Co-Founder & CTO of I Know First Ltd. With over 35 years of research in AI and machine learning. Dr. Roitman earned a Ph.D  from the Weizmann Institute of Science

Stock prediction is not new; professionals have been offering stock forecast services for years. The more modern approach to stock market forecast, however, is the implementation of highly sophisticated algorithms to make logical predictions on the direction which stock or currency will follow. Are there benefits to using algorithms for stock prediction? In what ways does this type of forecasting differ from traditional forms of technical analysis?

In order to answer these questions and understand how algorithms work, you must first have an understanding of technical analysis to offer a stock prediction; and we will look at them briefly.
The truth is, there are hundreds of technical tools used for stock market forecast and FOREX prediction. There are basic ideas behind them, though. One of the most fundamental ideas behind technical forecasting is that of converging and diverging averages. The MACD is one of the most popular technical tools for stock prediction, and it relies on previous knowledge of stock or currency, the rate of increase or decrease, and the current behavior of said stock or currency in comparison to the established rate.
Traders take note of the levels of convergence (moving with or toward the average) and divergence (moving away from the average) to make an educated guess (a rule) on where it will go next. There are also rules taking into account the interaction between different markets. To be useful in making decisions these rules have to be quantified, a difficult task when all you have is a chart and a ruler.
When technical analysis rules become widely known and used, their profit potential disappears. There is also a limit of how many indicators a human mind can follow, a limitation that the computers don’t have.

The aspect of trading that this type of technical analysis is unable to take into account, however, are the many variables which may influence the stock or currency in taking an unforeseen direction. One needs to realize that there is absolutely no way to be 100% certain about the future. The best one can come up is the prediction/probability curve, with each prediction point being associated with the probability of its occurrence. That’s where the power of the algorithm comes in. Algorithms us the same basis as technical indicators for stock prediction, but they also are capable of considering a multitude of other factors.
There are hundreds of variables that may affect the stock value. Stock market forecast algorithms are able to analyze them, arrange them in the order of importance, (Principle Component Analysis), and build from them a number of mutually competing models. The next step is either to combine these models in a statistically coherent super-model, or to pick the best performing one when predicting stock or currency fluctuations. These being the fact, algorithms for stock prediction are proving to be much more accurate than predictions made by use of technical indicators.
The next step is to use algorithms to construct an asset mix portfolio that minimizes the risks and maximizes the returns. The trick is to combine the stocks with the higher probability of better returns but with less risk than any of the individual items in the portfolio.

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