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What is the difference between AI trading and Algo trading

03 Oct 2023


AI or Artificial Intelligence has transformed the way you perform your daily tasks. Making automatic utility bill payments, using face ID to lock/unlock your smartphone, engaging with chatbots as customer service tools, and removing problematic posts from social media platforms are all examples of how AI is helping you with your everyday chores.

The world of investing and trading is no different. Technology has now started playing a significant role in the way you can make your investing decisions. Both AI trading and algo trading help you make accurate market predictions based on real-time data and automate the entire trading process.

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However, several traders have yet to know the difference between AI trading and algo trading. They think both of them are the same. If you feel the same, this article is for you. Continue reading to explore key features and differences between AI and algo trading techniques.

Introduction to AI Trading

AI trading refers to the use of Artificial Intelligence to predict price movements of securities and make accurate trading decisions. AI uses advanced algorithms and machine learning to analyse a vast pool of information, including real-time market updates, the historical behaviour of a stock, and various technical metrics to speculate short-term price movements.

AI trading enables you to automate your quantitative trading process. It helps in the automatic execution of trades without any manual intervention. Entry and exit points are calculated based on advanced machine-learning techniques.

Advantages of AI trading

AI trading has already become highly popular in several Western countries, such as the United States of America (USA). However, in India, it’s slowly trying to capture the investors’ attention on a large scale. Below are a few advantages of AI trading:

  • Improved accuracy through machine learning

It’s a well-established fact that machines are much more powerful and accurate than humans. AI trading systems are designed to derive appropriate trading strategies with defined targets and stop losses. These strategies often prove to be highly accurate as they are based on enormous data analysis beyond the scope of humans.

  • Minimum loss and maximum profit

When you know you can’t generate profit from a trade, you search for a safe exit route with minimum loss. However, when your portfolio is in green, you want to maximize your profit by exiting at the highest possible point. Although it’s nearly impossible to predict these points, AI trading helps in consistent decision-making.

  • Eliminates human emotions

Most successful investors have one common trait – they can control their emotions while trading. But, in reality, it’s quite difficult to do so. More often than not, investors make emotional investing decisions only to regret later. But with AI trading, you can eliminate the impact of emotions on your trading decisions.

Introduction to Algo Trading

Although AI trading and algo trading sounds similar, there are vast differences between the two techniques. Algo trading, also known as algorithmic trading, requires a little bit of manual intervention, unlike AI trading. Here, a human first sets specific conditions for trading, and then, the computer takes over. The trading decisions are based on pre-programmed algorithms.

That is why algo trading is a combination of manual trading and AI trading. The advantages of algo trading include:

  • Faster execution of trades

Algo trading systems are designed to execute trades much faster than humans. They ensure you don’t miss any opportunity to profit from the markets. They also eliminate the need for constant market monitoring.

  • The best of both worlds

Unlike AI trading, algo trading has a provision for manual intervention. Thus, you can get the best of both worlds without relying entirely on computers for your trading decisions.

AI Trading vs. Algo Trading

By now, the concepts of AI trading and algo trading must be clear to you. The key difference between the two trading techniques lies in the decision-making process. In AI trading systems, computers make investment decisions entirely based on advanced machine-learning techniques. On the other hand, algo trading systems require a bit of human intervention for trading decisions.

Also, AI trading systems can quickly change their trading strategies based on the latest data. However, algo trading systems rely on pre-programmed computer algorithms set by humans. They have to be updated manually from time to time.

To conclude

Both AI and algo trading systems have a few advantages and disadvantages. While AI trading helps make accurate decisions in ideal market conditions, algo trading is more effective during high volatility. The choice between the two ultimately rests with your precise investment objectives and risk appetite.


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