Trading Plan vs. Black Box System

[beachlife]

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?

 

[Wysiwyg]

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.

 

[tech/a]

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.

 

[Wysiwyg]

Re: Trading Plan vs Black Box System

It is simply betting on price direction.

Do you REALLY believe that?

Yes. What do you bet on?

 

[beachlife]

Re: Trading Plan vs Black Box System

Do you REALLY believe that?

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.
.

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.

 

[tech/a]

Re: Trading Plan vs Black Box System

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!

 

[Wysiwyg]

Re: Trading Plan vs Black Box System

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.

 

[TabJockey]

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.

 

[tech/a]

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?

 

[pixel]

Re: Trading Plan vs Black Box System

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:

1. 
   [*]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

 

[TabJockey]

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.

 

[tech/a]

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!

 

[Gringotts Bank]

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

 

[pixel]

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!

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.

 

[pixel]

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

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

 

[tech/a]

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/

 

[Gringotts Bank]

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.

 

[pixel]

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/

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

 

[Gringotts Bank]

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!

 

[beachlife]

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.