Beware of Black Box Trading Programs

It seems that on almost any web site relating to the stock market there exist multiple advertisements touting software programs designed to automatically make money for you on the market. These are referred to as "black box" trading programs. They are a black box because it is a mystery to you why the software tells you to buy or sell a given stock. It gives a command and you obey. So, do these black boxes work? Let's analyze that question.

Assume you were the one who devised such a device. You now possess a formula which is sure to beat the stock market. What are your options for its use? You could start a hedge fund and raise billions of dollars with the solid history and proven formula you've brilliantly created. That would make you a billionaire in relatively short order and quite possibly one of history's most legendary traders. Or, you can decide to sell it to the general public for $299.95 in intensive advertising campaigns. One would think a surefire way to beat the market would at least sell itself.

If the purveyor of such devices understood that no such program can stand up to the test of time, then they would seek to sell it to you for a relatively nominal price. If it was bound to eventually lose, then the hedge fund plan goes out the window. Ponder this deeply the next time you are inclined to buy such a program. Sure, the thought of abdicating control over to a higher power possessing computer intelligence is appealing. However, if it really did work the creator of the program would not be selling it to you.

To throw salt on the $299.95 wound, these programs often can prove more harmful than just setting you back a couple hundred dollars. This is especially so for the more popular ones. If a sharp trader or hedge fund figures out that many people are relying on a given program, then they can reverse engineer it thus ascertaining when many a retail trader's buy or sell signal will go off. This is powerful information essentially putting you in a position to play poker against an opponent who can see your hole cards.

There is a famous study where a group of monkeys threw darts at the stock page to make their picks versus the portfolio selections of the top financial gurus of the day. The monkeys won. Undoubtedly, the monkeys would also outperform all the black boxes on the market today. There would be commonality between those two opponents. Monkeys have the unseemly habit of throwing their doo doo at their owner. So do investment black boxes.