How AI might fit into your stock trading strategy

Stock picking takes time, and even then, it’s hard to know if you’ve made the right choices. Artificial intelligence (AI) offers a way to speed up the process. Whether you’re analyzing data, evaluating a trading strategy, or building a portfolio, AI tools can help.

There’s no guarantee of success, but artificial intelligence can make stock trading faster, easier, and more informed.

Using AI tools to help pick stocks

A primary way investors use AI for stock trading is to generate stock picks. If you’re interested in buying or trading individual stocks, AI can act as a stock screener. For example, you might use an AI tool to identify growth stocks in a specific sector, find companies with specific price-to-earnings (P/E) ratios, or identify stocks based on market sentiment.

AI tools can also help you analyze data in context, combining current sentiment, historical patterns, and technical performance. All of that data can be synthesized into a list of potential picks in a matter of seconds. The list might serve as a starting point for further research, or you might decide to trade based on the results.

How to use AI in your trading strategy

AI tools can do more than suggest which stocks to buy. From creating trading signals—rules that flag when to buy or sell—to analyzing performance, they can support a range of investing tasks, whether you’re an active trader or taking a more hands-off approach.

Build a custom indicator

Some trading websites and apps let you customize the charts you use to analyze stocks. With help from AI, you can create your own indicators without needing to write code. For example, you might ask an AI tool to highlight trading volume in bright orange when the number of shares traded doubles the 30-day average. You can paste the generated code into your trading site to make such signals easier to spot when reviewing charts.

Run historical tests on trading strategies

Stock traders often use a technique called backtesting to see how a strategy might have performed under past market conditions. AI tools can streamline this process and weigh past periods based on how closely they resemble current market conditions. Some tools also allow for scenario testing, which can help you see how changes in interest rates, inflation, or market volatility might affect your strategy.

Get help with asset allocation

AI tools can recommend an asset allocation and create a mix of stocks, bonds, and funds based on your risk tolerance and long-term goals. If you prefer investing in index funds, AI can also help you choose a mutual fund or exchange-traded fund (ETF) that matches your desired asset allocation and recommend when to rebalance.

Analyze your trading performance

Some AI tools can generate performance reports based on your portfolio data or trading history. These reports might include your profit factor, risk-reward ratio, average return per trade, and win-loss rate—metrics that can help you evaluate and adjust your strategy.

Use AI-powered investing apps

Some investing apps and robo-advisors use AI tools to help you screen stocks, build a trading strategy, and manage a portfolio. Apps like AInvest, Magnifi, Streetbeat, Trade Ideas, and TrendSpider offer built-in tools, so you don’t need to come up with prompts yourself.

Benefits and drawbacks of AI stock trading

AI can speed up research and automate trading tasks, but it’s not foolproof. Potential benefits and drawbacks of using AI include:

Pros

• Reduces research time. AI can quickly analyze large amounts of market data and summarize key insights, saving you time on research and screening.
• Can trade around the clock. Some AI tools can execute trades automatically based on your instructions, even while you’re asleep or away from your computer or phone.
• May lower costs. Some AI tools are built into low-cost apps or robo-advisors, which can be cheaper than hiring a financial advisor or subscribing to premium trading software.

Cons

• Garbage in, garbage out. AI tools pull from financial statements, market feeds, and third-party data. If that information is incomplete, outdated, or inaccurate, the results can be misleading and could lead to poorly timed or inappropriate trades.
• Lacks human judgment. AI can help reduce emotion-driven decisions, but it doesn’t replace experience or intuition, especially during unusual market events.
• Data and privacy concerns. Using AI doesn’t eliminate the risk of a cyberattack. Some tools may collect personal or trading information and share it with third parties, and not all of them clearly explain how they handle or protect your data.

Risks to watch when using AI to trade stocks

Even with AI, there’s no guarantee you’ll make money. These tools can suggest trades or build portfolios, but they may still lead to losses or investments that don’t suit your goals. Knowing your risk tolerance is just as important when using AI as with any other strategy.

AI-powered systems can also execute trades automatically based on preset triggers. That can be useful, but it also means you might make a trade you didn’t intend, especially with complex options strategies. Trades can be triggered automatically, so understanding the rules an AI system follows is especially important when trading options or using more complex strategies.

As with any digital system, data privacy and security are also concerns, but those risks apply no matter how you’re using AI.

The bottom line

AI can assist with many parts of the trading process: screening stocks, building indicators, testing strategies, and even rebalancing your portfolio. But it’s not a shortcut to better results. The quality of the output depends on the data and rules behind it, and the responsibility still falls on you to decide what to act on.

If you’re curious about using AI to help with your trading, start small, stay skeptical of big promises, and focus on tools that help you make more informed decisions.

Specific companies and tools are mentioned in this article for educational purposes only and not as an endorsement.