The purpose of this book is to introduce you to a range of what the authors consider are some of the best technical trading software packages around. New versions of software like this come along with a fair degree of rapidity, so rather than focus exclusively on what these products do now, we wanted
Technical Trading SofrvvARi - The Investor's New Weapon 3
to get behind the software to understand the guiding principles that the developers adopt, and how they use the product themselves. We believe the insights that these developer-traders contribute is the most useful way of learning about a package.
Each of the remaining chapters of this book - apart from the last - is structured in the same way. We start by looking at the ideas behind a particular style of technical trading, attempting to explain them in layman's terms. At the beginning of each chapter is a glossary of the technical terms used. Some key web addresses for further reading and education are at the end.
In each chapter we then look at one or two software packages that you can use to apply to your own trading activities. The software sections come in two parts: the first is a description of the package and how it works; the second is a Q&A style interview with the developer.
For this Q&A section, we started out on the interviews with the same list of questions. Inevitably the interviews took a slightly different course in each case. But there are common threads. And the responses to two key questions we asked all of our interviewees are contained in Chapter 10.
These key questions were: first, whether or not it was possible to devise a technical trading system that would give the correct signals all of the time -the "Holy Grail" of all traders and software developers. Second, in an echo of the classic question posed to all those who market any form of investment product - "if this is so good, why are you sharing it with me?"
This goes back to a criticism that is often made of technical analysts. Many technical traders are portrayed in the press as seedy, obsessive or unsuccessful individuals who are selling their systems because they have nothing else to sell. The question is sometimes posed in the form "if this is good, why aren't you rich?"
Nothing could be further from the truth. All of the individuals interviewed in this book are, as far as we are aware, wealthy and successful traders, and in some cases also successful and professional money managers and investment advisers. The products and techniques featured in this book are not those of charlatans, but of highly successful individuals.
One word of warning, though. There is a common thread that links alt of them. They are talented traders and disciplined individuals. Trading the financial markets is a demanding discipline that requires those who pursue it to follow some key rules (see in particular the money management disciplines outlined in Chapter 3). These traders and developers started as successful and disciplined investors. It is just that their particular method, and the software they have devised to take advantage of it effectively, has given them an extra edge.
Second, not all of these techniques will be for you. It's important to fit the technical trading system you use to your own investing style. What's right for you will depend on the capital you have, your appetite for risk, the time you have available to devote to trading, the instruments that are easily accessible in your particular market, the dealing costs that are prevalent in your particular market, your own interests, and many other factors.
Most traders are curious individuals. Even if you are an experienced trader, we hope that you will take the time to explore these different trading styles. Who knows, you may find one that is even more effective for you than the one you use now. If you are a newcomer to trading, then we hope this book will give you an inkling of what technical trading is all about and allow you to work out what trading style to follow. There are books and web sites profiled in Appendix 2 and Appendix 3 to help you.
how this book is organized
We've already described how each chapter is structured, with the theory, software descriptions, and interviews.
We start, in the next chapter, with two all-purpose technical trading software packages that will be a good introduction to any newcomers to the investment software scene.
Chapter 3 covers money management and market timing. Being disciplined in money management is the key to not losing your shirt and making a reasonable return on the capital you have invested. These are rules to follow to the letter, and there is software to help you do it.
Getting the market direction right over the period you are trading is vital to making good trading decisions. This is true not only if you are trading market instruments like index futures and options, index-tracking mutual funds or exchange traded funds, but also if you are trading individual stocks. Even the cheapest of stocks is unlikely to respond if the market is crashing at the time. There is a software package that can help you to look at the underlying technical condition of the U.S. market - the most important in the world - through examining a wide range of proven technical indicators.
Chapter 4 iooks at astrology software. Many traders hold that natural laws and phenomena, including the planets and planetary movements, can help guide trading decisions. This chapter looks at the theory, at one particular software package, and interviews two traders who have been successful in applying astrology to their trading.
Chapters 5, 6, and 7 look at three closely related sets of theory and trading technique - Gann, Elliott Wave, and Fibonacci - together with some key software packages and developers who have made these techniques their own.
All of these techniques are related. Gann and Fibonacci in particular are closely linked, because they are both based around number theory and relationships between numbers. Astrologer-traders often counsel, too, that number theory should be mastered before using astrology techniques to trade. There are links in reverse, too. The legendary trader WD Gann, founder of the eponymous trading theory, is also believed to have used astrology as part of his decision-making process.
Chapter 8 looks at mainly short-term cycles and how thev can be identified and traded, and at one of the best packages you can use to incorporate this into your trading.
Chapter 9 looks at multiple time frame analysis - how to incorporate the key technical indicators in different relevant time periods into your decisionmaking. This is an arguably less wrell known technique, but one that is both venerable and highly successful. There is an interview with the developer of the best known standalone software product that incorporates this technique.
Chapter 10 contains the collected answers of the developers interv iewed to our two key questions.
Appendix 1 is a detailed examination of the key considerations to bear in mind when you are (1) selecting a software product to use, and (2) when you are testing the results produced by a system of your own devising.
Testing in this way is looked at in two parts: back-testing (testing the system on all previous data you have available) and walk-forward testing. Walk-forward testing is when you take the results from one historical period and devise trading rules based on that data, and then test them on the price data for a successive period. Often this shows up flaws in the way trading techniques have been devised better than straightforward back-testing might. Those who are new to technical analysis in general and technical trading software in particular can omit this part of the appendix for the time being.
Much of this appendix is reproduced from an edited version of two articles published in the magazine Chartpoint in 2002 and written by Ian Copsey, There is also a description of system testing software that can be used to automate the testing process and an interview with its developer.
Appendix 2 lists the demos of some of the featured software in the CD included in this book. It is hoped that the demos will give a feel of how the software works.
Appendices 3 and 4 contain information on books and web sites related to technical analysis and technical trading software. Appendix 5 contains a glossary of useful terms.
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