Black Box Systems

Hi All,

I hope you are all fit, well and enjoying the summer.  Here in the UK it’s been a hit and miss summer – the jet-stream is 400 miles further south than it usually is at this time of year and as such we are having periods when the sky’s dumping a months worth of rain in a few hours!  Floods and floods have been the order of the summer of 2012 so far.

Right onto Black Box systems – this ones for the traders and Investors.

For those of you who have read this site or been personally tutored by me will know that you cannot predict anything in the markets with 100% certainty (from a standard Investing/Trading methodology)

I read this following piece in The Times newspaper on their Markets Business page on Thursday 5th July 2012:

“The misery of Man Group intensified yesterday when one of the City’s influential brokers more than halved its target price for the shares.

The broker highlighted the continued inability of the hedge fund group’s flagship AHL fund to make money, a decline in its more profitable “guaranteed” funds and the expected withdrawal of client cash precipitated by duff performance.

AHL, a “black box” computerised hedge fund tuned by a roomful of the cleverest people that money can buy, is supposed to find and ride trends across 300 instruments and 36 exchanges.  It takes positions in the future performance of everything from orange juice to Australian bonds.

In theory, whether markets rise or fall should be of no matter.  AHL should make money regardless.  In practice, it is not working.  In the past three months, AHL has fallen by 2.5 per cent.

Man’s shares have already collasped from 624p in the summer of 2008 to around 300p in early 2011, about 150p in March and then 70.75p on Tuesday.”

A number of points you ought to be considering:

  1. Why didn’t it take advantage of the very clear down trend in it;s own share price?  That was a clear trend!
  2. A fall of 2.5% in 3 months is not the end of the world – the share has fallen hundred of % in a couple of years though
  3. Finding trends in a sideways market is hard to do
  4. The main Focus of this post – Black Box Systems, see below
  5. 300 Instruments over 36 markets is a lot – a computer will trade the set-up if the parameters are met.

Black Box Systems

Many people will no doubt buy such programs thinking they work – this clearly shows they don’t.  I accept that they will work during certain market conditions, but the market is dynamic and grows and declines dynamically – If the market grew or declined statically then black box systems would work, but the markets doesn’t so failures like this have to be expected.

If the very clever bods putting together the rules for the black box system can’t guarantee profits, how is the ordinary person on the street expected to!

If you are new to the markets, it would benefit you greatly if you began to understand that there are no certainties or givens in the market, when you begin to start predicting what the market is going to do next it often does the opposite and catches you out.  Everybody and I mean all people that place a series of trades will have at least one loser – proving that they do not have a prefect system – It simply does not exist and the sooner you realise that right from the start that you are at a disadvantage to the market the better.  that does not mean that you are certain to lose when playing against the market, If you control things tightly you can win in the long-run.

I’ve never looked at using a Black Box System so I can’t really comment on how effective or ineffective they are – what I do know for certain is that no system exists that wins all the time.

The Hovis Trader

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