# Trading Plan vs. Black Box System



## beachlife (17 December 2010)

Two things I hear a lot.  
1. Black box systems dont work and 
2. you must have a trading plan to be successful.  

But isnt a trading plan that defines entry rules, exit rules and money management just a manual black box system?

I'm having a hard time develping a trading plan that gives consistent results and am wondering if its really worth it?  Maybe I am on the wrong path?

Any thoughts?


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## Wysiwyg (17 December 2010)

*Re: Trading Plan vs Black Box System*

If trading for a living was an occupation that gets a guaranteed minimum weekly return then there would be more than the few on these forums that trade for profit. A few make it but they have a large bank, patience, right exit strategies  and hard earned ($) experience. Don't be disillusioned by it all. It is simply betting on price direction.


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## tech/a (17 December 2010)

*Re: Trading Plan vs Black Box System*



> It is simply betting on price direction.




Do you *REALLY* believe that?



> But isnt a trading plan that defines entry rules, exit rules and money management just a manual black box system?




No a black box system is one where you don't know what the inputs are.
A trading plan has a set of inputs which you know.
Neither are getting you any closer to being long term profitable.

No wonder your at wits end.

There are only a couple of things you HAVE to do when developing a PROFITABLE system.

(1) Have far more winners than losers or
(2) Have far bigger winners than losers or
(3) A mixture of both.

Yeah its worth it.


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## Wysiwyg (17 December 2010)

*Re: Trading Plan vs Black Box System*



> It is simply betting on price direction.






tech/a said:


> Do you *REALLY* believe that?




Yes. What do you bet on?


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## beachlife (17 December 2010)

*Re: Trading Plan vs Black Box System*



tech/a said:


> Do you *REALLY* believe that?
> 
> There are only a couple of things you HAVE to do when developing a PROFITABLE system.
> 
> ...




My problem is the entry.  My winners are usually 2 to 3 times my risk but I only get around 30% correct so am always getting stopped out, and my stops arent that tight.  So I started looking for a better entry criteria for my trading plan which got me wondering about the need to be so rigid with entry rules.


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## tech/a (18 December 2010)

*Re: Trading Plan vs Black Box System*



Wysiwyg said:


> Yes. What do you bet on?




I dont bet on anything.

I can manage my trading its not win or lose.
I can govern how much I win and how much I lose in any one trade.
If I bet I either win or lose I can only govern the loss by position size
and the win by odds once bet is made I cannot alter this.
When I trade I can while the trade is going.
I know that by adding to the trade I can increase my total win and by decreasing or removing myself from a trade I can dramatically decrease my NETT losses V my Nett gains.

Once you understand that your not gambling if trading correctly it becomes very simple.

To graphically demonstrate I attach a screen shot of one of my portfolio's.
Its Small cap Resource stocks.
The idea as we all keep getting drummed into us is to let profits run while culling losses.
I ---(we all should) constantly do this in my/our discretionary trading.
Youll note the Unrealised Profit v The Unrealised Loss (If liquidated) $8609 as against $328.
A factor of 26:1
This obviously varies as I add New stock---sell losers and sell winners.

My and all our aims should be to maintain an increasing capital base and a healthy open profit foundation.
This is achieved by portfolio management and NOT betting!


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## Wysiwyg (18 December 2010)

*Re: Trading Plan vs Black Box System*



tech/a said:


> This is achieved by portfolio management and NOT betting!




Nice reply. I like your professional overview in comparison to my simplistic one. Had rather cynicism inducing experiences so I must have been playing it wrong.


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## TabJockey (18 December 2010)

There are these great books called "Market Wizards" and "The New Market Wizards", they are about 15 years old now, but its just interviews with some of the worlds best traders. Some of them use black box systems and some dont. All of the traders in the book have very good records so have a read and listen to how they do it! Allot of the things that those traders sum up in a sentence or two in those books I have not heard expressed in less than a complete book elsewhere.

If you want them I can send them to ya.


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## tech/a (18 December 2010)

I'm not aware of any of those featured in "Market Wizards" who trade with a "Black Box" system.

What is your understanding of a black box system?


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## pixel (18 December 2010)

*Re: Trading Plan vs Black Box System*



tech/a said:


> a black box system is one where you don't know what the inputs are.
> A trading plan has a set of inputs which you know.
> Neither are getting you any closer to being long term profitable.
> 
> No wonder your at wits end.




