Key Benefits of Machine Learning
October 15th, 2021 3 minutes read
To get a more in depth understanding of Machine Learning, read our previously published article “Generating Alpha: Machine Learning Helps Traders”
Machine Learning is the most beneficial tool in the hands of market professionals. Traders rely on their expertise, experience, and intuition in their decision-making practices. Machine learning gives them context and information to generate unique alpha. For a deeper understanding of machine learning, let’s get a closer look to its benefits.
First: Machine Learning helps identity Signals and Shifting Indicators
One of the cardinal rules of being a trader is knowing when to enter and when to exit. You can only do this by learning how to identify signals or shifting indicators. While some are easy to spot, others have variables that the most experienced trader will have trouble identifying. Machine learning algorithms are typically able to do this through sentiment analysis.
What Is Sentiment Analysis?
Sentiment analysis is when a machine examines data (e.g., people’s posts, news stories, other forms of media) to determine the public’s opinion on a topic. Essentially, machines try to pick up the “emotional subtext” through words. They will identify which companies are liked, criticized, or boycotted by the general public at any given moment. This is an invaluable tool in generating alpha, because you can determine which assets you must trade for the short-term and which ones you should hold.
Second: Using Alt-Data Insights (Many Traders Won’t Check)
Your machine will have no problem crunching tremendous amounts of data, which means you can feed it videos, video transcriptions, photos, audio files, social media posts, presentations, webpages, articles, blogs, business documents, and more. With multiple algorithms at its disposal, the machine then uses these sources to further refine its determination of market sentiment. Through the machine, you get the sophisticated nuances of what people are saying, and more importantly, what they mean by what they say.
Third: Maximizing Gains by Managing Risks
Alternative data is only helpful if a signal exists, and this is where you can combine machine learning with risk management techniques for better results. Maximizing your gain is all about reducing the risks involved in the volatile world of asset trading. Knowing when an asset price is due for a correction means you can take action before it even happens. With the right algorithms, you can predict positive and negative relative value in seconds, helping you trade assets with reduced risk. More than upward and downward trends, though, machines can also estimate portfolio volatility, or even how much asset prices will fluctuate based on the type of data you ultimately feed the machine.
However, despite their efficiency, machines are solely dependent on humans. Machines have no feelings or concepts of morality. Machines are designed by humans and will need humans to regulate them. Thus, traders shouldn’t see machines as a threat. On the contrary, they should utilize them for their own market advantage, and producing unique alpha.
Market professionals' main goal is producing unique and fresh alpha. Machine learning is one of the most valuable tools. We have listed its key benefits below.