Most investors will know the disposition effect well, even if many are powerless to fight it. It describes the tendency for holders of falling assets to hang on to them, while also encouraging the lucky owners of rising assets to sell out – often earlier than they should.
But new research suggests that artificial intelligence (AI) can make FX traders better than natural intelligence allows. By collecting large amounts of data and analyzing and mapping it in real time, AI is providing a heuristic function, helping traders to avoid repeating past mistakes.
To demonstrate how this can work, trading platform Capital.com analyzed all clients who opened more than 10 trades between May and August 2018. The firm found that, on average, unsuccessful traders held losing positions for 4.7 times longer than did profitable traders.
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Ivan Gowan, |
Capital.com then used machine learning to suggest relevant educational material for those traders who showed the strongest signs of this disposition effect in their trading activity, improving their entry and exit points.
The firm also used AI to calculate what would happen if all its clients put stop-losses in place (at the moment only about 30% use them).