Very well put, tech/a. 
With a black box, you're flying blind. 
With a personal Trading Plan, you know and control what you're doing. 

There is still more to it. Beachlife seemed to focus only on one aspect of a Trading Plan: the entry and exit rules. But there is much more to it: Psychology, Position Sizing, Diversification, Capital Management, and most importantly, continuous adaptation and backtesting ...
In a blog of mine, I have listed some of the ingredients.

The *Trading Method* that I employ and that makes up my *Trading Plan,* comprises several steps:



[*]Identify stocks that have a high probability of breaking to the upside.
[*]Calculate the start position size in such a way that a failure to perform does not hurt more than I can afford.
[*]Estimate a target zone, but keep a close eye on the stock regardless.
[*]Have the unemotional mind to realise signs of reversal, and the discipline to stop out in time.
[*]Don't lose sight of the individual properties of a stock - its "DNA"  - and the specific price and time range that I bought it for.
 There are scores of sub-points and gotchas.
 To find more about it click here


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## TabJockey (18 December 2010)

tech/a said:


> I'm not aware of any of those featured in "Market Wizards" who trade with a "Black Box" system.
> 
> What is your understanding of a black box system?




I suppose none of them do black box per se but there is a wide variety of degrees attitudes in which they interact with their own systems.


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## tech/a (18 December 2010)

Interesting Arty.
Had a read of your blog.

Would make for quite some discussion.

As an example your definition of "Positive Expectancy"
From what I read it is as many incorrectly believe it to be.
How its calculated and how to implement it into a trading method.
(You actually don't!!).

Many times I see poor or incorrect understanding of trading aspects placed into a trading plan
in doing so its like putting Old oil in a F1 motor it just wont run well!


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## Gringotts Bank (18 December 2010)

Some people make money trading black boxes.  No fuss, no muss.


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## pixel (18 December 2010)

tech/a said:


> Interesting Arty.
> Had a read of your blog.
> 
> Would make for quite some discussion.
> ...



 Thanks for making the effort, tech/a;
The term "Positive Expectancy" has only recently entered - not even mainstream, but some sectors of - the trading community. At the time of penning that article, I for one had not encountered it *under that specific label.* Not having defined (or used) it, I'm not sure can be classed as correct or incorrect. 
But we can turn it into a point of discussion - no problem with that.

As I freely admit, even today I'm not considering myself an expert in this particular field; when I evaluate the merits or otherwise of a Trading System, I backtest its results by either running the algorithm over a sufficiently large statistical universe, or evaluating all results over a sufficiently long period of time. Both approaches have their limits, especially in the case of those methods, where parameters change depending on environmental and other conditions.

The one remark that possibly gave you the "wrong" impression, may have been my figure of 80% entries "not losing". In isolation, that would indeed not mean much: for a "buy, hold, pray"-approach, the outcome ("expectation") could still be very negative. I mentioned that number solely in the context of trading psychology: Only few people I know have the attitude "stopping out at a loss is part of the cost of doing business." In the context of a proper evaluation of a method - let alone a complete Trading Plan - it's really only a small cog in the overall engine. Apart from a comprehensive Profit/Loss account of several years' trading (which I shall NOT publish on an open Forum), calculating the expectancy value could well have its merits.


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## pixel (18 December 2010)

Gringotts Bank said:


> Some people make money trading black boxes.  No fuss, no muss.



 True. Best example: Vendors of such black boxes. :


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## tech/a (18 December 2010)

Gringotts Bank said:


> Some people make money trading black boxes.  No fuss, no muss.




Yes your right.

But the ones I know actually know and trust the testing and results.
They can also checkout live results on a continuous report of actual live trading of the methods.

But in "General" terms most glossy bums on seat type make a million in 12 mths type who ha black box presentations are like shellfish---lacking guts!

But a quick goggle came up with this GEM!

http://www.forexblackboxsystem.com/


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## Gringotts Bank (18 December 2010)

3rd party verification definitely a crucial check.  Not many offer that, eh?  1 in a million, but they do exist.

beach, maybe start with some of the more reputable trading mags like Stocks & Commodities, if the idea of black box appeals to you.  Or Futures.Truth.com ... probably a more reliable reference.


