Black Box System

The term black box system denotes a method of producing data based only on the input and output of a process without an understanding of how the output was derived from the input. Only the input and the output are analyzed.

In a broad sense of the term, a black box system is any mechanism which produces an output based on an input, without the person who provides the input understanding the processes which lead to the output. Examples of black box systems range from locks (turning a key in a lock to open a door without being able to see or understand how the lock works) to complex computing systems which no one person could fully understand.

In trading, the term black box or black box system most commonly denotes software applications which analyze data entered and deliver recommendations without the investor or broker being able to fully understand the process or algorithms used to come to the given conclusions. The system is rated based solely on the success of its output They are tweaked or modeled solely by providing different input and not by making changes to the systems.

In forex trading, black box systems are often used to automate trading processes in order to take advantage of high frequency trading.

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