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If you are a pro trader, you’ve definitely heard about trading signals and probably used them.
In the volatile, ever-changing environment of the free market, they provide insights into potential market trends, entry and exit points and other relevant information to guide traders’ decision-making process.
To put it short, they offer peace of mind and help to build more profitable trading strategies.
Sounds too good to be true? Maybe.
In this article, we will explore if signal-based trading is viable, what makes crypto different from traditional asset classes and how Web 3.0 investment will benefit from AI integration.
Trading signals 101
Trading signals is a broad category, with technical analysis for instance, past market data, price momentum or changes in trading volumes at its core. Still, traders often also factor in fundamental analysis.
Fundamental analysis is one of the emerging methods in trading that aims to determine the intrinsic value of the underlying coin and separate it from purely speculative price movements.
In academic research and practical strategic use alike, there is a growing consensus in focusing on hash rate or amount staked, average transaction value, daily transaction count, market cap and liquidity.
An abrupt change in any of these metrics whether technical or fundamental can signal that a currency is over- or undervalued, a trend is likely to build up or reverse and many other things.
At the same time, clear directives provided by trading signals help to navigate the complex market landscape.
Although trading signals, like any other model, are not perfect, they also help to mitigate the human factor in trading.
According to Nobel laureate Robert Shiller, markets are inherently inefficient, but traders can strive to be as rational as possible in their approach and if they can’t, they fail.
In the scenario where risk aversion, FOMO or just a bad day could drastically influence our decisions, trading signals provide a backup.
Leveraging AI for effective trading
Two Yale researchers found that most of the cryptocurrencies’ price variation can be explained only by two factors momentum and investor attention.
Therefore, accurately predicting which coins could have the most volatility and most investor traction can help to move consistently before the market.
The best way to track these variables could be emerging AI-based technologies.
Reducing human error
Given all the complexity of constructing a trading signal, AI offers an innovative way to reduce human error and make models more accurate.
Firstly, AI algorithms might do better than humans in generating trading patterns based on historical data.
AI excels at processing vast amounts of data and identifying intricate patterns that human traders may overlook, and the knowledge of these patterns might help to predict short-term market action.
Allowing for more efficient analysis
Secondly, AI empowers us to use real-time analysis more efficiently. Even experienced, full-time traders might be overwhelmed by the volume of data the market generates every second.
On the contrary, AI can track markets and generate trading signals based on a more complete and up-to-date data set, giving any crypto trader an edge.
Empowering traders through NLP
Thirdly, AI opens a window of opportunity through NLP (natural language processing).
The internet has a dazzling number of articles, research, discussions and Twitter threads about the current state of the markets.
Traders, unfortunately, might not be able to read everything and know everything.
Even just by using ChatGPT, I can be sure that I get a snapshot summary of the latest trends in social media, digest of information about regulatory changes and a scan of fresh daily news what to say of more advanced and specialized tools that some market players are currently developing.
Powering automated trading
Lastly, AI can revolutionize automated trading by creating bots that execute trades based on pre-defined strategies, targets and signals and adapting them to the trader’s risk tolerance.
The primary aim is again to minimize human error, saving traders valuable time and improve overall profitability, especially in fast-paced and volatile markets such as crypto.
A helping hand ot a substitute
It’s important to note, though, that AI and machine learning still have a long way to go.
Retrieving sufficient amounts of diverse data for training an algorithm can be very costly, and if done poorly, it can put the whole portfolio at risk.
Traders risk losing money on biased AI algorithms, which could also become a mechanism for future market manipulation in the crypto space.
Nonetheless, there are ways to deal with these drawbacks, and the key word here is adaptation.
To harness the full power of AI, traders will have to learn how to work with new technology in a collaborative, symbiotic manner.
On the other hand, AI companies need to create reliable, accurate technology that would ‘understand’ how to solve a problem and which information is relevant.
In the coming years, traders will see how AI rises from a niche product to a standard for analyzing trading signals.
The benefits of AI such as improved market efficiency, increased accessibility and enhanced decision-making capabilities make it a working tool for all market participants, not just early adopters willing to take on the risk.
Once AI becomes a market standard, the crypto space will become much safer for instance, due to pattern recognition preventing malicious activity and AI-enhanced algorithmic trading may hedge against significant losses.
In short, over time, AI is likely to make the crypto industry more predictable and hence, attractive.
Anthony Cerullo is the chief communications strategist at Walbi and the founder of content marketing agency Walden. He is a crypto and blockchain enthusiast with over 10 years of experience in fintech. Anthony was an early investor in Ethereum, Chainlink and several other popular coins in the earlier stages of cryptocurrency.
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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
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