AI Trading Bots: The New Frontier of Investing or a Digital Gamble?

Exploring the promises and pitfalls of letting algorithms manage your money

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  • AI trading bots offer potential for high returns but come with significant risks.
  • Nearly one-third of investors would trust AI to make all their investment decisions.
  • AI systems can be biased or make mistakes, as seen in Amazon’s recruiting tool fiasco.
  • Experts urge caution and emphasize the continued importance of human oversight.
  • A personal experiment with a trading bot yielded impressive short-term results.

So, are AI trading bots profitable? Tomas Harrison had always been skeptical of get-rich-quick schemes. As a 55-year-old investor with decades of experience, he’d seen his fair share of market trends come and go. But when he started hearing about AI trading bots that could supposedly outperform human investors, his curiosity was piqued.

“I kept seeing ads online about these AI investing programs,” Tomas recalled. “They promised amazing returns with little effort. Part of me thought it was too good to be true, but another part wondered if I was missing out on the next big thing.”

Tomas’ dilemma reflects a growing trend in the investment world. A 2023 survey found that almost one in three investors would be comfortable letting an AI trading bot make all their investment decisions. This shift towards algorithmic trading has caught the attention of both individual investors and financial institutions.

But are these AI trading bots really as profitable as they claim to be? The answer, as with most things in finance.. is complicated.

Expert Opinions: Caution Advised

trading bot

John Allan, head of innovation and operations for the UK’s Investment Association, urges caution. “Investment is something that’s very serious,” he says. “It affects people and their long-term life objectives. Being swayed by the latest craze might not be sensible.”

Allan’s words echo the sentiment of many traditional financial advisors. They argue that AI, while impressive, hasn’t yet proven itself over the long term. These experts believe human investment professionals still have a crucial role to play.

One major concern is that AI systems, despite their sophistication, can’t predict unforeseen events. For example, the 9/11 attacks, the 2008 financial crisis, and the COVID-19 pandemic all caught markets off guard.

No algorithm, no matter how advanced, saw these events coming.

Another problem is that AI systems can only be as smart as the information they learn from.

This issue became clear when Amazon tried to use AI to help hire new workers. According to a Reuters report, the AI looked at old hiring data to learn how to pick good job candidates. But because most tech workers in the past were men, the AI thought being male was important for the job. This meant the AI unfairly rejected many women who applied, even if they were qualified.

Elise Gourier, an associate professor in finance at ESSEC Business School, points to this case as a warning. “If AI was originally fed bad data by human programmers, then its decisions may simply get worse and worse the more code it creates,” she explains.

“AI systems can only be as smart as the information they learn from”.

Despite these concerns, some investors are forging ahead with AI-powered trading. Tomas decided to dip his toe in the water, activating a trading bot on a platform called Finance Phantom. He invested $560 for a 16-day trial run.

To his surprise, the bot generated a profit of $219 in just over two weeks. “I was amazed,” Tomas said. “That’s nearly a 50% return. I’ve never seen anything like it in my years of investing.”

Tomas’ experience isn’t unique. Many investors report impressive short-term gains from AI trading bots. These success stories fuel the growing interest in algorithmic trading.

But experts caution that short-term results don’t tell the whole story. Professor Sandra Wachter, a senior research fellow in AI at Oxford University, warns of potential pitfalls. “Generative AI is prone to bias and inaccuracies,” she says. “It can spit out wrong information or completely fabricate facts. Without vigorous oversight, it’s hard to spot these flaws.”

There are also security concerns. AI systems can be vulnerable to data leaks or sophisticated attacks that try to extract the underlying code and data.

The Psychology Behind AI Trust

So why are investors like Tomas willing to trust their money to these digital traders? Business psychologist and Partner and Head of Development at Pearn Kandola, Stuart Duff offers one explanation:

“It’s almost certainly reflecting an unconscious judgment that human investors are fallible, while machines are objective, logical, and measured decision-makers.”

This perception of AI as an infallible genius is misguided, Duff argues. “An AI investment tool may simply reflect all of the thinking errors and poor judgments of its developers,” he points out. “More than that, it may lose the benefit of intuitive experience and rapid reaction when unprecedented events strike.”

If you, as an investor considering using AI trading bots, we recommend taking a more cautious approach:

For example:

  1. Start small and test the waters before committing significant funds. Invest $100 – $200 and see test things out. If the AI platform works, proceed with increasing your stake.
  2. Do thorough research on both the AI platform and the cryptocurrencies or stocks it trades.
  3. Regularly withdraw profits to secure gains.
  4. Monitor the bot’s performance closely and be prepared to make adjustments.
  5. Stay patient and avoid making rash decisions based on short-term fluctuations.

As for Tomas, he remains cautiously optimistic about AI trading bots. “The results were impressive,” he admits. “But I’m not ready to hand over my entire portfolio to an algorithm just yet. I think there’s a place for AI in investing, but it needs to be balanced with human judgment and experience.”

Final Words

The debate over AI trading bots is far from settled. As technology continues to evolve, so too will the capabilities and limitations of these digital investors. For now, the old adage still holds true: If it sounds too good to be true, it probably is.

Investors would do well to approach AI trading bots with a mix of curiosity and caution, keeping one eye on the potential rewards and the other firmly on the risks.


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