Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

When I started in systematic trading, the Berlin Wall was still up. I’m comfortable with the concept now, but I understand those who aren’t. Especially with the Big Tech backdrop, trust in algorithms is low. Nonetheless, I am always entertained by someone criticizing systematic trading as a “black box” in contrast to the human mind feeding discretionary trading approaches.

There is nothing more convoluted and perplexing than the autonomous human mind. The concern that systematic trading is a “black box” – implying that its rules and logic are hidden from the investor – pales in comparison to the impossibility of fully understanding what drives a discretionary trader’s decisions. Can anyone understand what comes out of a discretionary trader’s head and translate that to a trading program? Can you identify the exact anomaly she is exploiting and guarantee she will stay rational and consistent regardless of what’s going on in her life and what new market condition exists?

The brain’s ability to assess new information is better than any systematic strategy’s ability to do so. It’s unlikely a human can stay focused and consistent across a wide range of markets and conditions as a systematic strategy does. Systematic investing strategies have the benefit of producing historical results that can be compared to real experience of having rules that can be understood and replicated.

In this article, I’ll outline what makes good trading models and how to incorporate that into a thoughtful trading program.