Black Box Trading

Just to expand upon the recent posting of “Zip4x” by Manager: Enzo Stipoli - Collective2 trader of the week. This is an interesting article on Reuters 2 days ago which should be of considerable interest:

In the commercial market for hedgers of FX and Commodities the price discovery opportunity between bids and offers has now widened dramatically since 2008. Today we have very sophisticated hedge funds that have increased speculative positions and market volatility. Please turn to VIX. Whilst no hedge fund will ever reveal it’s algorithmic matrix that determines it’s deal-flow, an astute trader may pick upon tell-tale signs that the giants leave in the markets whenever they start accumulating positions. One of the most important concepts in FX is a true understanding of Time and Time can become your adverse enemy should it let you press yourself into daily trades which do not make sense. Swing traders love to scalp pips on news releases and often get punished with successive 15 min bars which retrace the first 15 min bar movement. Yet, most hedge funds do not preoccupy themselves with short term 15min trading time horizons and involve themselves with higher risks. Most hedge funds accumulate positions over larger periods of time within several connected markets ie. short the EUR/ USD, short bullion, long USDX, short US 10 year. They use exchange traded derivatives and OTC positions to overwhelm markets as in the case of the EUR/ USD plunge form 1.34 region and crude oil WTI from 100 USD.

Imagine throwing a large stone into a silent pool of water. That is the same effect that black box trading funds would like to achieve in markets i.e. create enough force to design a momentum trade as large as a tsunami. The underlying factors are usually a confluence of global macro-economic parameters
to determine the ground zero for initiation of massive forces of hundreds of millions if not billions of dollars. Eventually the long wave of ripples reaches the shore after several months and small traders learn to pick up these waves through their technical systems and trade the zigs and zags of ripples until the point of exhaustion.

Whilst every trader has his or her own personality trait an chooses systems that befit the character; it is also equally important to maintain the challenge of daily volatility within the perspective of larger black box designed moves and trends which are more often that not initiated by large speculative hedge funds with longer term horizons. Day and swing traders must always keep in mind how the large speculators think and try to see the viewpoint of the giants before initiating a quick trade based upon a signal generated technical system that can follow the ripples of a tsunami wave. System trading in the shorter term does work but sufficient reserves must be allowed for errors and discipline must be applied to work that system to make day trading successful. But also a trader must be aware that large hedge funds increasingly automating their positions and note the directions of such positions and markets. Regards all - Pieter Bergli - Trader X16.