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Black Box - What are Forex Black Boxes
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Black Box - What are Forex Black Boxes

created Natalia BojkoAugust 16 2021

Systems for auto trading they have captivated traders for a long time and tempted often with fantastic ones the results from the strategy tester. Having a robot that trades for us, we turn off emotions, we turn off the stress related to position planning and potential mistakes in its management. Thanks to them, virtually every human flaw can be excluded, and we, as traders, save ourselves time in working on ourselves, turning into passive observers of the operation of algorithms. Is it really so? If the world of trading were so beautiful, each of us would sit in front of the monitor for a few minutes a day and supervise the work of algorithmic systems, changing individual parameters from time to time. You know perfectly well that this is not the case, and while I do not deny that there are good trading bots, I am so eager to deny the theory that most will be able to handle the living market. Recently, in addition to classic algorithms, the topic has returned to the languages ​​of traders "Black boxes". What are these systems? What are they based on? Is it worth investing in them? I invite you to a short article. 

Black Box, or trading in a black box

What do we love auto trading systems? First of all, because they take care of the whole mass of processes related to trade. They respond to our laziness by guaranteeing profitable trade in the long term on the websites of "producers". Of course, there is nothing wrong with supporting your trading with such systems. With the appropriate knowledge and skills, you can use such systems very effectively and fruitfully. However, it is worth knowing their flaws and moments when something evidently stopped working in them. I think one of the best examples is popular Martingale. Beautiful and smooth graphs from the use of this strategy are until we hit a trend opposite to our position, and our robot will have to average the loss in theory indefinitely to achieve a meager profit. What in this situation? At this point, we come to a whole range of options for solving them (larger transaction spread, hedging, basing martingale on statistics for a specific currency pair, etc.), but not about this. The whole argument from the above example is based on the fact that the algorithmic system is effective if, in addition to uploading it to the platform, we give it a great understanding and plan "b" in case of failure. 

Coming back to the essence, what are black boxes? Black box trading is often called (and at the same time generalized) algorithmic, quantitative and automatic trading. But how does it differ from the average system? In that its code is kept secret and protected from public scrutiny. Lines of complex programming code define operations subject to certain trading rules and guidelines. In short, each system is unique. In the past, only large institutions had access to black boxes. They are now much more available. 

What do black boxes contain?

Each black box system is based on a trading strategy. The fact that his code is kept secret does not mean that he has access to big data inaccessible to the average trader. No matter how complex these systems may be, they are ultimately based on three areas. The first is signal generator. In each, also manually performed strategy, the signal generator acts as a kind of "trigger". In this case, the black boxes also have a built-in trigger that defines attractive markets and entry points to trade. What are these signals based on? Well, general question, general answer. On a very wide range of methodologies. Of course, the most effective black boxes certainly have systems with a very complicated signal generation process, although the trigger in this case may be any technical analysis indicator. Remember that we are talking about possible variants, not the effectiveness of their use. 

The second area that the black box system deals with is execution of transactions in the market. According to the programmed parameters, the system places an order on the market after receiving a trading signal. When a market entry order is placed, the newly opened position is managed by the automated framework of the system. 

The third and final area is risk management. There are many management strategies and they can be scalping, scaling, averaging or hedging. Of course, the black box does not have to use only one option. All available methods can be mixed together, depending on what the author of the system wanted to achieve. Nevertheless, risk management in this case is based on the full range of ratios, from the risk-to-risk ratio through the above-mentioned methods, to optimization of trading exposure at various exchange rates and complex optimization of the entire investment portfolio. 


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Summary. Is it worth using black boxes?

In addition to clear arguments for the use of algorithmic systems (which I mentioned at the beginning), based on human nature, black boxes support "effective valuation". I mean the process of price optimization with the parameters adopted by them. Thanks to them, the market becomes to a large extent more efficient. I present it as a benefit and it is on this ineffectiveness that the speculators make the most money, so the point of view depends solely on the point of the proverbial sitting. An undoubted advantage, however, is increasing the degree of liquidity. The more liquid the markets are (it is easier to cash a trade), the lower the costs of servicing this market (which are incurred by traders). We are talking mainly about narrower spreads and greater ease of executing orders at specific prices. 

The well-known drawbacks of black box systems are credited with "distorting the market." Perhaps this is a kind of half-truth, but it is often said that the best black boxes are based on information from dark poolsaccessible only to the largest institutions. One of the most famous situations on this topic is the convention in August 2015 Dow Jones index by over 1100 points in minutes. This enormous volatility of quotations was attributed precisely to the black box systems. 

The second argument against black box systems is that they increase "unhealthy" volatility in the market. Volatility itself is the result of investor activity in the accounts. Thus, the black box, by placing a large number of orders on the market in a short time, obviously increases this volatility. Combining this information with the above, it can be concluded that the black boxes strongly distort and distort the market. In addition, among the "producers" and sellers of these systems, you can often find frauds who, as part of secret codes, offer standard MT4 indicators, which are available for free on every platform. Therefore, it is worth being careful and, above all, persuading system producers to test or suspect the operation of black boxes. 

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About the Author
Natalia Bojko
Graduate of the Faculty of Economics and Finance, University of Białystok. He has been actively trading on the currency and stock markets since 2016. It assumes that the simplest analyzes bring the best results. Supporter of swing trading. When selecting companies for the portfolio, he is guided by the idea of ​​investing in value. Since 2019, he has held the title of financial analyst. Currently, he is the co-CEO & Founder in the Czech proptrading company SpiceProp. Co-creator of the Podlasie Stock Exchange Academy project (XNUMXrd and XNUMXth edition).