Bots and AI agents may not look very different if one doesn’t understand the nuances. Bots have been around for quite some time now. People use it for various purposes including trading as well. These are automated programs that operate with predefined processes. Artificial Intelligence (AI), on the other hand, takes it to a whole new level. Bots don’t update themselves, they just follow some standard operating procedures.
AI comes with learning capabilities, it consistently searches the internet to gain knowledge. However, bots are quite prevalent in the trading landscape. They have given impressive results to traders while handling multiple tasks easily. To understand the comparison between traditional trading bots and AI, one needs to understand them both thoroughly. AI is definitely the future, but before adapting it, it’s important to understand its predecessors.
To identify their benefits, it’s necessary to figure out their working. Before the advent of AI, software-based programs like bots were the most advanced technological solution. They performed various tasks for traders like doing marketing analysis and portfolio management. But AI is now being integrated into all domains. So let’s see how it’s revolutionizing the trading world.
A Comparative Analysis of AI and Trading Bot
At first glance, AI agents and trading bots may seem similar; however, they have some key differences that can impact your trading performance. Let’s compare both to understand the differences.
Trading Bots
As mentioned above, these are pre-programmed applications that work with a specific purpose. For traders, they can evaluate market data, study trends, and even execute trades. Also, they are fully automated and function without any human intervention. They bring precision and speed to trading while eliminating human errors. Bots operate 24/7 and help traders make rational decisions about their trade.
Types of Bots Prevalent in Trading
- Market-Making Bots: These bots place orders for buy and sell based on their predetermined criteria. For instance, a trader may set a buy order at the price of 10,000$ and 20,000$ for sale. The bot will execute buy and sell only when these price ceilings are touched.
- Arbitrage Bots: These bots identify the price difference of an asset on different platforms and take advantage of that. For instance, if two different exchanges are selling Bitcoin at 20,000$ and 22,000$ respectively. It would buy it from the platform offering it at a lower price. It takes the same approach when it comes to selling the assets and locks a higher-priced deal.
- Trend-Following Bots: These bots evaluate the market trends before buying or selling assets. So if its analysis suggests an uptrend in price, it sells the assets. If it finds out a downtrend, it buys the assets. Usually, the analysis is correct, but consistent price fluctuation can confuse the bot too.
Limitations of Trading Bots
- No Auto Updation: Trading bots don’t update on their own on a regular basis. Developers need to update or change them in order to tweak their functionality. In a highly volatile market, it becomes a major challenge to revise the software frequently.
- Lack of Learning Abilities: Since traditional bots don’t update, they don’t learn anything new. They just keep following the pre-programmed process even if it’s not relevant anymore.
- Possibilities of Flaws or Biases: The rules of processes on which trading bots may be flawed or biased. Since they are programmed by humans, there’s a possibility of a bot doing something erratically.
Trading AI Agent
An AI-based trading agent is a true game-changer for investors. It uses artificial intelligence not just to automate but to make sound buying/selling decisions. AI performs all those tasks that a bot does. However, it is a much more advanced and autonomous technology. AI scours the internet in search of updated information. It does not stick to any pre-programmed rules. On the other hand, it explores and gives solutions that traders really need.
The most prominent thing about AI is that it’s a self-learning program. It utilizes machine learning to keep updating itself and to give relevant results to the users. Another aspect that makes it more suitable is its adaptable nature. AI observes the market in real time and changes its approach as per the ongoing trend.
Prominent Features of AI Agents
- Risk Management: AI agents quickly change their strategy in response to the current situation. They shift their approach from bullish to bearish and vice-versa based on the ongoing trends. With this tactic, it minimizes the risk and keeps the portfolios fruitful.
- Predictive Analysis: AI agents conduct a thorough analysis of the market including the historical data. Using all those details, these programs do all the forecasting based on studies. They do a granular study of price drops and surges to make correct predictions.
- Sentiment Analysis: AI agents consistently peruse the information over the internet. They learn about the changing sentiments of the public regarding a particular asset. From social media to news, they keep their eyes on everything. While observing updates, they quickly change their strategy.
With all these different capabilities, AI agents make investments safer and wiser. They prepare traders for all types of situations while making their trade more dynamic. But that doesn’t mean that AI makes trading absolutely impervious to losses. Market participants need to remember that AI is still evolving. Moreover, the regulations of AI are still very unclear. Most countries don’t have any legal framework for it.
That’s why traders need to know about the possible threats of using AI agents too.
Risks That AI Agents Lay on Trading
- Flawed Analysis: Keep in mind that AI also relies on historical data provided over the internet. Thus, it is quite possible that traders get biased or erratic information. Also, when that happens, it may not be very easy to fix things. Most AI agents are provided by big tech organizations. Hence, it could be very difficult for startups or individuals to tackle these issues.
- Tackling Unprecedented Situations: Again, giving suggestions on existing data proves to be futile here. AI agents may not be of any help if you face such first-time occurrences. Companies and individuals relying heavily on technology will face the worst consequences then.
- Lack of Regulations: Regulations around AI is quite a grey area right now. Most countries are mulling over its usage criteria right now. More than that, scammers often exploit technologies in their nascent phase to make a quick buck. It happened with the internet, crypto and things could repeat with AI as well.
AI and crypto have the power to bring radical changes in our world. Sooner or later, they will become a mainstream solution. For the time being though, it’s important to choose things wisely. Traders must know if they should go for bots or AI for their trade.
Things to Remember When Choosing Between Bots and AI
- Ability to Adapt: By now, we know that AI agents are more adaptable right now. Bots are more suitable when you’re doing trade with a few rules. If you’re dealing with more frequent market fluctuations, the former is an obvious choice.
- Demand of Situation: For executing straightforward tasks such as arbitrage, bots are fine. They work perfectly well with limited parameters and follow processes really well. When the situation becomes more complicated in which more analysis is required, switching to AI is recommended.
- Trading Environment: Bots can’t help you predict the future moves of the market. They can’t do a comprehensive analysis of ongoing conditions or external factors. So for a dynamic trading environment, AI would be a perfect solution. On the other hand, the trading bot would be suitable for a predictable market.
Conclusion
One can safely say that AI is definitely a better solution than bots for trading. However, it’s important to consider various aspects before choosing one solution. Particularly, think about the market and the results you want to gain. A bot may be sufficient for the type or domain of trade you’re into right now. On the other hand, if you’re entering a very dynamic and volatile sphere, choose AI agents without any doubts. Furthermore, it’s wise to make your trading approach more flexible.
