TRADING TECHNIQUES
Automation Vs. The Human Brain
Robotic Trading
by Martha Stokes
What works and what doesn't? Only experience will tell.
Find out why you need to constantly modify a trading system so it gives
you the results you want.
AT a recent
investment trade show I attended, the booths displaying charting software
looked nearly identical. High-tech charts blinking red and green had hordes
of traders gathered around them. Vendors were proclaiming the age of the
emotionless trade, triggered by an automatic buy or sell signal generated
by a computer that never makes a mistake. Traders have flocked to these
automated trading systems in recent years in a mass frenzy typical of a
market boom.
COMPUTERS OR THE HUMAN BRAIN?
Look around you. If these automated trading systems are so perfect,
if the computer is better at selecting stocks than a human brain -- the
most advanced and complex organism on the planet -- then why aren't those
retail traders doing better in the stock market? For that matter, why would
large institutional investor and trader firms even need high-salary managers
and advisors? Stock prices do not follow a set mathematical process, which
is how computers are able to crunch numbers instantaneously and how most
automated trading systems function.
Contrary to popular opinion, computers have not gotten any smarter since
the day Bill Gates started Microsoft. In fact, computers are only capable
of following a set sequential list of commands written by a human brain.
And at this point, computers are highly limited to mathematical formulas
that follow a rigid set path of instructions.
But that's not how the stock market functions. The stock market is made
up of human beings and the results of their decision-making process, emotions
and all. The market behaves more like a highly complex biological ecosystem
with checks and balances, as well as evolutionary pressures driven by both
slow event processes that change the market over time, and sudden event
processes that alter the market abruptly and permanently.
FIGURE 1: DOW JONES INDUSTRIAL AVERAGE. The acceleration
of volume really begins in 1998.
...Continued in the June issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the June 2008 issue
of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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