Cybernetic Trading Systems

“Cybernetics was defined by Wiener as ‘the science of control and communication, in the animal and the machine’—in a word, as the art of steermanship.”

–W. Ross Ashby

CYBERNETIC TRADE CONTROL SYSTEMS

Cybernetics embodies a multi-discipline theoretical framework which focuses on goal-directed systems.  These systems use information, models, and control actions to steer towards and maintain a predefined objective while attempting to counteract anything which detracts from this objective.

Perhaps the most fundamental innovation of cybernetics is its explanation of purposiveness, or goal-directed behavior.

Cybernetics and Fund Management

“Goal-directed behavior” is particularly critical in the world of investment management.

Mechanical Trading Systems by Richard Weissman

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RECOMMENDED.

“The greatest benefit of mechanical trading systems is their ability to reprogram traders away from destructive types of behavior in favor of successful trading habits.”

–Richard Weissman

Perhaps W. Edwards Deming said it best: “If you can’t describe what you are doing as a process, you don’t know what you’re doing.”

I can count on one hand the number of traders I’ve met on the Philippine Stock Exchange trading floor who can describe every facet of their trading as a process.  True, some veterans can kick butt trading ‘by their gut’ but they are few.  I suspect the majority let their emotional state or whims of the moment play a inappropriately large role in putting on trades.

If you’re serious about your trading, you’ll systematize what you’re doing.

Market Wizards by Jack D. Schwager

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RECOMMENDED

If I was forced to jettison my entire trading library and keep ONE BOOK, this would be it.

Research and Development

Nothing beats original investigation.

“Ninety-nine percent of the people in the business are followers. They’re not creative and they’re not willing to rely upon themselves to make decisions, so they rely upon other people.”

–Tom Demark

The Study

Covered approximately 6000 years of raw price data from the Philippine stock market

• 600 stock charts
• Approximately 240 listed companies
• 10 years of monthly price data
• 10 years of weekly price data
• 10 years of daily price data

The Turtles: The Most Famous Trading Experiment in History

Can the skills of a successful trader be reduced to a set of rules?

“We are going to grow traders just like they grow turtles in Singapore.”

–Richard Dennis in Market Wizards

The Turtle Experiment

The story, which first appears in Jack Schwager’s Market Wizards, by now has attained almost legendary status. 

Merits of Rules Governed Trading

Do you, your broker or your investment manager have a pre-flight checklist?

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“After 20 years of trading, I find it almost impossible to trade without a plan that does not have fixed rules.”

–Robert Krauscz, New Market Wizard

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Can you imagine the pilot of a jumbo jet climbing into the cockpit, firing up the engines, and hurtling down the runway into the sky without a second thought?  I mean, no checklist, no clearance from the tower, no nothin’?

On Mechanical Trading Systems

"Hey Biff. Is that a buy signal?"

“The greatest benefit of mechanical trading systems is their ability to reprogram traders away from destructive types of behavior in favor of successful trading habits.”

– Richard Weissman, Mechanical Trading Systems