Chapter 7: You Are the Black Box

“Victorious warriors first win, then go to war, while defeated warriors first go to war, then seek to win.”

Sun Tzu, Art of War

Both professional managers and individual traders commonly use computers to manage trades. They scour the data each day and decipher what to do during the next trading session. These instructions come from very rigorous back-testing, a process by which professional managers and sophisticated individual traders test their rules using historical data. The rules are price based and have been tested using as many as 20 to 30 years of data.

These instructions include how to handle existing positions, what to buy or sell, at what price to take a loss, and, most important, how much of each ...

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