As an investor, you know that stock market movements are the difference between profit and loss. With artificial intelligence (AI) expanding into all sorts of areas, it’s only natural to ask whether AI can predict the stock market. To answer this question, we’ll look at how AI works and whether it actually works for the stock market.
Plot your path towards financial freedom with our Hero’s Journey tool!
MyWalletHero is here to help you learn about taking control of your money, whether that’s paying off debt, working towards a short-term money goal, or investing for your future.
This tool can help you understand the next steps on your journey – simply choose a goal that best describes your current interests to get started.
How does AI work?
In theory, if a trained expert can predict something from data, AI should be able to do the same. All AI models do basically the same thing: they find patterns in data, then use those patterns to predict what will happen next.
AI relies on data, so you need data to train an AI. But not just any data: you need clean data, in a particular format. In some cases, you need to label and categorise the data first.
So, to train an AI model to predict the stock market, all you need to do is feed it a lot of well-organised historical stock market data. That sounds easy enough, right?
What’s the problem with AI stock market prediction?
The first problem is, arguably, that random chance can beat expert stock market predictions. Even if that’s not true, the second problem is that the stock market is a level two chaotic system. Unlike level one chaotic systems, such as the weather, the stock market predictions themselves can change the stock market.
If someone develops an accurate AI stock market prediction system, they can either use it to make money for themselves on the stock market, or they can sell access or information.
However, if accurate AI stock prediction were to become commonplace, it would influence the stock market in unpredictable ways. This would mean that the patterns it learned from the historical data would no longer apply, which would make its predictions less accurate.
Yes, but does AI stock market prediction work?
The answer is a solid ‘it depends’. For obvious reasons, researchers and investment firms put a lot of effort into AI stock market prediction. However, the results are mixed.
Academic researchers have developed quite accurate models. Right now, you can use AI to either manage your investments or to provide you with investment advice.
Some of the better-known AI-managed funds are I Know First and World Markets, while Toggle, AIStockFinder, Danel Capital, BetterTrader and Finbrain offer AI-generated investment advice and tips. Trade Ideas is aimed at beginners, focusing on teaching you how to trade. If you’re interested in helping to develop a fund’s AI, Numerai crowdsources it.
However, you need to balance that against the possibility of losing money. K1, an AI-controlled hedge fund, cost one investor more than $20 million, while Aidiya, another AI hedge fund, shut down after achieving only 2% returns.
AI can predict the stock market – sometimes. However, as with any investment, it comes with risks, and past performance is not an indication of future results. You could lose money, and managed funds can flop. As long as you understand how the system works, you can make an informed decision.
If you’re interested in getting started with investing, check out the best share accounts for beginners – everyone has to start somewhere!
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.