New AI Trend Dangerous and Misleading

I’m seeing a new trend these days that I believe is misleading and dangerous. With the popularity of artificial intelligence there are people promoting stock trading programs with advanced algorithms they claim will deliver superior market performance.

Are They Wonder Programs?

These wonder programs analyse a multitude of stock performance indicators to determine optimum buy and sell times. Naturally there are testimonials to back up these claims of making easy money with little effort and no research.

All that’s required is for the investor to purchase the program and provide the necessary funds to start the investing process. The program is linked to a trading platform and can either advise when and what to buy and sell or be programmed to automatically execute buy/sell orders.

Too Good to be True?

First and foremost this is a very misleading product that obviously sounds too good to be true (and we all know how this always ends). The promoters suggest you can easily make money but they conveniently neglect to tell you there are no guarantees. You can also lose, and lose big.

History and exhaustive studies have proven over and over again that no one can time the market. Further studies have proven beyond a doubt that the more you trade the more likely you are to lose money because those trading fees add up. Stock markets don’t follow mathematical formulas or algorithms. The greatest deception here is the suggestion these programs can do the impossible – predict the future.

Research has shown that only 1% of day traders consistently earn money

Why are these products dangerous?

When you create something easy to use that feeds into human greed you have all the ingredients for a bubble. When people invest into these schemes out of ignorance, the influx of money into the market can create a rise in stock prices which creates a sense of success.

People seem to be making money easily which feeds into more people buying into the process. And so the bubble grows until stock prices become unrealistically high and fall. And they fall fast as the algorithms react to losses and begin to sell.

How much money do you need for day trading? This is a loaded question. The SEC requires that you maintain a minimum of $25,000 in equity to engage in pattern day trading.

Is there a Danger?

The dangerous part of this is the fact that the algorithms can be automated to do the buying and selling meaning essentially these programs are day trading on steroids. Like all bubbles a few people make money early and most who join later lose big.

Is this legal?

There are currently no regulations against this practice. Banks and stock trading services have no issues with the idea, since more frequent trading means more buy and sell orders at a fee generating more profits. The market regulators have no ability to protect the buyers from their own ignorance. And even for those who do make money the government will be more than happy collect capital gains tax on half the earnings.

Time for a reality check.

These programs have no diversification and subject the user to significant risk. You could own the wrong stock at the wrong time and suffer huge losses. Trading fees will be significant.

All artificial intelligence programs have a human bias that exposes the user to the risk of losses if the algorithm is not properly designed or if market conditions change unexpectedly. If you are caught up in a bubble you’ll buy high and sell low. I would never recommend buying into these schemes.

Is there a better way? I prefer a fund that offers diversification and has passive management. I buy and hold for the long term (years or even decades). My funds have low management fees and reinvest dividends. This is the only strategy with a winning record historically.

Water BarrelThe BalanceIn my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.

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