Technical
analysis software
automates the charting, analysis and reporting functions that support technical
analysts in their review and prediction of financial markets (e.g. the stock
market).
Overview
The following are
the most common features of technical analysis applications. Some software may
focus on only one aspect (say back testing) and the combination of more than
one software package is often required to build a fully automated trading
system.
Charting
A graphical
interface that presents price, volume and technical analysis indicators through
a variety of visual interfaces such as line, bar, candlestick and open-high-low-close
(OHLC) charts. The chart data is presented as a time series and users typically
have the ability to view historical data with varying interval (sampling)
periods. Interval periods range from seconds through to months; short term
traders tend to use frequent interval periods, such as 1 minute i.e. the price
data is updated every 1 minute, whereas longer term traders tend to use daily,
weekly or monthly interval periods when trying to identify price and technical
analysis trends. Some charting packages enable users to draw support and
resistance trend line or for example Fibonacci retracements to help establish
trending patterns.
Back testing
Enables traders
to test technical analysis investment timing strategies against historical
price movement for one or more specific securities. Strategies are compared to
each other using diverse performance measurements such as maximum drawdown,
annual profit and Sharpe ratio. The objective is to try and develop a trading
strategy based on technical analysis indicator criteria, which will generate a
positive return. This concept was computerized and introduced to traders by Louis
B. Mendelsohn in 1983 with his ProfitTaker Futures Trading Software (see August
2010 issue of Stocks, Futures &
Options Magazine).
Optimization
A process of
testing technical analysis indicator parameters, with the view to developing an
investment strategy that generates the maximum return based on historical price
movement. The optimization process is achieved through the fine-tuning of the
associated technical analysis charting parameters. Typically technical analysis
indicators have a range of parameters that can be adjusted, such as the
interval period and the technical analysis indicator variables. For example,
the stochastic indicator has four parameters that effect its
results: %k, %d, slowing period, interval period. Optimization must
be performed carefully to avoid curve fitting. Back testing of an
over-optimized system will perform real-time. One way to diminish
over-optimization is by carrying out optimization on historical data and then
performing future testing (sometimes referred to as 'out of sample') before
making a final evaluation of a trading strategy.
Scanner
Scanners enable
users to 'scan' the market, be it stocks, options, currencies etc., to identify
investment opportunities that meet a user's specific investment criteria. Using
a technical analysis scanner, a user could, for example, scan the market to
identify oversold stocks that have stochastic and RSI value of less than 20%
and 30 respectively.
Alerts
Alert software is
used to monitor specific equities, such as stocks, options, currencies, warrants,
etc., and provide a notification of when specific price, volume and technical
analysis investment conditions are met. As an example, a person who uses
technical analysis might want to be notified when the RSI indicator rises above
70, followed by the price falling below its 20-day moving average; using
alerting software the user will be able to create an alert, which will provide
a notification of when the technical analysis investment conditions are met.
When alert conditions are met, a notification is typically communicated via an
on screen pop up or sent as an email, instant message or text alert (to a
mobile phone).
Custom Indicators
Most technical
analysis software includes a library of de facto standard indicators (e.g. moving
averages and MACD). Some software will also provide a means to customize,
combine or create new indicators. This is typically achieved with a proprietary
scripting or graphical language.
Data Feed
Technical
analysis software is typically used with end of day (EOD), delayed or real time
data feeds. EOD data feeds provide the end of day closing price for the given
equity and is typically updated once a day at market close. Delayed data is
typically delayed 15 to 30 minutes depending on the exchange and is the most
commonly used data feed type. Real time data feeds provide tick by tick 'real
time' data. Real time data is licensed on a per-exchange basis whereas delayed
data is typically purchased on a regional basis, such as US markets, rather
than an exchange basis.
Broker Interface
Some technical
analysis software can be integrated with brokerage platforms to enable traders
to place trades via a user interface that they are familiar with. Typically
these software providers try to differentiate themselves from the brokerage
software through enhanced features such as automated trading.
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