like Wealthfront or Betterment
- Automatically rebalances your stocks and bonds using AI
What AI Is Good At in Trading
- Processing millions of data points instantly
- Removing fear and greed (no emotions)
- Working 24 hours a day, 7 days a week
- Backtesting ideas on decades of historical data in seconds
- Finding tiny patterns that repeat
What AI Is Still Bad At
- Handling completely new events (Black Swan events like COVID in early 2020)
- Understanding real-world context sometimes (a sarcastic tweet can fool sentiment models)
- Overfitting: looking so hard for patterns that it finds meaningless ones
- Flash crashes: sometimes many AIs react the same way at the same time and make prices collapse or explode in minutes
Who Uses Them
- Big hedge funds (Renaissance Technologies, Two Sigma, DE Shaw)
- Prop trading firms (Jane Street, Citadel, Jump Trading)
- Banks and brokerages
- Crypto trading firms (many of the biggest market makers on Binance or Coinbase are pure AI)
- Retail traders who rent or buy algorithms
How Much of the Market Is AI?
In the US stock market, roughly 70-80% of daily trading volume is done by algorithms, and most of those are now AI-powered or at least use machine learning components. In crypto, the number is even higher, often over 90%.
Risks and Controversies
- Flash Crash of 2010: the market dropped almost 10% in minutes, mostly blamed on algorithms
- Some people say AI trading makes markets less fair for regular investors
- Regulators worry about manipulation (spoofing, quote stuffing)
- If too many AIs use the same strategy, the strategy stops working (“alpha decay”)
Can a Normal Person Use Them?
Yes. Options include:
- Copy-trading platforms (eToro, ZuluTrade)
- Renting algorithms on QuantConnect or Composer
- Using robo-advisors
- Running open-source bots on your own computer (especially popular in crypto)
The Future
Most experts believe that within a few years almost 100% of trading will be done by increasingly advanced AI. The big question is whether humans will still be able to compete or understand what’s happening in the markets at all.
In short, AI powered trading algorithms are already the dominant force in financial markets today, and they are getting smarter, faster, and more widespread every month.