As technology has evolved, black-box systems have come online to the masses.

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No longer must one be a large institutional participant to become a practitioner, as individual retail traders also have numerous options readily at their disposal. The exact specifications of a black-box trading system are typically shrouded in secrecy. Lines of intricate programming code define operations governed by specific trading rules and guidelines.

In short, each system is unique, proprietary and protected from public scrutiny. Every black-box system begins with a trading strategy. The strategy is then translated into computer coding language, integrated into a software trading platform and plugged into the market. However, no matter how intricate the code or robust the platform, a black-box system includes functionality local to three standard areas of trading:. It's important to remember that the supreme goal of each black-box system is to create and preserve a quantifiable "edge" in the marketplace.

An edge is the means by which a strategy or system consistently gains market share. It may be extremely sophisticated or very simple, depending upon the type of trading and methodology involved in its construction. Over the last decade, the rise of black-box trading practices has been a hotly debated topic.

Pieces of legislation such as the Markets in Financial Instruments Directive MiFID in the European Union have formally addressed the role of automation and quant trading in the contemporary marketplace. MiFID II puts forth official guidelines to ensure greater transparency and efficiency surrounding automated trading systems within international markets. Opponents of black-box trading contend that widespread trade automation serves to undermine the integrity of the financial markets.

Essentially, the case against boils down to three main arguments:. Conversely, proponents argue that the markets and participants benefit from automated systems trading. The following points are commonly made in defense of the practice:. As technology advances, the role that automated black-box systems play in the marketplace is likely to grow.

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For instance, one-third of the staff at financial titan Goldman Sachs are computer engineers, many of whom specialise in the automation of currency trading. Retail traders are also joining the ranks of black-box practitioners.

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Pre-made systems are readily available online for purchase or lease, with many priced affordably. In addition, software trading platforms offer custom programming options for automated system development. Regardless of the size or resources of a firm or individual, integrating a black-box trading system into operations is no longer a monumental task.

So as a bottom line conclusion: buy only systems with revealed trading rules. Black box is a very risky endeavor and should be avoided.

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Risk Disclosure: Foreign Currency trading and trading on margin carries a high level of risk and can result in loss of part or all of your investment. Due to the level of risk and market volatility, Foreign Currency trading may not be suitable for all investors and you should not invest money you cannot afford to lose. Before deciding to invest in the foreign currency exchange market you should carefully consider your investment objectives, level of experience, and risk appetite.

The Black-Box Debate: Pros And Cons

You should be aware of all the risks associated with foreign currency exchange trading, and seek advice from an independent financial advisor should you have any doubts. Some black boxes may have a great trading strategy for a trending market, but what happens when the market counter-trends? Or the black box may have a great breakout strategy, but the market is rarely in a breakout, so how is that going to perform the majority of the time?

These are all extremely important questions to consider with any black box, as it is YOUR real hard earned money that will be at risk. In addition, try to do some research and make sure that the system has an actual record of profit.

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If it doesn't, that should throw up some immediate red flags. Systems that have large up front fees with no money-back guarantees are also usually ones that you will want to avoid. The last major thing to be wary of is over optimization. This is when all the data and successful signals are optimized to the point that instead of having a pattern that predicts the future, you have "curve fitting" where you make a line going through all the profitable points without developing an actual projection.

This makes it look like a slam dunk because it includes a "successful" past, but it has no ability to predict the future and therefore doesn't give you any advantage. In the end black boxes are like anything else: there's no Holy Grail, but there are solid systems and programs that can help traders make more off the Forex market.

As always, look for a proven system that has a history of profitable trades, and when you find it, don't be afraid to act! Editorials » Business Resources » Foreign Exchange ».

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