Dear Financial Voice Reader,
Is the stock market crashing? What does it mean for you? Seven things to bare in mind:
The market is not run by humans
For the first time in the history of the market it is run so much by computer algorithms than ever before. When humans ran it, you could out-think them. You knew they would be irrational and could keep one step ahead, and buy when they were panic selling and sell when they were panic buying.
Now, the market still has emotional humans, but is bounded in a big box by computer algorithms. And those stop humans panicking and at other times cause the panic too.
It has become more important than ever to think like a machine
Controlling your emotions has always been key to market domination. When I wrote my first book, Mind of a Trader, published by the Financial Times – it was all about trading pschology. Now, everyone has caught on about the importance of controlling emotion, so they created machines, algorithms to trade. They have no emotion. They will naturally win.
Artificial Intelligence already exists in the market
They say the true measure of AI is if you cannot tell you're dealing with a machine or human. Only in trading is this clearly achieved. I do not know if I am trading against a human or machine. You've seen the movies where the human is up against the robot – and the human in the end wins. Well in real life – you've got no chance – the machine can think quicker and process more information than you.
Trading with an algorithm is like being Iron Man with his suit
Speaking of movies, only a trading algorithm gives you the power to scan many markets and find opportunities. When the markets are dislocated and volatile, this is more important than ever.
The winners will be algorithm humans
But clearly, you cannot in extreme market volatility leave a algorithm to trade for you and just leave it on autopilot. Speaking of autopilot, would you get on a plane without a pilot, even though I told you plane algorithms can take off and land planes? Of course not. You want human oversight to make the final decision. It's why I and professional hedge funds like mine create trading algorithms.
In fact one of the largest, most successful in the world is AHL – a hedge fund purely run on trading algorithms.
As for the question of whether it is a crash? No...not yet. It's an opportunity to buy Apple and if at any point in the next five years it goes up 50% (it will) then sell it and make 50% within 5 years. Simple. That too is in a way a trading algorithm.
