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5 Reasons Why AI Advisors Won’t Help You with Trading

Ruholamin Haqshanas
Last updated: | 4 min read
AI trading

The financial sector has been rapidly adopting artificial intelligence (AI) technologies, particularly generative AI and large language models (LLMs), to enhance various aspects of operations and customer interactions.

For instance, banks are leveraging AI to automate manual processes, enhance data analysis, and personalize customer interactions, improving operational efficiency and customer experience.

Moreover, AI is increasingly used to analyze vast amounts of data for detecting suspicious activities and transaction patterns.

AI technologies are also deployed to improve customer engagement through chatbots, virtual assistants, and recommendation systems.

Top AI Use Cases Among Financial Institutions

According to NVIDIA’s fourth annual State of AI in Financial Services Report, an overwhelming 91% of financial services companies are either assessing AI or already using it in production.

The report revealed that 37% of respondents showed interest in using AI in report generation, synthesis, and investment research to cut down on repetitive manual work.

Customer experience and engagement was another sought-out use case, with a 34% response rate.

The most popular uses for AI were in operations, risk and compliance, and marketing.

Furthermore, financial institutions are using AI to automate manual processes, enhance data analysis, and inform investment decisions, improving operational efficiency.

Overall, the survey found that 97% of companies plan to invest more in AI technologies in the near future.

The Limitations of AI in Trading

Some traders have recently turned to AI for price analysis and prediction.

Finbold, a financial news and analysis platform, has been actively utilizing AI to provide price predictions across various assets, including cryptocurrencies.

The media outlet provides daily and weekly price analysis of top cryptocurrencies using popular AI models like ChatGPT.

While AI tools offer certain advantages, traders must be cautious of their limitations as well, including potential issues like overfitting, lack of adaptability to new market conditions, and the inherent unpredictability of financial markets.

These tools should be viewed as complementary to human decision-making rather than replacements.

Here are five reasons why completely relying on AI for trading might not be a good decision.

1. Lack of Emotional Intelligence

AI excels in processing vast quantities of data and executing high-volume trades.

However, it lacks the emotional intelligence that human traders bring to the table, which includes an understanding of market sentiments and ethical considerations that machines cannot replicate.

Recent researches have revealed that AI often struggles with understanding the context and subtleties of emotional expressions.

In fact, for this reason, in fields like therapy or healthcare where emotional understanding is crucial, AI’s limitations can be stark.

While AI offers substantial benefits in processing speed and handling large datasets, its lack of emotional intelligence presents significant challenges, particularly in fields requiring interpersonal connections and emotional interactions.

2. Over-Reliance on Historical Data

AI systems primarily depend on historical data to make predictions and decisions.

This can be problematic during unprecedented market events, such as those influenced by the lack of regulations seen in cases like FTX or Binance​​.

Moreover, historical data may not always be representative of current or future conditions.

Changes in trends, consumer behavior, market dynamics, or regulatory environments might not be captured if the data is outdated, leading AI systems to make predictions based on scenarios that no longer exist.

3. Limited Flexibility and Adaptability

Unlike humans, AI algorithms have a rigid nature and may not quickly adapt to sudden market changes.

These systems operate within the confines of their predefined algorithms and parameters.

They excel in environments similar to those they were trained on but struggle when conditions change unexpectedly.

The pace of technological and economic change often outstrips the adaptability of AI systems, highlighting a crucial area where human oversight remains superior.

4. Ethical and Bias Concerns

AI systems can also manifest biases based on the data they are trained on, leading to ethical concerns in decision-making processes.

If the data they are trained on contains biases, the AI’s outputs will likely reflect these biases, which can lead to unfair or prejudiced decisions.

These biases can affect everything from trading strategies to client interactions, necessitating a vigilant approach to AI management and a robust human oversight framework.

5. Dependence on Technology

Heavy reliance on AI technologies introduces risks, including system failures or cyberattacks that can disrupt trading activities.

There are several notable instances illustrate how technology failures have significantly impacted trading.

In 2012, a software glitch due to the faulty deployment of trading algorithms led to $440 million in losses for Knight Capital. The problem caused a massive number of unintended orders to be sent to the market within minutes.

Likewise, in 2013, NASDAQ experienced a significant disruption due to a software malfunction that froze trading for three hours.

These incidents demonstrate the critical importance of robust and reliable technology in trading environments, as well as risks of overdependence on technology.

The Bottom Line

AI technologies, particularly generative AI and LLMs, are extensively used in the financial sector to automate manual processes, enhance data analysis, and personalize customer interactions.

More recently, some traders have recently turned to AI for price analysis and prediction.

While AI offers numerous benefits in trading, such as enhanced data processing capabilities and the ability to execute high-volume trades, it also comes with certain risks such as over-reliance on historical data, lack of emotional intelligence, and potential ethical issues​.

The financial sector’s dependence on technology also brings risks of system failures and cyberattacks, which can have severe impacts on trading and market stability.