Markets, Strategies, and Tactics

Graybox Trading

Apr 08

If you are a struggling trader you may want to review your market, strategy, and tactical focus to ensure that there is a balance across all aspects and that no aspect is completely neglected.

I am very big proponent of market cognition because it is the process by which a strong ability to read and anticipate markets is developed. However, focus on market cognition to the detriment of strategy and tactics can lead to problems. Market cognition sits somewhere between an opportunistic or speculative focus and a strategy focus. Market cognition can be refined through strategy development, journaling, and real-time hypothesis generation.

Strategies or setups are simple to understand: they are quantified rules or setups that define how trades will be taken and managed. Strategies simplify the process of trading and make it much easier to execute and gain consistency. Many big money traders are predominately strategy focused.

Tactics is the mechanics of how trades are executed and managed. Tactics can be very important or of lessor importance– depending on the style. Some tactical considerations for scalpers is whether or not you will add when down and how trades will be executed. For lower frequency traders, the tactics may focus on how a trade is expressed versus executed, i.e. such as considerations for when it may be appropriate to use options instead of outrights.

Mark Melnick from T3 Live has mentioned the US Air Force Colonel John Boyd’s OODA loop as a model for processing market information or observe, orient, decide, and act. Some have pointed out that this loop is similar to steps in the scientific method such as observe, hypothesize, test, and iterate.

If one reflects on it, many of the problems that traders have may be due to imbalances in the loop:

  • Analysis paralysis => Too much decision
  • Non-thinking or fast trading => Too much action
  • Seeing opportunities but not taking them => Failure to move to decision step or action step

Dr. Alexander Elder developed the triple screen trading method back in 1986 which sought too classify and orient trader attention across multiple time frames long term trends “tide”, intermediate trend or “wave”, and the short-term trend or “ripple”.

In the past, I completely disregarded the ideas of setup based trading and instead focused primarily on understanding the nature of randomness in the market and making quantified predictions. While, it can work well– it is harder to execute because there is a lack of strategy.

Below are some models that may work well for the discretionary, graybox, or semi-automated trader:

Pre-market Loop or the Pre-Real-Time Processing Loop

  1. Scan (observe). Identify the markets with most opportunity.
  2. Select (orient). Narrow the focus to a few markets that will be focused on.
  3. Hypothesize. Generate some initial hypothesis for what may happen. This may or may not be beneficial.

Real-Time Processing Loop (A)

  1. Focus (observe). Observe the market more intently to look for patterns and seek understanding.
  2. Hypothesis (predict). Develop a hypothesis or prediction for the given market. It can be a simple prediction or a conditional hypothesis.
  3. Evaluate confidence in prediction and decide whether to place the trade (decide). This is the core step — one has to accurately introspect to develop a confidence. This is where risk or externalities may also be considered.
  4. Act. Place the trade.
  5. Manage-> Observe, orient, decide.

Simplified Real-Time Trading Graybox (B)

  1. Focus (observe). Observe the market more intently to look for patterns and seek understanding.
  2. Hypothesis (predict). Develop a hypothesis or prediction for the given market. It can be a simple prediction or a conditional hypothesis.
  3. Simplified decision step– decide which setups to take in the market.
  4. Arm or Ready. In this step, one “arms” the trade either through semi-automation technology like BeyondBot or through manual process.
  5. Act. Take qualified setups.
  6. Manage -> observe, orient, decide

While A-loop style trading affords maximum flexibility, the problem is that it is very discretionary. B loop style trading is a simplification of the A loop style trading. A-loop style trading is more likely to work well at a lower frequency, such as 1 or 2 trades per day. The challenge for B loop style trading is for the trader to develop at least a few setups that can work well across different regimes and to be able to switch among them.

Different traders may find variations on those core loops work best. One way to develop your loop is to keep the risk to a minimum while you refine your trading plan. While not investment advice, by minimum risk, it is important I stress that I am referring to not just a small or manageable risk but a trivial risk will be the best place to start.

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at