ChatGPT and algo trading

ChatGPT is taking the world by storm. Microsoft is due to close a $10 Billion investment in ChatGPT after only a few months since the sophisticated software was made open-source by AI gem, OpenAI.  Search engine queries for the powerful AI toolset have skyrocketed. From algo trading to due diligence, users of all experience levels are starting to explore new and innovative ways to implement AI. You may also be wondering what the deal is with ChatGPT and how it could affect your trading strategy moving forward. What is ChatGPT? How does ChatGPT work? Can you use ChatGPT to trade? What is algo trading? How does the state of AI influence big tech companies like Google and Microsoft? 

In this article, we will unpack all these questions and more. 

What is ChatGPT?  

ChatGPT is a chatbot developed by OpenAI. It can be interacted with much in the same way as less sophisticated chat bots you have probably used before. For example, the amazon customer service chat bot or the Apple appointment organiser chatbot. GPT stands for Generative Pre-training Transformer, it is a language model that is designed to be able to converse with humans in a natural and intuitive way, using language processing techniques to understand and generate human-like text. The goal of ChatGPT is to create a chatbot that can engage in realistic, open-ended conversations with users about a wide range of topics.  

In addition to being able to hold natural conversations, ChatGPT also can perform various language tasks, such as producing original text, answering questions, and generating responses to prompts. You could ask ChatGPT to summarize long pieces of text or documents, write stories, poems, or other creative works. It can generate descriptions or captions for images and translate text from one language to another. Some people are even using ChatGPT to write code and computer scripts as the AI is capable of writing in various computer languages.   

How does ChatGPT Work? 

The AI works by being fed large chunks of text and learns to predict the next word in the sequence based on the context provided by the previous words. In this way, it learns to generate coherent and coherent sentences and paragraphs. Once trained, the model can be used to generate text by providing it with a prompt and allowing it to generate text based on the patterns it learned during training. The generated text is not a direct copy of the text it was trained on, but rather an original piece of text that is similar in style and content to the training data.  

Can you use ChatGPT to trade?  

Well, sort of. While ChatGPT is incredibly sophisticated and intelligent it does not have access to the internet or any information before 2021. ChatGPT also expressly warns users that ask for trading advice that the program is ‘not able to provide personalized financial advice’. Without being able to analyse news or new data as it appears this means that ChatGPT has the potential to produce unreliable results. Which may be fine for a bit of fun but becomes a serious risk when being asked to handle important financial calls which have serious implications for the user that is relying on the algorithm to function productively.  

This means that ChatGPT falls short as far as being effective tool for assessing instruments or the larger market in the context of current events. However, while ChatGPT cannot be used as a personal trading assistant, it can be used to streamline many of the workflows that a trader will go through. For example, it can be used to summarise large amounts of information and therefore can save traders time in responding to data and report releases that inform trading decisions. Alternatively, traders can and do already use AI tools that are specifically designed to execute trades already. This is known as ‘algo trading’   

What is Algo Trading? 

Algorithmic trading, also known as algo trading, is the use of computer programs and algorithms to automatically place trades on an exchange or over-the-counter. These trades are based on a set of predetermined rules, which can be as simple as "buy on a dip" or as complex as a multi-factor model that considers a wide range of market data. One of the main advantages of algo trading is speed. Because the trades are placed automatically, they can be executed much faster than a human trader could manage. This can be especially beneficial in fast-moving markets or when there is a large amount of trading activity. Algo trading also helps to reduce the emotional bias that can often influence trading decisions. By following a set of predetermined rules, algo traders can avoid making impulsive decisions based on fear or greed. 

However, using AI to trade ultimately requires a significant amount of upfront investment and expertise in order to set up the necessary infrastructure, including high-speed computers and sophisticated software. Additionally, algo trading relies on the accuracy of the algorithms and models used, which can be affected by a variety of factors such as data quality and market conditions. The rules an AI is programmed to operate under can easily change from perfect to disastrous in changing market conditions which means algo traders must constantly monitor and adapt strategy to produce the best results.  

Traders should conduct thorough research before investing even if trading seems attractive on paper, a detailed understanding of the trading tools and assets is crucial to make informed decisions. Failure to do so could lead to trading high-risk assets with little chance of returns, resulting in substantial losses.