How To Evaluate Technical Analysis Software

Traders have options when it comes to technical analysis software: either use what the broker offers, or purchase a software package. One way to decide which choice may be best is to think about the features necessary to implement your trading system. Here are a few ideas --

Graphing price is the basic feature in most technical analysis packages. The software allows the user to plot charts in a variety of ways: candlesticks, bars, and lines. It should also allow you to draw trend lines and horizontal lines for support and resistance. It's a nice bonus if you can write on your charts -- it helps to keep a few notes about reasons for the entry, stop, etc.

Back testing is very useful to test the viability of your trading system. You'll need to understand the formula language the system uses in order to write the formula to test your trading system. Some formula language can be quite difficult. See if it's possible to download a manual from the vendor and read through the section on writing formula code. It's even a good idea to ask the sales person if technical support can help with this function.

Optimization isn't so important, but is usually a part of the package if the software offers back testing. Optimization is fine-tuning your trading system to find the peak settings for the strategy's rules. This could be an entire discussion by itself.

It seems to me that traders trade and formula writers code software. In other words, you don't need to worry about optimization. If you thoroughly back test your strategy it will become apparent if your strategy is sound, or not. Test over many years, during up and down years, and during sideways markets. If you can be honest with yourself you'll realize if you have a good system. Optimization can lead to curve-fitting that can lead to unrealistic expectations.

A scanner is a great component to have. It should allow the creation of many of scans that can be saved, retrieved and implemented with ease.

Alerts are helpful. A simple alert could be a buy or sell indication on the chart. More elaborate alerts are designed to go to an email account or a hand-held device. It just depends on the amount of “contact" you need or want if away from your computer for the day.

Indicators are something with which you don't need to concern yourself. Most software comes loaded with loads of indicators -- many more than you need or likely want. What is nice is the ability to customize indicators. For example, a custom indicator could be a weighted Relative Strength Index (RSI), or coloring rising price in one color and declining price, another.

Another feature, that is more common, is the power to overlay multiple indicators in the same pane. This is very useful if you have a system dependent on multiple indicator criteria. For instance, it's nice to display a 7 period, 14 period, and 40 period RSI in one pane. In addition, displaying the moving average of the RSI would be another example of a multiple indicator overlay.

A good, clean, timely, data feed is critical. You get what you pay for with data. Free data is often error-ridden, late, or unreliable. Buying data separate from the software program can be costly. Try and find a bundle of software and data. If it meets your needs it will save some serious coin!

Much of the software for sale, but not all, has a broker interface. This allows order entry directly from the program. It's not a necessity, but more of a personal preference.