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## pixel (18 December 2010)

tech/a said:


> Yes your right.
> 
> But the ones I know actually know and trust the testing and results.
> They can also checkout live results on a continuous report of actual live trading of the methods.
> ...



 Nice one, t/a 

I'd rather follow Sir Alan G:




> Nonetheless, despite extensive efforts on the part of analysts, to my  knowledge, no model projecting directional movements in exchange rates  is significantly superior to tossing a coin.




Alan Greenspan - 20/11/2003: http://www.federalreserve.gov/boarddocs/speeches/2003/20031120/default.htm


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## Gringotts Bank (18 December 2010)

beach, this is not a recommendation, however...

These are the top ten independently verified black box systems from Futures Truth.  Each has been running for minimum 18 months, which is not long long, however if you look at Vivienne's (rank #1) website you can see it's been successful much longer than that (can we get that verified also? - the equity curve is very nice).  Keep in mind, return is based on three times the required margin.



Annual % Return

ChrisVivienne 	

258.6%

TSL_CEL_NG_1.1 	

255.5%

Natural Gas Offense 	

201.7%

Dual Thrust 	

179.6%

RC Beginner 	

147.2%

Natural Gas Trader - GA 	

145.7%

Auto Core Duo 	

115.5%

Jen Jamer 	

111.9%

Catscan IV 	

105.7%

TSL_SP_1.0Z 	

104.4%


Their out-of-sample testing is quite rigorous I believe.  However this is the internet, so a degree of trust is required, and it's not the sort of thing I'd go in for myself.  They've been around a long time, however *this* *link must be read very carefully * http://www.futurestruth.com/testinginformation.htm  Might put you off a bit!


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## beachlife (19 December 2010)

Thanks everyone, some interesting posts.

I'm not looking at a black box system, I was just wondering if I should bother with a structured trading plan or be more flexible/discretionary.

I am trying to trade short to medium term using end of day charts.  I position size based on a stop point, have token targets but try and let the trades run until the chart says the trend is over.

I have tried waiting for new trend confirmation but found that by the time the trend was confirmed it didnt have much run left.  So I then tried looking for an earlier entry but am getting too many false starts, which is why I was back to a developing a new trading plan.


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## TabJockey (19 December 2010)

You could always give a fundamental view a go, I think it probably requires less education to make money with overall than technical trading. Fundamental's are closer to what we experience in the real world and are easy to get a good grasp on with some dilligent reading.


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## Wysiwyg (19 December 2010)

beachlife said:


> I have tried waiting for new trend confirmation but found that by the time the trend was confirmed it didnt have much run left.  So I then tried looking for an earlier entry but am getting too many false starts, which is why I was back to a developing a new trading plan.



Looking for lower pivot points in a longer turn up trend for entry? First find an up trending stock. This is determined by the duration. Then the angular support or horizontal support or Fibonacci levels or MACD/Signal cross or high/low volume or RSI cross or whatever (not one method works everytime). 

Search for up trending stock over whatever period one chooses using this code. Sorry, no put in, take out guaranteed entries  I know of but that is what initial and time stops are for. 

_SECTION_BEGIN("");

Lookback = Param("Look Back", 126, 30, 252, 1);

X = Cum(1); 

LastX = LastValue(X);

C1 = ParamField("Field", 3);

Slope = LastValue(LinRegSlope(C1, LookBack ));

Pi = 3.14159265 * atan(1); 

Slopeangle = atan(Slope)*(180/Pi);

Buy = Slopeangle > 0.15 & Cross(MACD(), Signal()); 

Filter = Buy;
AddTextColumn(WriteVal(Slopeangle, 1.2), "Slope Degrees");

_SECTION_END();


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## tech/a (22 December 2010)

For those interested portfolio update.
Youll note that a few days have passed we now hold less stock with an increasing un realised profit.
I have closed some non performing trades at very small losses.
I will over the break calculate this portfolios Expectancy and all the other numbers that go with it.
Ive been trading it a week befoire I went to FIJI Sept 28 ish.


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## satanoperca (22 December 2010)

*Re: Trading Plan vs Black Box System*



tech/a said:


> I dont bet on anything.
> 
> I can manage my trading its not win or lose.
> I can govern how much I win and how much I lose in any one trade.
> ...




