From Traderpedia


[edit] Introduction

As traders we need reliable and accurate software package(s) to analyse the data we use to trade our chosen instruments. Whether we depend on technical analysis or trade on price alone or use fundamental analysis, we need software to display and analyse price data for those instruments.

We also need to be able to rely on the technology to perform reliably in the environment it is used in. For example, we need to know that our computer has not been hacked into and our security compromised. For this we require utility software such as firewalls, antivirus and antispyware.

The data we have painstakingly assembled (often at a great cost) must be secure, backed up and protected against equipment or other failure. We have to consider the effect of power or internet connection failure on our trading.

Trading on our own account is a lonely occupation. Websites like this make communications between traders much easier. The technology exists for individual traders (& groups of traders) to be in written & audio-visual touch with each other in realtime via their computers if they so wish. Use of this technology is likely to grow with the take up of broadband services. At present it is only in its infancy. It is an important issue for traders & this guide will try to address it.

In short we need to be armed with the appropriate tools for the job. We must make our arrangements to deploy them at short notice if need be. To do this effectively we have to understand & be familiar with the workings of the software that makes what we do possible.

[edit] Charting/Technical Analysis Software

There are various approaches to this. We can sometimes manage with the limited & free software provided on websites. We can self-program spreadsheets such as Excel to display charts & technical analysis. The majority of users though will purchase or lease purpose specific software from commercial vendors. The degree of sophistication will depend on users' experience & trading style. It is not necessarily the case that more experienced traders will use more elaborate software. They will however have established their methods & techniques & will use software that accomodates these.

  • Commercial charting/technical software can be divided into several categories:
  • Charting/technical analysis for end of day (EOD) data
  • Charting/technical analysis for real time (RT) data.
  • Charting/technical analysis combined with order execution.

These are (usually real time) integrated packages where the charting software is linked to the user's brokerage package & trading account. Trading can be transacted from within the charting software on an account set up with an approved broker).

[edit] The Toolbox/Greybox/Blackbox Debate

There are three types of software within the categories mentioned above. They do (or claim to do) different things and their cost is usually very different.

[edit] Tool boxes

These are often marketed as "technical analysis software". They are used to draw charts, back test strategies or scan securities using a database of market prices, volume, open interest & other data. They can calculate & use technical indicators pre-installed by the vendor or custom built by the user. The prices database is often supplied & kept updated as part of the software package. Sometimes data is purchased separately. To meet the "toolbox" classification, technical analysis software must either fully disclose the algorithm for any indicator, or provide an acceptable technical analysis reference to its calculation. Tool boxes do not create trading suggestions. The user does his/her own analysis & makes his/her own decisions.

Before buying a toolbox, get a demonstration disc & a demonstration of the software. Make sure it does everything you want, features can vary quite a bit. You should find out what support is available when you have problems & whether there are any active user groups.

[edit] Grey boxes

They are like black boxes as they generate trade suggestions from proprietary algorithms. The difference is that they give a general idea of how the formula works. They sometimes allow the user to modify the settings or parameters. They often have an associated tool box. If they are expensive, they may well be disguised black boxes. They should be evaluated the same way as a black box.

[edit] Black boxes

These are generally described as "trading systems". They are easily identified as they use undisclosed proprietary algorithms. These algorithms operate on the system data base & give trading recommendations. Black boxes are expensive. They sometimes pretend to be tool boxes or grey boxes. Dr Alexander Elder in his book Trading for a Living states "Most black boxes are sold by hustlers to gullible or insecure traders [...] The only way to make money from a black box is to sell one."

[edit] Types of Black Box

Colin Nicholson, a private technical trader, former President of the Australian Technical Analysts Association and Principal Lecturer in Technical Analysis for the Securities Institute of Australia believes there are three types of black box, categorised by the motives of the people behind them:

[edit] Real experts

There are very few of these. They have been developed after long periods of testing both on past data & in actual trading. They are almost never for sale, because the owner knows their value is enormous & is best realised by using it to trade their own funds &/or managed funds. They are never advertised to the public or sold by high-pressure means.

[edit] Naive developers

There are some of these about. The developers have learned a little about technical analysis & mistakenly think they have found ‘the secret’. They often say that they are selling the system so they can make some money to continue development. So, you are being offered the opportunity to pay for them to learn. These people will usually have no experience in the securities industry, no industry specific qualifications & no license. You would be better to just give your money to charity. If you believe their story, you must take the time to test the system before using it to trade real money.

