Artificial Intelligence (AI) is definitely improving the capabilities of stock trading apps. Read more about that here. But, it’s also important to understand the potential risks that come hand in hand with this cutting-edge technology. In this article, we’ll walk you through some of the key risks you should be aware of when it comes to AI in stock trading apps.
AI Risk Categories
Many of the risks have their origin in how the AI has been trained (what information/data was included in its learning). To make it easier for you to grasp, let’s break down the risks into distinct categories:
Data Security Risks
First, we have security risks around data. AI-driven trading apps heavily rely on data, the more data, the better functions will be offered by AI. The handling of data comes with a risk and here’s what you need to consider:
| Risk | What to Look For |
|---|---|
| Data Breaches | You need to protect your sensitive trading data from hackers. Your app needs the right encryption standards and you need to be aware of app updates. |
| Privacy Concerns | Make sure your personal information remains confidential by using regulated apps and by avoiding phishing scams. |
| Algorithm Bias | Try to watch out for biases that could skew trading results. The people behind AI will set up rules for the AI learning process and this can bias the end result. It will be almost impossible for you to know if that is the case. |
| Data Manipulation | Be wary of malicious actors or the AI software altering trading data. |
Volatility and Uncertainty
The stock market itself is a realm of uncertainty, and the risk is that AI will amplify that (mainly because AI hasn’t been trained based on all events that could potentially happen):
| Risk | What to Be Mindful Of |
|---|---|
| Over-Reliance | Don’t solely depend on AI; human analysis is vital. Sometimes AI gets wild because it is wrongly trained. |
| Market Manipulation | Try to watch out for AI-driven actions that cause instability. |
| Rapid Changes | AI’s swift responses might lead to unexpected shifts, monitor closely. |
| Black Swan Events | Stay aware of rare and extreme events that AI might miss.This can easily happen because AI wasn’t trained including extreme events. |
| News Sensitivity | AI’s sensitivity to news could lead to overreactions, again based on limited training of the AI. |
| Global Factors | External factors might not always be in AI’s scope. AI has learned only from the information it has been given. |
Technical Glitches
Even the most advanced technology isn’t immune to glitches, and therefore AI isn’t either:
| Risk | What to Keep an Eye On |
|---|---|
| System Failures | Prepare for technical malfunctions disrupting trading, the function that AI supports might be failing. |
| False Signals | Beware of AI misinterpreting data and giving false signals. Again based on the wrong learning of the AI. |
| Latency Problems | Delays in data processing could lead to errors. AI is highly dependent on data processing. |
| Model Degradation | AI models can degrade over time; monitor their performance. It is important that AI is continuously fed with new information, otherwise it can perform quite badly based on old information. |
Your Vigilance Matters
Understanding these risks could help you mitigate the risk of using stock trading apps based on AI. It’s of course not about avoiding them, because they can be of great help, but being aware and proactive will minimize the risks you take. Keep in mind that AI is a tool that will most likely increase your trading capabilities, but as said, you also need to be aware of the risks. Stay informed, and first and foremost let the advantages of AI work alongside your own expertise and you’ll likely be successful.