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Eye-opening Reality of Black Box Systems v. The Omnipotence of Technical Analysis

Trading Systems
Written by Andy

The Psychology Of Selling

It’s amazing what we didn’t know we had to have, until we read the description. I’m talking particularly about the black box trading robots that you can buy – it seems like there’s a new one every week. As someone who has done some copywriting, I must admire the squeeze pages that some of these vendors come up with, as they are very compelling. They even deal in ways that seem to make sense with the inevitable question of why they are choosing to sell the robot rather than just using it themselves to make a fortune. The answer ranges from ‘wanting to give back’, ‘the market is large enough that others using the robot will not make a difference to my profit from it’, and others. Somehow they make the answer seem plausible.

Give a man a fish or…teach a man to fish!

But Really?

Just stand back for a moment. The price of these black box trading systems robots varies from $97 for a whole plethora of Forex EAs up to several thousand dollars for the highly promoted versions. But do you really believe the claims? I’ve just checked the selling page for F** T**** (May 2010), and they are claiming that their robot is capable of ‘Doubling Your Money Every Single Month’. Its current list price is $149.

Let’s assume that the robot inventor has $1,000 to invest. This particular robot has been on sale for at least two years. In two years, doubling every month, $1000 would become over $8 billion. To make this from sales of the robot, he would have to sell one copy to every man and woman and child in the United Kingdom. Why does he bother to sell any? In just three more months of trading, he would have more than Warren Buffett! The answer given is ‘We get to invest the profits into our trading accounts’. So…if the profits are not just a drop in the bucket, then he can’t be making what he claims from the robot, can he?

The Reality

‘If it seems too good to be true, it probably is’. I’m sure that the ideas expressed above have occurred to you, probably many times. Yet it’s in the nature of human psychology to still hope against hope that it will work as described, and lead to a life of leisure, or windsurfing, or altruism, or whatever appeals to you. HOPE IS NOT A STRATEGY.

What About The ‘Proof’?

That’s a good question, and one that people struggle with. If the robot really doesn’t work, then how can they show you ‘proof’ of its performance? Sometimes it’s not just backtesting, either. As anyone knows, you can, perhaps not rig, but ‘optimize’ any system to give the best performance on backtesting, and that doesn’t mean that it will do anything worthwhile in the future. But some promoters of these programs also go “live”, showing the performance as they send out their selling messages.

The point is, I’m not saying that the robots can never work (although I am saying that I believe the claims are exaggerated). After all, when you learn to develop a trading system, one of the things that you are encouraged to do is to backtest it to see how it performs on real data. You expect to see that it will increase the account over time, and you can use the backtest to look at weaknesses and try and improve it. More on this later.

Bonus Systems?

Another intriguing development that I’ve noticed is the packaging of previous robots with the new one as ‘bonuses’. If one is good, surely four are better? The spiel goes something like ‘you not only get the latest ultimate robot, but you will also receive three more robots previously sold for $997 each, and you can see their sales pages here’. Stop press: the latest offer I have seen in the last few days includes seventeen additional robots and indicators! Pardon my asking, but if the robot they are selling is so good, what are you supposed to do with these ‘bonuses’? It reminds me of my 401(k) retirement account a few years ago. I had my money spread across most of the different funds offered, and they pretty much all lost money. The manager sent out a newsletter saying that times had been hard for some funds, but it just goes to show you must be properly diversified to avoid losses. As I’d lost money in every direction, I nearly exploded at this! But it was just double speak to say that they had given you lots of choices, so it wasn’t their fault if you lost money. Just like the bonus EAs.

Even More… Why?

Now the promoter of this Forex robot, along with many others, keeps e-mailing me when new products are released. I’ve just received from him details of another one which costs $2397. Of course, if I bought it he would get affiliate commissions, but we’ve just established that he shouldn’t need them, and as a customer of his I should not need anything other than his ‘excellent product’, should I?

The Human Psyche

Yet it’s hard to really take in the facts expressed above. We want to believe, and regardless of the facts there is always a small voice saying ‘Yeah, but what if it does work?’ When you study trading, you read a lot about the psychology and how difficult it is to overcome fear and greed. The chances are, before you start trading with real money, you wonder what all the fuss is about. Well, this example just goes to show how out of control our thoughts and emotions really are. Starting to trade is an opportunity for amazing self revelations. It’s useful to have people to talk to, mentors, who have gone through the same feelings. And that’s one way in which learning to trade is much better than hanging your hopes on a succession of black boxes.

The other question is whether you really want to put your trading capital in the ‘hands’ of some software that you don’t have access to the code of and you wouldn’t understand if you did. Who will you complain to when it blows out your account?

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