Brilliant - printing it out and posted on the office wall.


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## Fishbones (23 December 2010)

I heard lots of bizaare claims about many systems, and most of them come with a hefty price tag.....If I had something so wonderfull , then why would I even bother trying to sell it...Trading by just looking at charts equates to gambling. There is nothing wrong with gambling as long as one understands that. Personaly, I prefer Monte Carlo, with all that style and pizzaz...it would be lot more enjoyable the looking at charts and computer screen all day.
Another maxum: "Market is always right " is absolute garbage as proven by Graham, Buffet etc. .. if market was right they wouln't have found anything to invest in....

cheers !! and Marry Christmass !!


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## pixel (23 December 2010)

Fishbones said:


> I heard lots of bizaare claims about many systems, and most of them come with a hefty price tag.....If I had something so wonderfull , then why would I even bother trying to sell it...Trading by just looking at charts equates to gambling. There is nothing wrong with gambling as long as one understands that. Personaly, I prefer Monte Carlo, with all that style and pizzaz...it would be lot more enjoyable the looking at charts and computer screen all day.
> Another maxum: "Market is always right " is absolute garbage as proven by Graham, Buffet etc. .. if market was right they wouln't have found anything to invest in....
> 
> cheers !! and Marry Christmass !!



Hi Fishbones,

One misconception and one misinterpretation - if I may argue the points:

1. "Looking at charts" is not all a T/A trader does; in analysing the chart, we assess the current market trend and the relative odds of one outcome versus the other. As soon as the odds swing against us, we cut our losses or rake in whatever profit we can get. The comparison with gambling, e.g. Monte Carlo, is valid to the extent that winning or losing odds are concerned. It stops and becomes outright ridiculous where loss minimzation is the issue:
In Monte Carlo, you try and place $1000 on nymber 35, and just as the ball is about to drop into number 15 or zero, try and sell your position to the croupier or another gambler for $800. Or whack on another $5000 just as it hits slot 35. You can do the equivalent of both if your chart analysis is good enough and you have DMA from your system into the Market.

2. "The Market is always right" has to be taken as a metaphor, in the sense "No matter what you think an item should be worth, you can't force the Market to accept your notion." 
For example, if you believe a stock is worth $1, but no buyer in the market is willing to pay more than 80c, your guess - no matter how fundamentally sound - is wrong and it's no use arguing about it. Moreover, if you paid $1 and keep insisting that's the correct value, "the Market" - being all other holders willing to sell for 80c and less - proves you wrong, even foolish (after the fact) for having paid too much. If in a week's or a year's time the price recovers to $2, you were still wrong paying too much, compared to a Buffet or any T/A trader, who tuned in to Market sentiment and bought the same share for 80c or maybe even 50c.

But in the last point I absolutely agree with you:
Merry Christmas and a Happy New Year to you and your loved ones - regardless whether they follow Technicals, Fundamentals, the Stars or chicken entrails


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## Fishbones (23 December 2010)

1. I do understand what T/A trader does, but taking a game of roulette is not a fair comparison...There are statistics out there, but I "bet"    that the percentage of pro technical gambers are on par with pro horse or card players. I can provide evidence of many succesfull horse systems but just like T/A systems they carry a disclaimer; "past performance does not guarantee future profits..." or words to that effect.

2. Graham and Buffet have on many occasions bought  stocks that had fallen in price before rising and giving them profit. The reason I am saying this is because of your comment :
" Moreover, if you paid $1 and keep insisting that's the correct value, "the Market" - being all other holders willing to sell for 80c and less - proves you wrong, even foolish (after the fact) for having paid too much. If in a week's or a year's time the price recovers to $2, you were still wrong paying too much, compared to a Buffet or any T/A trader, who tuned in to Market sentiment and bought the same share for 80c or maybe even 50c..."

