Experienced traders will tell you there are three important components in trading successfully. In order of importance, they are: The right psyche or mental outlook, a money management method to tell you how much capital to commit and when to exit, and a system to guide your trading decisions.
“I think that’s true,” says Perry J. Kaufman, a trading systems innovator and author of “New Trading Systems and Methods.” His advice about using software to trade? “When you decide you want to trade, investing in software is the last step you take, ” he says. “Philosophically, you have a lot of decisions before you even [start] implementing a strategy using software.” This leads to the ancient Greek advice: know thyself.
Are you a short-term or a long-term trader? Can you sell losers quickly? Can you take losses and keep your trading focus? Can you sit in front of a screen all day watching for the beginning of a trend, looking for certain price patterns to appear, or waiting for convergences or divergences to set up mean-reversion trades? If you can’t live with that, you will have to create systems, as Kaufman has for almost 40 years.
Today, the components of trading platforms are perhaps smaller, faster, and so cheap that with overheads of $250 to $400 per month (excluding brokerage), one-lot futures traders can build platforms for their particular market comparable to what institutional prop desks are using. Virtually all of them run on Windows 7 or Windows XP. However, Microsoft announced it will stop supporting XP at the end of 2013.
If you know how you want to trade, here are the components you need, whether you trade in days or minutes:
- A charting program (Free to $100/month)
- Price data ($220 to $320/month, including exchange fees)
- A broker ($5 or less/round turn)
- A disaster avoidance/recovery plan (Free)
- A daily trade record or trade log (Included with software)
- A risk management plan (Free)
Some programs perform just one of these six components. Others bundle some of them. Our goal is to guide your thinking regarding how to make software selections that best fit you.
It is important to have the right tools to determine what you need to execute your approach now and in the future.
Many vendors can be found in the 2010 Guide to Electronic Trading (GTET) inside this issue. Ideally, you should test as many as possible before settling on one. Many software vendors offer free trials from a week to a month.
Charts are pictures of price action. “Technical analysis is a more than 100-year-old body of accumulated knowledge you can use to guide your trading decisions,” says Barbara Rockefeller, who offers daily reports on fundamentals and technicals of the major currencies (www.rts-forex.com).
Most charting programs have indicators pre-installed: Bollinger Bands, moving averages, On Balance Volume, MACD, relative strength index (RSI), stochastics, etc. Some have programming languages as well. You can create your own trading algorithms, and even automate them. Cost can be about $50 to $100 per month. TradeStation’s is free, if you do a set number of trades per month.
Technical analysis can quantify and measure price and volume. Charts put this information in picture form. Technical analysis may not predict price action, but it can suggest trends. Even traders who insist on only trading off of fundamentals acknowledge that with so many people trading off of technical price points, they are valid, if for no other reason than so many people are using them.
In “Technical Analysis for Dummies,” Rockefeller describes many technical tools that can help you identify trends. “Spotting trends,” (below) shows a simple line chart of the S&P500 cash index. The blue line is a 13-day simple moving average that smoothes out the noise of daily volatility, giving you a better understanding of the prevailing trend.