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TRADER'S NOTEBOOK


Choosing Charting Software

11/08/10 02:07:06 PM PST
by John Devcic

What kind of software you need to chart depends on how you trade.

For years, charting software was considered to be only for the professional trader: the trader who could afford to pay for the (often very expensive) software as well as the datafeeds necessary. Well, that is no longer the case. These days, charting software is available for traders of all levels.

Charting software isn’t just for your computer, either. The Internet has helped to give rise to a multitude of charting choices. There are so many choices, ranging from products for Apple Macintosh computers to the PC, and a variety of web browsers. A few years ago, it was difficult to acquire software that ran on Macs, but that’s not the case anymore. The array of choices are good but can be very confusing, especially for the first-time buyer.

The best place to begin is to understand what kind of trader you are and your trading style. This is key information when determining what kind of charting software you will need.

WHAT KIND OF TRADER ARE YOU?
Daytrader: If you are a daytrader, you either have one charting program or even a couple with which you trade. Those of you just beginning to daytrade will need to get at least one. You will need a reliable one that can perform backtesting. With backtesting, you can calculate your win-loss ratio as well as how large your average drawdowns are. You will need to be able to trade directly from the chart; look for one that allows you to trade directly from the chart. This feature was once only seen on the most expensive charting programs, but that too has changed, and it is now available on most charting software choices.

Technical trader: Market technicians love charts, and they can have many different charts open constantly on their computers looking for patterns. If you are a technical trader, the chart is your best friend and key to your trading success. A profitable charting program will allow you to not only have many technical tools from which to choose, but it will also allow you to manipulate the chart. You will want a program that allows you to make the chart easier to read, allowing different colors as well as different sizes. You should consider multiple monitors so you can analyze multiple charts quickly.

Self-directed trader: This is where the choices really matter. If you are self-directed, you need to find the right software for your needs. Trading directly from your chart can be important to someone who trades during market hours. It’s not as important to the trader who only needs end-of-day (EOD) data. You may want to have it linked to your brokerage account so it can automatically show you how your portfolio is performing. You will want to be able to backtest your system or trading plan to see how it is faring.

Many technical indicators do not necessarily improve a chart. Using a lot of indicators on a chart without knowing how they work or, more important, understanding your level of comfort with those indicators can only hinder your trading. Remember, the chart is only a picture of the securities price at a given time. You are using it to ease your trading decisions. Use only the indicators you are comfortable with. Practice using new indicators before using them live.

Computer-based or online? The debate between computer-based software and online charting software is no longer an easy one to answer. Modern computers are faster, and the programs offered online are robust and good in their own right. Obviously, the online software cannot compare to the many features offered by software on your computer’s hard drive. Online charts have many of the same features offered by charting software meant for a computer. For many, this is an excellent alternative.

There are a few things to be wary of, one of which is the datafeed required. Because the software is online, the datastream may be delayed slightly. This can pose a problem during a very volatile market when prices are moving quickly. You will need an Internet connection, of course. Not many online charting programs allow you to save the charts for later use. If you are interested in backtesting your trading strategy, you will have to use a hard drive-based program. While online charts have come a long way, they still cannot compare to the charting programs installed on your computer. If you are a self-directed trader or investor and need to view charts but have no need to trade from them directly, online charts can be an excellent solution.

Both have their drawbacks, of course. Both can be taxing on your current system’s resource, since charting programs can slow a computer down. The ones offered online are usually rendered in Flash or Java programs, which can tax your system as well. They will be slower to use than a program on your hard drive. Knowing the type of trader you are will help narrow the choice. Far more important is the idea that a trader, no matter how advanced, can use both. You can easily have your charting program do the backtesting while using an online chart to test out some other trading ideas.

DATA
I have neglected to mention the most important part of any charting software: data. The kind of data you require will also come down to the type of trader you are. One of the biggest costs of charting software can be the datafeed. Live datafeeds are essential for many traders, and this does not come cheap. Live datafeeds for multiple streams can get very expensive very quickly. You have to know what kind of datafeed you will require before you purchase charting software. EOD feeds are the cheapest of all and frequently free. This feed usually contains the high, low, and close of the day, which can be quickly plotted by the charting software. You can get away with using EOD if you are backtesting, but if you plan on trading from a chart, you will need live feeds. There are a few charting software developers that tie the datafeed in with the price of the software. Some will have a reduced price or give away the software if you purchase a monthly data subscription.

No matter your level of trading experience, charting software can be useful. The wealth of choice is astounding and can even be confusing, especially for a trader who has never bought charting software before. It is important to understand what kind of trader you are first and narrow your search based on that criterion. Of course, price will play a significant role in your software choice as well.

To a lesser extent but important nonetheless is your computer. Whether you are using computer-based charting software or something that resides on the Internet, you will need to make sure your computer can handle the job. Do not simply assume your computer can handle online charts. Online software can be tested quickly and easily.

If, on the other hand, you only want or can use a computer-centered program, you still have options. Some software makers allow you to try out their charting software for 30 days free or for a small fee before you make a decision.

Installing and uninstalling all the various choices of charting software can be time consuming. Talk to fellow traders and self-directed investors to help narrow your choices.



John Devcic

John Devcic is a market historian and freelance writer. He may be reached at drmorgus@gmail.com

E-mail address: drmorgus@gmail.com


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