Using AI to Trade Stocks & Create Strategies from Scratch

There’s no question: AI is changing the way we live—and the way we invest. 

As the adoption of AI in stock trading surges, more and more individuals are harnessing its power for three key reasons: unmatched convenience, data-driven decision-making, and enhanced efficiency.

In AI trading, Composer leads the charge

Here, we’ll focus on the cutting-edge functionality available in Composer (rather than competing AI platforms such as Trendspider or Tickeron). Composer enables you to use ChatGPT-4, the latest generative large language model (LLM) by OpenAI, to help you construct trading strategies with artificial intelligence.

GPT-4 was released in March 2023 and represents significant improvements over GPT-3 and other previous models. In fact, OpenAI describes GPT4 as its “most capable model, great for tasks that require creativity and advanced reasoning.” As such, it provides an incredible breakthrough in trading, supporting you across the board from ideation to execution.

This integration is just one reason Composer is the best place for AI trading. It enables building trading algorithms with AI, backtesting them, and then executing them—all in one platform. Once you execute your strategy on Composer, it will automatically trade for you based on the logic you set.

Of course, that’s just the beginning. We’ve fine-tuned the ChatGPT-4 model specifically for trading use cases, so you get a much better AI assistant for your trading needs.

Our simple guide is suitable for beginners up to advanced traders. You don’t need any coding or machine learning experience. Just keep in mind that we’ll focus on the US stock market and ETF market and won’t be looking at cryptocurrencies or crypto trading.

So, let’s get into it! 

Does AI stock trading work?

In a word, yes!

Employing AI for stock trading, particularly through Composer, unleashes unparalleled effectiveness in investment endeavors. Composer's AI-driven capabilities empower traders like you to swiftly analyze vast datasets, identify patterns, and make data-driven predictions. The platform's machine learning algorithms adapt to real-time market dynamics, ensuring strategies evolve with changing conditions.

This dynamic responsiveness is critical to exploiting fleeting opportunities and mitigating risks—key sources of alpha in a market that moves as fast as this one. 

In addition, Composer’s AI capabilities can help minimize emotional bias in decision-making. Objectivity is a significant factor in maintaining a disciplined and rational investment approach with huge potential to improve results.

Why is reducing emotional bias so important? It’s simple. Emotions often lead to impulsive decisions, such as hastily buying or selling assets based on short-term market fluctuations.  Investors can avoid the emotional roller coaster by relying on Composer’s algorithmic, AI-driven strategies.

AI remains indifferent to market noise, ensuring a rational and data-driven approach. This detachment allows for a disciplined adherence to long-term strategies, preventing knee-jerk reactions that may harm overall returns. 

Long story short, with Composer, AI transforms stock trading into a strategic, efficient, and effective endeavor, providing investors with a powerful ally in navigating the complexities of financial markets.

(Ready to discover how AI could up your trading game? Grab a free 14-day trial of Composer!)

Benefits of AI stock trading

Let’s take a closer look at the benefits of using AI for trading. Key benefits include:

Automation

Automation facilitates the timely and precise execution of trades, eliminating manual delays and potential human errors. 

Data analysis

AI excels in data analysis, swiftly processing vast datasets to identify trends, anomalies, and potential opportunities that might escape human notice. 

The power to adapt and learn

Machine learning algorithms continuously adapt and learn, optimizing strategies based on evolving market conditions and providing traders with a sophisticated edge in navigating the complexities of the market.

A more equal playing field

Let’s face it. The “big boys” on Wall Street have enjoyed the benefit of incredible computing power for years—if not decades. They’re using expensive, cutting-edge systems to analyze and execute on trades. But with the rise of AI-powered platforms like Composer, everyday investors now have the chance to put the latest technology on their side. Together, we can even the playing field between the so-called “smart money” and “dumb money.”

How to get started with artificial intelligence stock trading

Ready to jump right in? The steps are simple, and there are only three of them!

1. First, head to Composer.trade and sign up for a free account.

2. Once you’re signed in, head to the “Create” page (using the navigation bar at the top). Then, select “New Symphony.” A symphony is Composer’s name for a trading strategy.

3. Next, click the “Create with AI” button to open up the AI trading assistant. You can ask the AI assistant to build a strategy based on the markets you want to invest in. Don’t stress too much; you can amend the symphony by continuing the conversation with your AI trading assistant.

Now, let’s walk through some common scenarios in which investors use Composer to create and execute trading strategies.

Investing in certain markets

Here’s a trade idea. Let’s say you want exposure to “sin stocks” (i.e., stocks involved in activities that are considered unethical, such as alcohol, tobacco, gambling, adult entertainment, or weapons).

You wouldn’t be the first to spot how attractive some of these investments can be. Sin stocks frequently provide high dividend yields and can be recession-resilient.

You can ask the AI trading assistant, “Can you create a strategy that invests in a basket of sin stocks?” As you can see, the AI builds a trading strategy with 12 sin stocks that rebalance automatically every quarter.

Now click “Insert and backtest.” This brings the strategy into a no-code editor for you to make any manual changes and test the performance using historical data. This lets you see how the symphony performs in different market conditions.

Investing based on macroeconomic conditions

Let’s say you want a strategy that’s resilient to a high-inflation environment. Given the Fed’s ongoing battle with inflation, this could be a fascinating investment approach.

You might ask the trading assistant, “Can you create a strategy that does well in a high-inflation environment?” The AI will create a weighted strategy based on inflation-resistant securities, such as gold and real estate. 

If you want to personalize this strategy further, you can change the weights in the no-code editor or change which assets are used.

Investing based on technical indicators

Let’s say you already know the algorithmic trading strategy style you want to implement based on a technical indicator. The next step is to ask the trading assistant a question about technical analysis along the lines of, “Can you build me an RSI strategy for QQQ?”

Note: When asking the AI assistant to build with technical indicators, it is unlikely to readily understand the intricacies of the set date ranges. It’s helpful to thoroughly understand the metrics and data points you’re using so you can instruct the assistant.

Investing based on a well-known trading style

Let’s say you want to build a momentum trading system, a swing trading system, or a high dividend strategy. You can create that straight from the AI assistant. Ask the trading assistant, “Can you build me a momentum trading strategy that invests in big tech, such as AAPL or NVDA?”

Once again, you should put in the time to understand and adjust the metrics of the strategies as needed. For example, how would the strategy change if you only selected the top two instead of the top three stocks based on the 60-day moving average? Or what if you look at a smaller window of 50 days?

Investing based on a well-known investor

Another example is to build a strategy based on one of the market greats, like Ray Dalio. You might ask the AI assistant, “Can you build me the All Weather portfolio by Ray Dalio?”

The All Weather portfolio was modeled after Bridgewater’s own risk-parity All Weather Fund. It’s made up of assets that do well in different economic seasons and is intended to weather any storm—a strategy that has obvious appeal for more risk-averse investors.

What if I don’t want to use the AI straight away?

Sure, diving into AI can be daunting. If you would prefer to stick to pre-built strategies you can amend with ease, head to the Composer’s Discover page. You can search by name, ticker, or investing category.

Now, it’s your turn

All these strategies built by the AI assistant represent a starting point. The possibilities are limitless. By the same token, AI shouldn’t be trusted as an end itself when building an algorithmic trading strategy, just as a means to get started.

Hopefully, you’re inspired to build your own trading strategy based on your trading ideas.