Is Machine Learning the Secret to Successful Investments?

August 8, 2018 - 4 minutes read

It’s no secret that machine learning development is opening up a plethora of new possibilities. This is especially the case in FinTech. We’ve all heard of automated trading powered by artificial intelligence (AI).

But what if machine learning could cobble together the DNA of great investing strategies? Would this perfect investment? London-based developer and social trading network eToro wants to find out.

AI Can Identify Cats… and Winning Strategies

Machine learning is a subset of AI that focuses on improving how computers understand the world around them. Basically, you let a machine learn on its own.

For instance, if you were to teach a computer what a cat is, instead of giving it information like “cats have whiskers, tails, and pointy ears,” you’d feed it a mountain of cat pictures. Eventually, the machine would learn how to efficiently deduce what a cat is and isn’t.

So, what if you applied this to trading and investing? Machine learning could technically learn what trading habits are great and what strategies are risky. By examining plenty of successful portfolios, a machine could identify the most common winning factors.

Giving Equal Ground in Investing

It’s not uncommon for every trader’s move to be documented and logged. Letting machine learning sift through these behavior patterns could produce the blueprint or DNA for successful investing. Having access to millions of traders’ histories could give firms a serious leg up on the competition.

So it comes as no surprise that financial giants like Goldman Sachs and JPMorgan Chase are investing heavily in machine learning. But what about everyone else? Enter eToro. The social trading network has made it its mission to remove the barriers between private, smaller investors and the big professional firms.

The company offers CopyFunds Investment Strategies, which are essentially portfolios managed by machine learning algorithms. So now, the power, previously reserved for finance giants with the right resources, can be leveraged by any individual. And eToro is already having some success with this.

Profound Potential for Profit

One of the company’s CopyFunds was designed to outperform the Nasdaq 100 index. The algorithm behind this strategy analyzed the patterns and portfolios of successful Nasdaq traders and discovered 15 key components that all of them rely on. After factoring in some risk management, the final product is a low-risk, completely managed portfolio with good odds of beating the market.

Another CopyFund, called MomentumDD, utilizes machine learning from Microsoft to find traders most likely to turn a profit, then bundles them together. This low-risk fund came back with 22 percent profit in its first year.

The results of incorporating machine learning into investing look more than promising. But this is just the beginning. There is so much untapped potential. Now’s a great time to get in on the ground floor if you’re a little adventurous and are looking to diversify your investments. Would you trust a machine to make you money?

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