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Artificial intelligence has become a part and parcel of our daily lives. We use it for business, communication and personal purposes. The latest AI model making waves is ChatGPT which many traders are now using to develop trading strategies and signals. As a trader, you may not know how to use AI for your trading, particularly if you are trading forex and other financial markets such as Binary options. You can compare Binary Options and Forex Trading on IQcent.
Forex, cryptocurrency trading – illustrative photo. Image credit: Cedrik Wesche via Unsplash, free license
AI trading strategies are something you should consider as a trader, especially if you don’t have the time or experience to make trades on your own. With the right AI systems, you can make more money from your trading activities while keeping your trading errors to a minimum. Sure, you will have to invest funds in getting the software, but the gain is usually more than the cost, especially in the long term.
In this post, we will answer some questions using AI in forex trading strategies. At the end of the article, we give you a guideline on how to set up an automated trading system using AI.
Table of Contents
What is AI in forex trading, and how does it work?
AI in forex trading simply means using AI to analyze market data and making traders,
When we say AI, we are talking about a branch of computer science that tries to replicate human intelligence in computers. In terms of forex trading, it means the computer system will be able to analyze market data and recommend the best trading options, just like a human trader.
A trader can decide to use AI only for trading signals or pair it with trading software for automated trading. In this sense, the trading signals that the AI-generated is immediately executed by the trading software.
Types of automated forex trading system
There are two types of automated forex trading systems:
- Prebuilt systems
- Custom build systems
Prebuilt automated forex trading systems
Prebuilt systems are automated systems that are designed by third-party providers. You can get these systems by subscribing monthly/yearly or making a one-time purchase
The reason many traders go for a prebuilt automated trading system is their cheap cost. What you will spend on an off-the-shelf automated trading system is only a fraction of what you will spend if you want to build a custom system.
Custom-made automated trading system
You can get a system custom-built for you by paying a developer. Another option is to develop the program on your own using programming languages. Trading platforms like MetaTrader 4 (MT4) allow you to customize trading systems to your personal taste.
How to use AI in Forex Trading?
After you have chosen the type of trading system you want, you can now move on to interpret AI into your forex trading strategy. There are many ways for you to do this, but the guide below will make the process simple and resume the chances of error.
1. Develop a Trading Strategy
Every trader needs a trading strategy to guide their trading decisions and prevent errors from happening. With a good trading strategy, you can easily point out where you are making mistakes and what to correct. There are many aspects to forex trading strategy, but the following are basic things that must be included:
- Your entry and exit points
- Portfolio management
- Risk management
You can finetune your forex trading strategy by using AI systems to backtest it.
2. Use the Right AI Technology
It is one thing to have a good trading strategy; it is another thing to use a good AI tool that helps you get the most benefit out of your trading strategy. This is why you need to take something to research the available options and choose a platform that works for you.
When it comes to AI, there are three categories that apply to forex trading: computer vision, machine learning and natural language processing.
- Computer vision algorithms identify patterns by analyzing graphs and charts.
- Machine learning algorithms predict market trends using historical data.
- Natural language processing algorithms analyze textual sources such as social media and news articles to provide actionable trading insights based on market sentiments.
You should choose the AI technology that aligns with your trading needs and expertise.
3. Gather and Analyze Data
Now that you have set up shop with your trading strategy and AI tool, it is time for you to feed it with data. It is the data that you provide that the AI will analyze and interpret into trading signals. There are many places to get data, but the commonly used sources for forex traders are:
4. Backtesting and Refine Your Trading Strategy
Any trading system is only as good as the results it provides. However, if you wait until the program goes live before you review the results, you may lose significant trading capital. For this reason, it is better to test the program before it goes live through backtesting. Backtesting shows you the results you would have gotten with your strategy based on historical data so you can decide if it is a good strategy or needs improvement.
5. Automate Your Trades
When you are OK with the results of your trading strategy, then you can proceed to automate your forex trading system. Some traders set up the system in a way that allows automatically executing trades based on your trading strategy and market conditions.
Conclusion
Congratulations. You have learned how to use AI and automated trading strategies to make better analyses and improve your trading profit.
You can check IQCent for more learning resources.
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