Just for the arguments sake if I had bought at $1,  Buffet at 80c and , you at 70c - that would make you a better investor then Buffet or me ?
No , I wouldn't think so...Not even Buffet claims that he picked them up at the bottom...what the question here is : wheather I am correct in my analysis that the stock is undervalued at $1? If  I am correct( or Buffet or you , doesn't realy metter) then the market is wrong. I presume you have heard of another wisdom "that market is driven by sentiment" ....also the T/As,  you have your MACD and overbought or oversold signals so therfore market CAN NOT be always right....right?  

cheers,
insomniac


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## pixel (24 December 2010)

We may have to agree to disagree.
Roulette, two-up, dice, lotto, keno - those are gambling games.
I'm aware of some horse trades, where people "in the know" place the "right" odds on horses *and win overall*. Done properly and with a "technical" system background, I wouldn't call it gambling. Likewise, a skilled card player can remember discarded  cards and recalculate the odds for his hand - a trick Casino operators hate and will actively "discourage".

Same thing with the second case: When we talk about the Market "being right" and a trader or investor finding a "right entry", we're using the same word for two vastly different concepts. That's a "tragic" feature of the English language that many monosyllabic words can have different, even contradictory meanings. Just imagine you hear someone, who is reading this, mutter "yeah - right!"
In the example, where you bought a share at $1, Buffet spent 80c, while I would wait for the price to hit, say, 60c, before turning, I would be "right" if I bought it at 70c *after my consistent technical analysis* suggested high odds for a further rise. The person that sold it to me, expecting it to fall further, could in that case be wrong. But neither of us could argue that the Market was "wrong" at any point in time. Because, as you put it yourself, the Market is driven by sentiment and each share's "value" is determined by all participants' *perception* of its current value. That perception integrates the entire width of "consensus" - another word for "average" - with intangible beliefs, hopes, interpretations of reports and management capabilities. It may be as fickle as _"la donna Ã¨ mobile"_ and change daily; but shares are bought and sold purely on that basis, which makes it "the right price."


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## Fishbones (24 December 2010)

Dear Pixel,
I have come to realisation that I have made a post in the domain of consistant tech. analysts. I, being of different "creed" should not have done so ( post) as it serves no purpose. The abys is too great for one to cross over, if you know what I mean.
Ultimately, accept my apology, and have a very, Merry Christmass !!!


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## KurwaJegoMac (24 December 2010)

tech/a said:


> For those interested portfolio update.
> Youll note that a few days have passed we now hold less stock with an increasing un realised profit.
> I have closed some non performing trades at very small losses.
> I will over the break calculate this portfolios Expectancy and all the other numbers that go with it.
> ...




If you don't mind me asking, on what basis did you close the non-performing trades?

I know you'd stop if it hit your original sell stop, but do you use any other stops/decisions when a stock is stagnant? So for example do you have a timed stop? Or do you close out on the basis that you have identified new and better opportunities?


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## tech/a (24 December 2010)

KurwaJegoMac said:


> If you don't mind me asking, on what basis did you close the non-performing trades?
> 
> I know you'd stop if it hit your original sell stop, but do you use any other stops/decisions when a stock is stagnant? So for example do you have a timed stop? Or do you close out on the basis that you have identified new and better opportunities?




As you can imagine a bit busy today and tomorrow and Boxing day is another big one.

There is some interest in how I trade these so as I use a breakout formula for my entries and we have *THIS thread *going

https://www.aussiestockforums.com/forums/showthread.php?t=20906&page=5

I will run the method I use (which is predominantly discretionary) through its idiosyncrasy's when I get a chance.
Quickly though.
I expect positive movement pretty well immediately--if I dont then its on my radar next day.
Ill exit anything not continuing to trend and NOT showing a consolidation which displays continuing characteristics well before the Stop. Not fool proof but with a massive amount of new trades to choose from its worth the quick cull!

More with charts explaining the above later.
Have a great xmas everyone!


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## KurwaJegoMac (24 December 2010)

tech/a said:


> As you can imagine a bit busy today and tomorrow and Boxing day is another big one.
> 
> There is some interest in how I trade these so as I use a breakout formula for my entries and we have *THIS thread *going
> 
> ...




Appreciate the response Tech/a. Will continue this in the thread you posted. A Merry Christmas to you and everybody else.


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## picker304 (28 December 2010)

Oh Yes a trading plan is most important don't know about a black box. I lost over 10000.00 while backtesting and finding a plan. Its now paying off but finding one is most crucial. Good luck to you. 







beachlife said:


> Two things I hear a lot.
> 1. Black box systems dont work and
> 2. you must have a trading plan to be successful.
> 
> ...


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