Leverage is the lure, but beware the hazards. It's rough out there. But new strategies are helping many daytraders stay afloat. Anecdotal evidence suggests daytrading may be coming back, in a slightly different form. If you can't beat the market, join it, writes the author of a recent book. Wouldn't it be great if you could devise a trading strategy, test it against historical data for five months, five years, whatever, and then let that system run on automatic for a while -- paper trading so you can see how it works?
In fact, software lets you do just that has existed for years. Problem is, the programs have been so clunky that only hardcore programmers could use them. Or else -- as I talked about in a column in March -- the software was locked away in the backrooms of investment firms. Now analytical trading software is beginning to creep onto the Web.
Whether that's good or not we can deal with in a moment. But the fact is, right now you can register with several Web sites and test drive strategy-developing software for free.
Moreover, at least one online brokerage plans to make analytical trading a major part of its service package. Robotrader First, what exactly are analytical programs and how do they work?
Many function a little like the stock screens I wrote about in June. To use them, you first devise a series of rules you think should govern your trading. An example might be: Different programs allow you to create trading strategies for futures, options and currencies. In all cases, you just fill in the blanks, as in a questionnaire, denoting all the criteria you wish to use. A stock screen will then spit out a list of companies that fit the bill. But analytical programs go a step further.
They'll search for companies that met your criteria, say, two years ago. Then, acting as if they purchased shares of those stocks two years ago, they'll track the progress of the investment using historical market data.
In that way, they're able to test whether your strategy would have made you rich or poor. The term for this is back testing. As a next step, analytical programs will paper trade stocks that meet your selection criteria. This is called forward testing. And here again, you get an ongoing view of how well your system works. Finally, in the course of your live trading, the best of these programs scan through terabytes of real-time market data and alert you when a trading opportunity arises -- as always, based on the rules you've defined.
That's the gamut of things these programs can do for you. A couple of Web sites now offer pieces of this functionality for free. For example, the stock screen at CNBC allows you to build a fairly complex search that brings up a list of companies.
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In addition, a nice graph comes up to show you how well your strategy would have performed month to month over the past year. And in that way the site is similar to siXer. All these free sites use analytical software to generate buy and sell signals. It would be nice if more financial Web sites were this forthcoming. So let's say you choose America Online AOL.
Tell the program how much of a gain you want each time you enter a long position. Now here's where AboveTrade. You then choose from a handful of canned strategies.
Specifically, a graph of the stock comes up showing your suggested entry and exit points for the test period. If your strategy turns out to be a winner, you can look for parallels between how the stock charted in the past and how it charts currently and then trade accordingly. Devising even this sort of simplified strategy can be time consuming. The trading systems I built on AboveTrade.
Maybe that was just my luck. This feature reminds me of the amateur stock recommendations you find at sites like ClearStation. Except that instead of swapping stock recommendations, people at AboveTrade. It's all a lot of fun.
But, as I hinted earlier, AboveTrade. For that matter, I wouldn't bet the house on a strategy spit out by the CNBC stock screen or the Tradetrek. Serious Stuff Lots of companies market more serious analytical programs on the Net. The magazine Technical Analysis of Stocks and Commodities traders. The leader in this category has long been TradeStation from Omega Research.
TradeStation has its own programming language, as well as an extensive list of canned strategies to choose from. The program's users have always been a close-knit subculture, like Airstream trailer owners. They meet at annual conventions and belong to user clubs throughout the country.
And they actively sell or swap the trading strategies they've devised. But sometime in September, Omega Research plans to merge with the Internet active-trader brokerage OnlineTrading. When that happens, TradeStation won't be sold as a stand-alone package.
Instead, it will be integrated with OnlineTrading. The idea, of course, is that you can program in a trading strategy using TradeStation, then back test and forward test it.
And when you're ready to go live, you just pull the trigger whenever your system spots an opportunity -- a nice package.
And Omega Research co-founder Ralph Cruz believes he can count on TradeStation's 45, strong customer base to be among the first to migrate to the new service, which will be called TradeStation. A popular daytrading brokerage, CyBerCorp.
CyBerQuant allows you to do real-time stock screening, but it doesn't back test the results. So will back testing and other sophisticated trading strategy development tools become part of every active trader's arsenal?
Cruz believes leaving it to a computer to plan and execute your trades will take a lot of angst and uncertainty out of the job. TradeStation is based on the premise that the best way to be successful is to isolate your emotions from your decision-making. Action Alerts PLUS is a registered trademark of TheStreet, Inc. You are using an outdated browser. Please upgrade your browser to improve your experience. Jim Cramer's Best Stocks for Most Recent Trade Alert. Subscribe Access insights and guidance from our Wall Street pros.
Find the product that's right for you. Aug 5, Jul 20, 8: Still Some Life in the Trenches: Daytraders Sound Off It's rough out there. Jul 11, Return of the Daytraders? Jul 5, Armchair Investing If you can't beat the market, join it, writes the author of a recent book. Jun 27, 4: Twitter's Stock Surges on Positive Feedback from Advertisers.
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