TME 004: Black Box Trading

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Black box trading is a derogatory term that many people use for successful traders. Some people don’t understand systematic trading so they ridicule the systematic trader. Let me give you an example.

A few years ago, when oil ran up to $100 dollars per barrel in 2007/2008 there was an outcry from the politician. What was the cry? The cry was that it’s the speculators driving the price. The word hedge fund was thrown around a lot. That word was considered a bad word by many. When an oil crisis comes or when a crisis like that comes do the politicians ever look at themselves?

It was the politicians who would not allow the American businesses to drill for oil in the United States. They blame the speculators for the high prices.  The media ran with it. One political pundit went on day after day talking about the speculators.

Black Box Trading:  Why Do Speculators Get Such a Bad Name?

One reason black box traders get a bad name is no one understands what they do. And how they do it. Many people call this type of trading black box trading.  One blog I read gave advice on how to deconstruct the black box.

They spoke about it like aliens came down from outer space and gave this future telling device to a group of people and the rich people were out there using this advice to take everyone else’s money.

That’s not what the black box is. Once you see what the black box is you understand that it is not as complicated as the pundits would have you believe.

Black Box Trading: What is the secret?

So, what is the black box and what is the secret? If you bought a mutual fund and put in a 10% trailing stop on it.  That is a system. Once it hits the stop you get out until it makes a high or until your system gives you another buy signal. Depending on what your signals are based on.

It may be a 50-day average. It may be a 200-day average. Whatever you base your system on is up to you.

Black Box Trading: Fake News

Now when you build a system the media would call it a black box. Anything that does not fit into the medias idea of investing is considered a black box. One blogger said organizations running computer algorithms are highly secretive. This means we will have to wait for a tell all before we learn the dark mysteries of the quant universe.

The person makes it sound like the black box traders are part of the dark side. It’s almost like they believe the black box trader has made a deal with the devil. I feel like I’m in a Star Wars movie.

Black Box Trading: Truth

Let’s shed some light on the darkness of the black box. I went into Investopedia and it gave a definition of the black box model. It said a computer program in which users enter information. The system utilizes preprogrammed logic to return an output to the user.

You build the system. You build the robot. Then you become the robot. You build the robot based on the parameters then you let the robot tell you what to do. The robot is built by people.

Investopedia also explains that the black box model contains formulas and calculations that the user does not see nor need to know to use the system.  Black box systems are often used to determine optimal trading practices. These systems include many different types of data including buy and sell signals.

So, when you look at the actual definition from Investopedia it is not as scary as you might think.  It is just a computer program. Users not aliens enter the information. Darth Vader is not entering the information. The devil is not the one in charge of the black box.

Black Box Trading: What does the evil black box consist of?

It has formulas that make calculations. The trader makes decisions based on these calculations. Is that scary? I built a system and it is a good system. The formulas in that trading system are less complicated than a high school senior’s math test.  It is not that difficult.  When people don’t understand something, they like to attack it.

The mathematics behind these systems is not that complicated. People want to give bad names to successful traders.  These traders are just using formulas to make money. They use math to make their trading decisions.

Black Box Trading: Different Styles bring attack

Think about this Man. No matter what your opinion of this Man is no one can argue this fact. There is one Man who has had more influence on this world than any other person in history. We tell time by this Man.

This Man’s name is Jesus. Jesus walked on earth. He was God in human flesh. When we look at the life of Jesus we see that He made the sick well. He made the lame to walk and he made the blind to see. Even though He did all of that people didn’t understand Him.

They got mad at Him because He healed on the Sabbath day. So, what did they do they crucified Him. Thru ought History when we don’t understand something we attack it.

That is human nature. Calling something the black box is a way of attacking the systematic trader. Once you understand the black box you will see that is not what you thought it was. It is not the scary dark side that the pundits and politicians would make you think it is.

It is just a systematic way of trading. You build the brain then you follow the brain that you built. Once its built it does the thinking. You just do what it says. If it says buy then you buy. If it says sell then you sell. If your trading is automatic then just monitor it and make sure it is doing as expected.  If it is not automatic once you build the robot you become the robot. You do what the system says every time.

If the politicians and media are attacking a group of investors or traders then it might be a good idea to look into the way they are doing it. Because the politicians and the pundits are usually wrong.

You are smarter than you think you are the system we build is not rocket science. It is not as difficult as you would think.


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