Software packages – mostly based on technical analysis – have become a popular investment tool, for the ability they give investors to crunch the price and volume numbers that technical analysis needs, to organise and present the data, and highlight stocks that fit certain technical (or fundamental) criteria.
But software packages are not a ‘magic bullet’ for share trading success. The simple fact is that no software program can think for you, and give you the knowledge – and the discipline – you need to make money on the sharemarket.
“You can’t buy a trading software package and simply expect it to make you money on its own,” says Charles Browne, president of the Australian Technical Analysts Association (ATAA). “They are good tools to have in the toolbox, but they require quite a bit of understanding to use well.”
Investment software packages come in four basic categories: portfolio management software, charting/technical analysis software, scanning software and fundamental analysis software.
Most software packages are charting/technical analysis packages. The ATAA divides charting software into three categories:
1. ‘Tool boxes’ (or ‘white boxes’): Software that creates charts from a data base of market prices, volumes, open interest and other specialised data series. A tool box also calculates indicators from the database and draws charts, but doesn’t tell its user to buy or sell shares: the user performs the analysis and makes their own decisions. A tool box describes the reasoning used (that is, the algorithms, or methods of computation, which analyse price and volume data from the market) which is built into the computer program, and allows the user to incorporate their own trading rules, by altering the setting.
2. ‘Black boxes’: Software systems that generate buy and sell recommendations through proprietary (undisclosed) algorithms. Investors using a ‘black box’ are relying totally on the program. If the black box reasoning is wrong or unreliable, you won’t know; nor will you have any control over the settings. You will also not be able to properly assess the level of risk in the program, and whether the risk matches your own risk tolerance. The Australian Securities & Investments Commission (ASIC) requires software vendors to be licensed if their program generates buying and selling advice. An ASIC licence means that the people involved meet basic standards, including membership in a complaints resolution scheme.
3. ‘Grey boxes’: These systems resemble a black box in that they generate trade suggestions from proprietary algorithms, but they provide a general idea of how the formula works and sometimes allow the user to modify the settings or parameters. They may also have an associated tool box component. If they are expensive, they are probably disguised black boxes, says the ATAA, which recommends that they should be evaluated the same way as a black box.
Toolboxes are by far the biggest sellers, says the ATAA. It offers a very helpful trading software survey (available to non-members for $19.95, through the association’s website at ataa.com.au), which compares the features of more than 50 trading-related software packages and stock market data vendors available in Australia.
Most software packages on the market come bundled together with data supply, at least for the first year. Andrew Doig, senior analyst at charting and technical analysis education firm SpiWatch, says that for somewhere between $1000-$1500, the average investor can buy a package that has “all the bells and whistles they could ever want” in terms of studies, tests, indicators and overlays.
The most prominent brands of fundamental software on the market are Stock Doctor, Value Gain (both standalone packages) and MetaMarket+, which is designed to integrate directly with the MetaStock charting software package.
Another popular package is ShareFinder, a mechanical software system that uses criteria based on price, volume and relative strength – the relative comparison of a stock’s price action against the S&P/ASX All Ordinaries index – to trigger trading signals.
But all of these products are tools – they are not guaranteed means to making a fortune. Unfortunately, there are enough people looking for easy, work-free success on the sharemarket for there to be a lucrative market in financial snake-oil: a package or a process that would-be multi-millionaires can simply plug into, and start making money.
This is the province of the self-appointed gurus who have discovered the secret of success in the stock market: a process that consistently makes money. Better still, they are prepared to sell it to you, if you attend their seminars, see their spectacular purported success-stories, and sign on.
“Australian investors are very susceptible to this kind of thing. They can be very financially naive,” says consumer advocate Neil Jenman.
“We see this all the time in both sharemarket and property investment seminars. Any investment or trading expo is crawling with some very dodgy operators, promising all sorts of easy riches. There are some very good and worthwhile products too, but it’s definitely a case of ‘buyer beware’.”
Jenman says ASIC (Australian Securities and Investments Commission) has “barked as much as it can”, and it has had some success with some of the American ‘spruikers’ of packages and processes – for example, making them say upfront that they are not licensed to give financial advice in Australia. But he says the scrutiny from ASIC has forced spruikers to switch their marketing from newspaper and magazine advertisements to the Internet – mining databases and sending invitations to ‘webinars’ (online seminars) by email – where it is much more difficult to police.
“If you feel like buying a particular investment package or product, do some basic research on it. See if it is sold by independent retailers, see if it is competitively priced with similar products, see if it has been back-tested. Get some independent advice – the more the better. Treat the glowing testimonials with a grain of salt. Be very wary of claims of people earning a high return trading stocks, or making a certain amount of money over a certain period. It’s usually too good to be true.”
The most important thing, says Jenman, is to know what you’re getting into. “I mean, why would you buy an astrology program for making money on the sharemarket? The stars are for looking at, at night.”