Mac Murray

Cybernetic Trading Systems

In DEEP Investing, INTELLIGENT Investor on January 4, 2011 at 2:59 PM

“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


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.

A fund manager’s goal is simple:

  1. To generate the best possible return given prevailing market conditions
  2. To control the risk of loss

Hence the advantage of a systematic trading methodology designed to mitigate risk and optimize returns.  Achieving this goal, however, while safely navigating the Marketplace—itself a complex adaptive system—is no easy task.  Our constant immersion in subjective phenomena—the temporary consensus of values exemplified by changing stock prices—necessitates a scientific and objective goal-directed trading methodology, counter-intuitive as this may seem.

Goal-Oriented Behavior

Cybernetic trade control is characterized by its systematic pursuit of the fund’s objective, resisting internal and external obstructions from the environment which deviate from these goals.  Such a system forces the fund manager to operate within a very strict and highly regulated set of rules, the main benefit being the prevention of fund failure and catastrophic losses.  Thus, goal-directedness implies the regulation of—or control over—trader response (internal/controllable) to market conditions (external/uncontrollable).

Cybernetic thinking has impacted my investment philosophy by compelling me to seek:

  • Scientific and objective means to identify the inception or existence of high-probability trends
  • Scientific and objective criteria to enter, exit, and if need be re-enter those trends, while
  • Never incurring greater than predetermined % of risk against total trading capital for any single trade.

This requires a systematic approach  to trade management which minimize the impact of subjective, emotional, or impulsive input on the part of the trader.

The net effect is a systematized goal-oriented discipline imposed on the trader that in principle is very similar to that imposed on the pilot of a jumbo jet.  In fact, I feel this is an appropriate metaphor and mind-set for a fund manager–insofar as his or her successful implementation of a system-driven approach has a dramatic impact on the lives of perhaps hundreds of people.

"ASEAN heavy, we confirm high-probability long-term trend. You are cleared for take-off."


E. M. M.


When Failure Is Not an Option

Mac Murray.  Customized Stock Portfolios. Professional Management.  Precision Controlled Risk.

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