7 ways how ChatGPT is helping traders in technical analysis

The University of Florida researchers have recently published a study indicating that ChatGPT, an AI model, has the ability to forecast stock market trends accurately. By analyzing public markets data and news from October 2021 to December 2022, they discovered that trading models powered by ChatGPT yielded impressive returns of over 500% during that period. 

In stark contrast, investors who opted to buy and hold an S&P 500 ETF experienced a disappointing (-)12% return over the same timeframe. Furthermore, the study highlighted ChatGPT’s superior performance compared to other language models, such as GPT-1, GPT-2, and BERT, as well as conventional sentiment analysis methods.

From October 2021 to December 2022, the research team tested six different investing strategies.

• The first strategy, the Long-Short strategy, involved purchasing stocks of companies with positive news while simultaneously short-selling stocks of companies with negative news. This strategy proved to be the most successful, generating returns of over 500%.
• The second strategy, the Short-only strategy, focused solely on short-selling stocks of companies with negative news. This approach resulted in returns of nearly 400%.
• The third strategy, the Long-only strategy, exclusively involved buying stocks of companies with positive news. This approach yielded returns of approximately 50%.

However, the remaining three strategies led to net losses. The “All News” hold strategy, the Equally-Weighted hold strategy, and the Market Value-Weight hold strategy all resulted in negative returns during the testing period as you can see in the chart below.

By looking at the success story of ChatGPT by the traders or investors, asking for suggestions from these AI could be an acceptable way to start. However, it has yet to replace human experience. While the trader must ultimately decide whether to accept ChatGPT’s suggestion, AI makes a great starting point.

Here are 7 ways AI is helping newbies and experienced traders and investors save time and reach the right conclusion of picking a stock. These are as follows- 

Chart Pattern Recognition

Its ability to process and analyze information enables it to recognize patterns in complex datasets, including stock market charts. By leveraging its deep learning capabilities, ChatGPT can swiftly identify chart patterns that may have gone unnoticed or would have taken hours to spot manually.

One of the critical strengths of ChatGPT lies in its ability to analyze historical price data and identify recurring patterns associated with specific market conditions. By recognizing these patterns, traders can make more informed decisions and adjust their strategies accordingly. Whether it’s a head and shoulders pattern, a double top, or a bullish flag formation, ChatGPT can swiftly highlight these patterns, allowing traders to take advantage of potential market movements.

Moving Averages

Moving averages are commonly used technical indicators in stock market analysis. ChatGPT helps traders gather all the real-time information regarding a particular stock within a few seconds. It could be humanly impossible to gather all the information this quickly and make informed buying or selling decisions. Using ChatGPT, traders can time the market hassle free without wasting a lot of time researching the market to book their profits. 

For example, a 50-day SMA calculates the security’s average closing price over the past 50 trading days. SMA smoothes out price fluctuations and provides a clearer representation of the overall trend. ChatGPT helps traders analyze these trends within seconds by putting relevant prompts as questions 

As you can see in the given image- 

Support and Resistance Levels

When a stock’s price approaches a resistance or support level, traders often look for confirmation of a breakout or breakdown. ChatGPT can analyze current market conditions, provide insights on the strength or weaknesses of these levels, and offer guidance on whether a breakout or breakdown is likely to occur. 

ChatGPT can provide insights into potential reversal patterns or candlestick formations around these levels. By alerting traders to these patterns, ChatGPT can help identify possible entry or exit points, allowing traders to capitalize on price movements.

Oscillators and Indicators

ChatGPT can explain the signals generated by different oscillators and indicators and their implications for traders. It can discuss how these tools identify overbought or oversold conditions in the market, potentially indicating a reversal or correction. ChatGPT can provide insights into the usage of these signals in timing entry or exit points in trading strategies.

It can also describe the calculations and implementation of the value that traders will get in their results, which will help them in assessing the market conditions and act accordingly to make profits in their trades. 

Candlestick Patterns

ChatGPT can provide insights into interpreting candlestick patterns as bullish or bearish signals. It can explain what these patterns indicate about market sentiment and potential price reversals or continuations. It can also give information on the extent of reliability and significance of specific candlestick patterns in different market contexts.

ChatGPT can help you in dealing with massive amounts of data which is required in every trading session. For example, it can give you the applications which assists you in recognizing specific patterns to gain maximum profits.

Trend Analysis

You can engage in conversations with ChatGPT about identifying and interpreting trends in stock prices. The model can help explain the characteristics of uptrends, downtrends, sideways trends, and potential tools to confirm or assess the strength of a trend. 

ChatGPT can provide insights into various tools and indicators used to confirm or assess the strength of a trend. These may include moving averages, trendlines, the Average Directional Index (ADX), or other technical analysis techniques. It can explain how these tools can be applied to identify trend confirmations or potential reversals.

Additionally, traders can inquire about potential entry and exit points based on trend analysis. ChatGPT can offer insights into identifying optimal entry points in the direction of the trend and potential exit points to secure profits or minimize losses. It can extract insights from unstructured data like social media posts and hashtag trends through which traders can analyze the sentiments of the stakeholders of the company. 

Risk Management Tools 

Setting a stop loss order and taking profits is a common strategy used by the traders to get the most of their trading activities. A small research conducted by the TradingAcademy concluded that ChatGPT could be a great way to meet the specific requirements of the traders and help them achieving reducing their risk by indicating exit and entry points, stop loss levels, and taking profit targets. 

ChatGPT can assist traders in formulating risk management strategies around resistance and support levels. It can provide insights on setting appropriate stop-loss levels, determining profit targets, and adjusting positions based on the strength or weakness of these levels. By incorporating risk management techniques, traders can enhance their overall trading approach.

Conclusion 

ChatGPT or other upcoming AI will work on text-based instruction, which means traders need to focus on giving appropriate prompts to AI for the best results. The more specific the prompts are, the more effective the results, indicators, sentiment analysis, and suggestions traders will get. Additionally, traders will need to understand the concepts of keywords to be written as prompts popular in the industry. Any jargon might manipulate the results and lead trades to a loss. 

AI is the most prominent way of making quick decisions as it gives a certain level of accuracy and information from the various data available on the internet. However, it is crucial to understand that relying entirely on AI to make the final decisions is not advisable.