Within the massive global financial framework, goods, services, and assets trade hands constantly, passing through international borders as if they weren't there. All of the action is facilitated by a number of well-known markets, such as the major stock markets in New York, London, and Tokyo, the mercantile markets located across the globe, and any number of other, smaller financial exchanges.
Among all of them, though, one market stands out as unique: the foreign currency exchange market (Forex). It stands alone for a number of reasons, the most notable being the fact that it's the only major global financial market that exists with no physical, brick-and-mortar presence anywhere. Instead, all Forex transactions happen electronically, via trading platforms like EagleFX, which makes the market uniquely dependent on technology. It also makes the Forex market particularly sensitive to new innovations, which have to power to grant traders a considerable advantage over their competition.
In the last several years, in fact, the market has seen some major technological changes, ranging from infrastructure upgrades that allow for less latency in electronic transactions, to a proliferation of new smartphone apps to allow trading from anywhere with a cellular connection. Of all of the changes, however, none have had a big and lasting impact as the introduction of AI to the trading market – and it's changing just about every aspect of currency trading as we know it. Here's how.
The Role of AI in Currency Markets
The idea that AI would one day become a force in global currency markets is not new. In fact, researchers from MIT predicted as much way back in 1991, when they speculated that computerized currency models might soon outperform human traders in terms of trade efficiency. Their prediction proved to be prescient, but the actual reality of AI in currency markets has gone much further than anyone could have guessed.
Today, AI-driven trading software is everywhere in the Forex market. Although it's impossible to pin down how much of the daily trading volume may be traced back to AI at this point, it's fair to say that it's a majority due to the fact that large, institutional traders that make up the bulk of the activity have come to rely on the technology. Up until now, though, AI applications in the space have been known for their high accuracy in short term trading, but have still displayed weakness over longer periods of time. Now, there's some evidence that's starting to change.
Nikkei AI Shows Promise
Last year, Japan's Nikkei Group, a financial publishing giant and originator of the eponymous Nikkei stock average released the results of their quarterly "Dollar-Yen Derby", in which readers of their publications attempt to forecast the exchange rate of the currency pair in one month's time. For the first time, though, they allowed an internally-developed AI system to compete, and the results were astounding.
The AI predicted the exchange rate to within .05 yen, besting the top human analyst by .01 yen. It was a result that surprised many of the contest's entrants, but not its' developers, who knew that their system would arrive at an accurate result due to its access to precise market information as well as the company's vast array of articles chronicling market movements. Observers were quick to note, however, that the prediction came amid a calm market, and that the AI might fare much worse during a period of volatility. Fortunately, AI could solve that problem, too.
The Effect of AI on Market Volatility
The Forex market is known for high periods of volatility, with certain currency pairs swinging wildly during intraday trading. Those swings are used by expert traders to realize short-term gains, which is an excellent profit strategy for those who can pull it off. With the introduction of AI, however, there's going to be a noticeable drop-off in unintentional volatility as algorithmic trading becomes the norm. Experts already acknowledge that AI trading tends to lead to more efficient markets that don't fluctuate as much, making for a more stable trading system. Of course, unscrupulous traders may yet try to intentionally introduce volatility to create gains, but as the broader market moves away from reaction-based trading and to data-driven AI models, it will get much harder for them to do so.
The Long-Term Outlook
The bottom line is that AI has already had a pronounced effect on Forex markets, providing traders with smart tools to make better decisions, as well as in managing the trades themselves. If the recent developments are any indication, the technology is improving to the point that it should start performing better than human traders on a routine basis, and a higher adoption rate will solve the volatility issues that have thus far been an Achilles heel for the AI applications.
In short, as the technology gets better, it will spread further, which will only help it to function even better. It's a positive developmental loop that all but guarantees that AI is going to take over almost every part of Forex trading in the coming years, even moreso than it already has. Once that happens, the market, which has up to now been somewhat inaccessible to the average investor, will become far more user-friendly and should gain an even larger following than it already has. At that point, the Forex market will become the model that all other financial markets will follow – into an AI-powered future of stability and profits, which is great news for the world at large.