A black box system can be defined as any device where the internal workings are not understood or obscured to the user. In the financial world a black box system is any system which generates trade signals without the trader either having knowledge or access to the underlying formula’s which generate these trade signal. This typically means the black box system in question has been developed and tested by a third party. In this post we are going analysis the benefits and disadvantages of using such Black box systems.
- Takes away the human factor of trading. Personality traits and human emotions can turn a winning trade into a losing trade, with many not realizing it’s time to take the profits or cut the loss until it’s too late. Cold mathematical formula or algorithm encounters no such problems.
- All the tough development of such a system has been undertaken by someone else, you don’t need to have an understanding of the formulas or quantitative analysis which formulate the strategy. All you need to do is trust the system and trade accordingly to the signals it gives you.
- Price, people do not develop such systems and then release them for free. Typically you either bay for them outright or you pay for a subscription. Some systems can also be used for free but only with certain brokerages with the system operator receiving a revenue share from those brokerage services.
- Of the successful Black box systems out there many are only designed to target specific types of instrument or specific types of market conditions. Before you subscribe or purchase a Black box system make sure you understand what it’s targeted to do under what conditions.
- Misleading performance reports. With performance results only published for limited time periods or for certain instruments only. This can lead to their future performance being very different from what is expected.
- May cause you worry or discomfort not understanding what the system is based on. This can be compounded if the system is subscription based with the possibility that the underlying formula has been changed whilst the trader remains unaware of this fact.
While there are some clear advantages to using a black box trading system, there are also some worries about underlying issues that come with the system being a black box as such. This means every trader should take a serious evaluation when considering using a black box trading system.