Machine Learning Basics : In the stock market, you learn every day. There is no person trading in the stock market can claim to predict the price movement correctly every single time. The fluctuation and volatility always keep the trader interested. They apply many tool and techniques to rightly predict the stock price movement and accordingly take the position. On some occasions, they would be right and on some occasions, they would be wrong.
In this article, we will learn about the machine learning basics. This article would be very helpful if you are a beginner in the stock market and want to use machine learning as a tool to trade. Firstly, let us learn about its meaning.
What is Machine Learning ?
Machine learning is a mechanical processing machine that learns on the basis of experiences, analysis and observations it captures. The machine learning does not require any set of input data and instructions. It learns on its own and takes decisions on the basis of its observations, experience and pattern analysis. It is very different from writing program because in that a definite set of data and instructions is given to the machine to follow and perform accordingly.
Before moving forward it is important to learn the differences between deep learning, artificial intelligence and machine learning.
Artificial intelligence is the ability of machines to understand human behavior and take decisions accordingly like a human being.
When machines learn without being programmed it is termed as machine learning.
When machines use the help of an algorithm to create artificial neural networks which can learn and take decisions accordingly are termed as deep learning
In this segment of the article, we will understand how the machines learn.
Machine Learning Process
Human beings take decisions after understanding certain things. We learn from the past and identify the future to take any decision. Our brain processes the knowledge and data to take a successful decision and differentiate between things.
Just like that, the machines processes it’s knowledge and data to take any decision. You need to input data into the machine to enable it to take a decision. The data can be divided into two parts; training data and testing data. With the help of training data the machine learns the patterns and trains itself to take decisions. The machine identifies, classifies and predicts the new data before arriving at any decision. The testing data is used by the machine to check how accurately it will be able to take these decisions.
Let us now understand the classification of the machine learning basics algorithm
Classification of Machine Learning Algorithms
Supervised Machine Learning Algorithm
Supervised machine learning algorithm functions on the basis of data set on which the machine is trained. The data set clearly defines the input parameters and the required output. The data under the labels are differentiated on the basis of the required output.
Unsupervised algorithm is different from supervised algorithm because in this type of algorithm the machine deals with labeled data for training. Therefore, the training data will be unlabeled in the case of unsupervised machine learning algorithms.
Reinforcement Machine Learning Algorithms
Reinforcement machine learning algorithm works on the principle of rewards and punishment. It means that if any decision taken by the machine is right, it will be rewarded. Whereas, if any decision taken by the machine is wrong, it will be punished. In this way, the machine will understand the mistakes and learn to take the correct decisions in order to maximize the reward.
Let us now have a look at the benefits of using machine learning in the stock market.
Benefits of Using Machine Learning or Algorithmic Trading
- Since algorithm programs are written beforehand and they are executed automatically. Therefore, the main advantage of machine trading is the speed at which the trades can be taken. The machine can trade infraction of seconds which is not possible for a human to do.
- Algorithm trading has the advantage of executing and scanning multiple scripts at a single time at a very high speed. Since the machine can analyze and execute the trade faster, you get more opportunities to trade at a better price.
- Algorithm trading provides the biggest benefit of accuracy. The machine not only picks the right stock to trade but also avoids the mistakes that human can do while trading in the stock market. There are no errors like accidental putting of wrong trade or making wrong currency pair or buying for the wrong amount. Algorithm trading ensures you that all the trade taken would be error free.
- Another big advantage of algorithm trading is the ability to remove human emotion out of the stock Humans often take poor decision while trading and suffer losses. Whereas, algorithm trading is machine based and avoids irrational decision making.
- Algorithm trading helps in saving time and reducing the transaction cost. Right trades can be taken without spending much time in monitoring the market and supervising the stock price continuously. This not only saves the transaction cost but also provides multiple opportunities to trade.
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