Disable The Black Box Trading in order to Gain an Edge (2024)

Black Box Trading

Once a luxury reserved only for heavy hitters, black-box trading is now available to just about anyone looking to gain an edge in their trading. Advances in technology have led to cheaper and faster solutions, opening up this once exclusive tool to all.

For every event that you witness on the market, you need to ask yourself, “why did this happen?” ‘Why’ is the most important question you can ask yourself. If you can answer this question, black-box systems will no longer be hard to decipher complex tools.

But before getting into the details of specific types of black-box trading, it’s best to clarify the term in order to clear up any preconceived notions or biases the name conjures.

What is Black Box Trading?

Black-box trading is commonly defined as an automated trading solution created to turn a profit via automated trades. In this system, each black box is a set of algorithms designed to deliver a specific trading strategy. Trades are placed automatically, however frequently or infrequently you choose.

In reality, the black box is a term that can be applied to many techniques ranging from simple technical indicators to candlestick formations to combined trading systems, trend lines, pivot levels, Fibonacci lines, and so on.

For you, any tool applied on price which you had never explored, researched your own, fully understood its academic premise, should be considered a black box. Any tool that you have acquired through the word of a guru is a black box. In fact, a black box is much more commonly used than you think. Anything that you don’t have a well explained honest answer for the question WHY is considered a black box.

When we take a step back and view black box systems in this wider perspective, it makes them look much more legitimate and integral to the trading process.

Let’s explore these techniques and understand why they’re actually black boxes.

Technical Indicators

A system doesn’t have to be automated to be considered a black box.

One of the most common tools at a trader’s disposal is technical indicators.

These are accumulations of historical data such as a price, volume, and open interest used to forecast future market movements.

This algorithmic formulation, which traders widely accept, is actually a black box system. It relies on complex data accumulation and formulation to guide a trader in their actions.

Candlestick Patterns

A subset of technical indicators, candlestick bars are a traditional way of viewing trends based on data points such as prices, highs, and lows, and ranges over time. Like technical indicators, these charts are accumulations of data combinations that traders use to guide their efforts in the market.

There are glimpses of truth to Candlesticks patterns trading rules guides. However, the markets are careless about the shapes and formations formed by their activity. Sometimes the harami pattern will work similar amounts of times when other times it will not if you as a trader cannot tell WHY to consider candlesticks patterns as a black box.

Trend Lines, Fibonacci levels, Pivots, Support & Resistance.

The third type of non-conventional black box is system trend lines. All these line levels perform as support and resistance lines. Nevertheless, if those levels would always work, the market would be ranging forever in a very predictable way.

So WHY would these levels break? Why would they be respected? Is there a rule for how many times a trendline should be respected before it breaks? Of course not. How would you explain false break out? Like all of the other black boxes, there should be a better explanation for why and when prices behave the way they are.

Breaking Preconceived Ideas

The rationale for introducing these three methods into the lexicon as black-box systems is to break the preconceptions that black box systems are just automated, mostly bogus algorithmic systems created to trade in place of a person. But if you dig and get to the core of why these systems work, they are no longer shrouded in mystery and secrecy and therefore cease to be a black box.

For example, why on a Doji candlestick bar should you look for a reversal? It is because someone told you it’s going to predict a reversal, or do you actually understand why it’s predicting a reversal? What happened in the market that told you this reversal was coming?

The problem with black box systems is that traders often only use the conclusion of the tool rather than understand why and how the tool was created. If we understand the why, the methods and formulas became less mysterious and no longer black boxes. After all, it’s only called a black box because we don’t know what’s going on inside.

Bottom Line on Black Box Trading

In order to successfully use and capitalize on a black box system, you really have to understand how the mechanism works, how the market works, and how the two can work together.

If we can answer such questions as to why prices move the way they do, what the motivation for a retrace was, why is price flagging, our brains can become the most effective black box system.

If we can transform the black box from something obscure and shrouded in mystery into something familiar and understood, we can create our own incredibly powerful and well trained black boxes powered by our brains. If we’re a little less ignorant and a little more in the know, we won’t need to blindly rely on complex systems we don’t understand even a bit about.

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