[edit] Marketers

These are the ones widely advertised & sold by high-pressure means. They are always expensive, to pay for the marketing organisation & enrich the promoters. Wild claims are made about the performance of these systems, almost always based on theoretical testing rather than actual trading. Maybe some of them will make you wealthy. Unless you are hell-bent on enriching the promoters, you must evaluate them before you buy. If you buy on the basis of a money-back or other guarantee, get legal/financial advice as to whether the promoting company is likely to honour the guarantee.”

Colin Nicholson also states:

"If I were contemplating the purchase of a black box or grey box trading system, these are the steps I would take before handing over any money

I would want anything that I am told to be given to me in writing, or I would make complete diary notes of all conversations. I would consider tape recording any presentations. No honest promoter should object to this.

I would ask for an audited track record of all actual trades over a reasonable period made using the system. I would contact the auditor & verify his or her report.

If I was unable to get an audited track record of all actual trades, I would ask to see the complete details of testing done on historical data using the system. I would require that:- The system test be over several different markets & over periods long enough to cover bull, bear & sideways markets. The system testing be done in front of me or verified by an independent person, such as an auditor. I would contact that independent person & verify his or her report. I be allowed to paper trade the system on several markets before finalising my agreement to purchase it After buying it, I would carry out my own testing on historical data. I would then paper trade it for some months before using real money"

[edit] Fundamental Analysis Software

Fundamental Analysis probes the Balance Sheet, the Income Statement, & the Statement of Sources & Uses of Working Capital.

Fundamental market analysis is the examination of the underlying forces that affect the interests of the economy, industrial sectors & companies. As with most analysis, the goal is to derive a forecast for the future.

Some analysts analyze the company's balance sheet to determine the the value of the company & try to buy the stock at a price lower than the liquidation value or at a low price compared to the valuation of the net assets of the company. Other fundamental analysts focus on the expected future earnings of the company & try to buy the stock at a low price compared to the future earnings (low PE: price earning ratio).

Industry groups are compared against other industry groups & companies against other companies. Usually, companies are compared with others in the same group.

Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group.

Fundamental analysis is good for long-term. It will help identify companies that represent good value.

Software is available to assist with the analysis - it gathers together historic data & presents it in a form making comparisons easier

[edit] Execution Improvement Software

Order Management (Execution Improvement) software is available as part of some of the more Expensive Trading Platforms. It is generally linked to specific brokers.

Many members of Trade2Win use Interactive Brokers (IB) who are a deep discount direct access broker.

IB’s software includes an application accessible to 3rd party developers to provide "front ends" for their software.

These front ends usually allow most of the following to be done in a fast & efficient manner without getting to grips with more detailed aspects of the IB software:

  • Live order entry & order monitoring & management
  • Automation
  • Stop loss management
  • Trailing stops
  • Commission tracking
  • Alarms
  • Profit target mangement
  • Paper trading facilities

[edit] Traders' Communications Software

The increasing take up of broadband with its "always on" feature has led to an increase in the availability of methods of communication between traders. Email has been with us for a long time. Real time “email” or Chat facilities have been around for a while & are very popular but traders require dedicated “rooms” such as those provided by T2W to keep their focus & privacy. There are a number of public and private chat rooms for Traders on the web. One disadvantage of the chat room is that content is typed in - not always convenient while trading.

Voice Over Internet Protocol (VOIP) is now allowing us to chat to other traders “over the phone” at no extra cost as all the conversation is carried on our Internet connection. The quality of these services is improving but so far no Standard has become accepted. Conferencing is becoming available on these services & groups of traders will be able to hold “phone” conferences. The latest development in VOIP telephony is the peer to peer network approach as adopted by Skype.

By hooking up web cams we can now see each other & our charts & soon, software will be available to allow all this to be managed from one interface within our charting & trading platforms

We can host & attend interactive audio visual presentations with the only limit being that imposed by international time zones.

In short the Internet will soon allow traders to be as close to each other as they wish without actual physical presence.

A major problem at present is the lack of compatible formats or standards. At present all the traders wanting to communicate by voice or video must use the same software. Until a standard becomes established this may prevent full exploitation of what is potentially available.

[edit] Utility Software

Along with the more exciting (to traders) software there is the dull & boring software that:

  • Helps to keep you trading efficiently.
  • Helps to keep your PC running efficiently.

If your PC is giving trouble – whether with hardware or software you & your trading will suffer! The suffering will be in the form of lost time, money cost, lost opportunities & potentially (depending on your temperament & knowledge base) a great deal of frustration.

Utility software is available for a variety of purposes. The more common ones that traders need fall into these categories:

  • Backup
  • Firewall
  • Defragmentation
  • Pop up advert stoppers
  • Anti spam
  • Anti spyware
  • Anti virus

[edit] Related T2W Resources