How to use ChatGPT for Trading — Build a Trading Algo in Seconds

You’ve heard it before. A giant price swing happens to a stock — or the broader market — with no obvious rhyme or reason. In unison, the talking heads, your friends who trade, and even the voice inside your head say one word: “Algos.” 

Trading algorithms, or “algos” make up roughly ⅔’s of all US trading. (Just another thing that AI has the potential to do better than humans.) These lightning fast computerized trading systems can latch onto technical breakouts and breakdowns and make precise buys and sells with no room for human error. 

So how can you get in on the algo action? In order to make or even customize your own trading algorithm, you’ll need to learn some coding skills in a language like Python. And that usually isn’t preferred for the busy trader who only cares about descending a trading-terminator upon the market to do his or her bidding.

At that moment, it feels hopeless. This is how “they” box you out of the market — if you can’t code, or if you don’t want to drop hard-earned money on someone else’s program, then you’re out of luck — right?

Wrong. Introducing ChatGPT. 

What is ChatGPT and How Can ChatGPT Be Used for Options Trading?

Before you ask — this isn’t an ad. ChatGPT is a free, powerful language model developed by OpenAI — and we have no connection to them in any way. But the utility of ChatGPT’s service is pretty incredible. Among other things, you can use it to write a variety of scripts, including those for options trading, with zero knowledge of coding, scripting, python, or anything else.

Options trading is a complex and dynamic process that requires a deep understanding of the markets, as well as the ability to quickly analyze and react to market conditions. Meaning, while you won’t need knowledge of how to code, you’ll still need a firm understanding of options trading and the markets. Think about it: a trading algorithm is like telling a super fast machine how to execute trades. Still, ChatGPT makes it easy, and in this article, we’re going to make it even easier. 

One of the key challenges in options trading is the ability to quickly and accurately analyze large amounts of data and make informed trading decisions — without involving your emotions. ChatGPT can be used to help with this process by providing a tool for analyzing and processing large amounts of data quickly and accurately. 

Outside of making scripts (the main topic we’ll cover here), options traders can quickly analyze historical market data and identify patterns and trends that may provide insight into future market movements. This can help traders make more informed trading decisions and potentially increase their chances of success.

One of the benefits of using ChatGPT in the options trading process is its ability to generate code. As the user inputs parameters and goals for their trading strategy, ChatGPT can generate scripts based on the parameters, thus allowing the trader to have an immediate and accurate implementation of their strategy. 

Another benefit of using ChatGPT in options trading is its ability to assist with automating the trading process. With ChatGPT, traders can write scripts that automatically execute trades based on certain conditions and signals. This can help traders save time and increase the speed and efficiency of their trading process.

Step-by-step: Using ChatGPT to Write Scripts and Trading Algorithms

To use ChatGPT to write options trading scripts, you will first need to access the model through an API or by using OpenAI’s GPT-3 Playground. Find that link here: https://beta.openai.com/playground

You’ll also want to get comfortable with a brokerage that allows direct plug-ins of a script into their interface, so that you can fully automate your trading process and get the most out of the trading algorithm. Two solid brokerages that allow this and still allot for excellent order execution are IBKR and Thinkorswim.

Once you have access to the model and have become familiar with your brokerage of choice, you can input your desired trading strategy and parameters, and ChatGPT will generate code based on your inputs. Then, you can test the script using historical market data and make any necessary adjustments before using it in live trading. Let’s look at a few example scripts and trading algorithms that we’ve built to shine some light on the process.

QQQ Strategy: Bullish When the RSI is Oversold

For a simple starter script, let’s look at the RSI rule. 

For the uninitiated, RSI — or the relative strength indicator — attempts to depict when a security is oversold or overbought, and by how much. A simple rule of thumb for reading RSI is that when the RSI is below 30, a security is oversold, and prone to bounce. Likewise, when the RSI is over 70, the security is overbought, and prone to take a pause. 

With that in mind, let’s make a rudimentary script that does just that, using QQQ as the target, and at-the-money options as the tool.

Simple — a python script you could plug directly into a brokerage for auto-execution of trades when the RSI fits the parameters described. When this strategy was backtested on SPY using the 15 minute timeframe it carried a win rate of 66% according to TrendSpider. 

But how about a more complex strategy?

SPY Strategy: MACD Crossover With Bollinger Band Confirmation

The headline of this strategy may sound complicated, but it’s relatively simple. The MACD indicator — which stands for moving average convergence divergence, is essentially two different moving averages measured against once another. The MACD looks like this:

Source: TradingView

With that in mind, let’s ask ChatGPT to write a nuanced MACD strategy, using another indicator — Bollinger Bands — as a confirmation.

This is where ChatGPT shines — no matter how complex the ask, AI is capable of getting it done. For those of us who understand and are willing trade nuanced strategies like this, it can be a pain to hunt down these opportunities and pounce on them immediately. With ChatGPT, one could theoretically set this script up on multiple high-liquidity tickers — just like setting hunting traps. 

Notably, there are areas where ChatGPT hasn’t yet broken through — strategies that still need a human touch.

For instance, you could tell ChatGPT to create a strategy that hunts for trend reversals with 100% average volume, however, ChatGPT still doesn’t understand the nuance of reversal candles and technical patterns (though you could theoretically define those items).

The Bottom Line: A Great Tool, but Nothing is Perfect

Obviously, using ChatGPT or any other tool for options trading does not guarantee success — options trading carries a high degree of risk, it’s complicated, and if anyone had “cracked the code” it would quickly become world news. 

As we made clear it’s crucial to have a solid understanding of options trading and the risks involved before using any script to trade. Additionally, it is essential to regularly backtest and monitor the script performance and adjust it if needed. Market conditions change — what worked in 2021 (Buying and rolling call options like a mad man) didn’t work in 2022. Backtesting will help show you what works and what doesn’t.

In conclusion, ChatGPT is a powerful tool that can be used to help with the options trading process by analyzing data and generating code — but nothing is perfect, it’s only as good as the instruction you give it. By using ChatGPT, options traders can quickly and accurately analyze market data, test and implement new strategies, and automate the trading process. However, as with any tool, it is essential to understand the risks involved and to use it with caution.