Black Box Trading Syndrome

Black Box Trading Syndrome can affect any person who trades a trading strategy solely based on it’s past performance. If you have ever experienced the situation where you’ve spent hours, months, even years back testing what you thought was the perfect trading strategy that worked flawlessly in the past only to live trade it to find out that it wasn’t as perfect as you had thought, then this episode is for you!

Click here or in the video below to listen to episode 33 of the Trading Performance Podcast for some important information that can help get you out of the box and close the lid on the Black Box Trading Syndrome.

Back testing a trading strategy that a trader is intending to trade is a very important exercise for a trader to perform. However, it may not be for the reason most traders think. It is very important that back testing be to understand:

• The concept of the trading strategy
• Why it works in the market
• When it will work and when it won’t
• The market conditions of when the trading strategy is likely to win

It is not recommended that back test results be used solely to gain confidence in it’s future performance. It is very, very easy to create strategies that would have done well in the “timing of the past” giving you a false sense of what might happen in the future.

A trader should be able to back trade a trading strategy over a long period of time and find that the specifics, within reason don’t matter that much to the results long term. If however those small changes in the specifics DID make a big difference over a long term sample, then there is likely a problem with the trade concept and a trader should not expect the trade to perform well in the future.

When ever a trader runs into a situation where they “could have conceivably” made different choices, they should consider the alternative outcomes and factor them into their results in order to get a more realistic idea of how the strategy is likely to perform in the future.

Before a trader scales up their trading, they should really take some time to consider if they truly understand the nuances of the trading strategy from their back testing and live trading or if they believe the trading strategy will do well solely based on the past performance.