A stock market trading system is simply a set of rules that you follow to trade stocks. This is termed a technical analysis method as opposed to a fundamental analysis method where one uses a company’s performance data to decide whether or not to buy a stock.

People that use fundamental analysis like company reports and economic data usually buy stocks as an investment intending to hold them for an unknown length of time (buy and hold method) while technical analysts are usually traders that buy and sell stocks based on fixed rules or chart patterns.

That is, they know when they will enter a position and exit it with no discretion for a purely mechanical system trader if they stick to the rules.

Most fundamental analysts will tell you that you cannot beat the market and that technical analysis methods are a close cousin to Voodoo but the reality is technical methods and stock market trading systems have been proven over time to work.

What hasn’t worked for so many people over the years is buy and hold but we’ll leave that discussion for another day.

The reason chart patterns and stock market systems work is because, like history, markets tend to repeat themselves and astute traders have been able to identify these patterns and exploit them giving rise to the term the trader’s “edge”.

It is these little edges that any trading system is looking for that will let a trader get into a position with a high probability of making a profit overall.

Notice I didn’t say a high probability of making a profit on each trade. This is because all trading systems whether based on stocks or commodities like oil are prone to periods of bad trades.

This doesn’t make a system bad necessarily; it just is a reality of trading. Many trend following trading systems like the Turtle Method have been extremely profitable over the years despite a relatively low hit rate (percentage of winning trades vs losing trades) and long periods of drawdowns (multiple losses in a row).

This is what makes stock market trading systems kind of a paradox (if that is the right word). A good trading system can be shown to make money having been thoroughly tested and traded with live money for years yet there will still be people that take the exact same system and consistently lose money until they blow up their trading account.

Why is this? Simple it is because of the two basic emotions that drive the market, fear and greed. Many people buy a stock market system thinking that all you have to do is push a button and the money just rolls in.

First off, the best systems have been developed over years of extensive testing and hard work and no one in their right mind would sell such a system for $500 no matter what story they tell you.

Second, the systems that are for sale and are robust are only good as the system trader using them which brings me back to fear and greed.

An undisciplined trader can take a valid trading system and start to trade stocks with it. The first couple of trades go against them and all of a sudden faith has been lost in the system.

Couple that with a fear of losing money and now the trader becomes paralyzed because they cannot pull the trigger to close their losing position even thought the system (which has proven over time to work) says to liquidate.

Now the trader thinks the system doesn’t work and goes into a hope and pray mode of trading which inevitably ends up losing them money, often lots of money. Now the downward spiral begins as the trader takes the next signals from their stock market trading system.

Still stinging from the prior losses they see the stock start to move up to a point where a nice profit could be had as the trading system signals an exit. A real trader takes the profit and moves on but in our story the trader starts to think that now they are in profitable territory they can manage the trade and wring out even higher profits.

While experienced traders can and do trade this way using exit stops that they continually adjust our trader ignores any stops because they can just feel that the trade will turn around and go even higher and besides they want to make back the slippage in profits that just occurred.

You can probably guess what happens next, our system trader allows the position to move against them to the point where they are now sitting with an open loss and eventually they get frustrated and hit their “uncle point” and sell once more defeated by the evil market.

The moral of the story here is that no there aren’t any stock market trading systems that you can buy where you push a button and double your money every week or month but yes there are very good stock trading systems that will let you make money in the stock market as long as you learn to control your emotions and follow the rules.

When you hear the words stock trading software what do you think of first? When I get that question I have to always say, “It depends.”

Is it a computer program that generates buy and sell signals that you follow without knowing what the rules are that issue the trades? If so you are using a “black box” trading program and since you don’t know how the system was programmed you are at the mercy of the developer as to the effectiveness of the system.

While “black box” stock trading software can be robust I usually steer clear of anything that is kept secret from me because for all I know it is s simple coin flipping program that determines buy/sell signals.

Maybe to you a stock trading software program does disclose some of the rules used in the calculations but the “secret sauce” remains a mystery to all but the programmer. These are called “gray box” trading systems and once again I tend to shy away from these.

Stock trading software can also mean a program that fully discloses the rules used in the algorithms and these are the best types for anyone wanting a mechanical trading system because they can analyze and sometimes improve the system. It is also easy to check if a system has been over optimized by doing your own independent back testing.

A stock charting package that allows you to plot trend lines and indicators like a moving average or MACD are also a form of stock trading software and some times these charting packages incorporate a system module that you can use to program your own trading systems and test them. MetaStock is a good example of this type of program.

Other stock trading programs are built to run multiple systems on massive numbers of stock symbols to try and isolate good trading candidates. OmniTrader is my favorite program for this type of trading.

Finally, there are some high-end programs that are built specifically for testing systems. These programs feature extensive back and forward testing capabilities as well as more complex functionality like out-of-sample data testing and Monte Carlo simulations. These usually require some degree of technical knowledge and are not geared towards the beginner or casual trader.

Stock trading software also comes in a range of prices from free to thousands of dollars and price alone should not be used to determine the overall quality of any software. I will say that free software can be good but it is nowhere near the level of software that you pay for.

On the other hand, I have seen some very expensive software programs that I felt were way overpriced particularly those that are complete rip-offs that are constantly being foisted on the unsuspecting public.

This is the type of stock trading software that most people think of, the kind that promises a simple, fast “push button” way to make money in the stock market.

Of course the reality is that these programs don’t work and the simple reason is if trading were that easy everybody would be doing it.

A stock trading simulator is designed to let you trade stocks without risking any real money so you can sharpen your trading skills without risk.

One type of stock trading simulator is the kind found in trading software packages like OmniTrader. These use historical data and you generally pick a start day and then run a scan on a group of symbols, make your trading decisions, and then run the next day and so on until you stop or run out of data.

The other type of trading simulator allows you to set up a dummy trading account that you can use to make trades in real time. This is exactly like real trading in all respects except the money is not real.

While a stock trading simulator sounds like a good idea because you get to practice trading without risking any real money the reality is that these do little to prepare you for actual stock trading.

Why? Simple, unless you have real money at risk you will not, and I mean WILL NOT, make the same trading decisions that you would make with a stock trading simulator where you have no risk.

The reason for this is because human emotions will take over as they inevitably do and you will make trading decisions while supposedly practicing with a stock trading simulator that you would not make in real-life trading.

The only exception to this is if you have a mechanical trading system and you follow it to the letter because if you follow your trading rules exactly you will have removed the emotional component of trading that causes problems for so many would-be stock traders.

I have used stock trading simulators to practice my discretionary trading skills and can tell you that it is so easy to trade with these and make “money”. You can just cruise along and take trade after trade and you feel like you’ve got this trading thing down.

You even start to wonder how it can be this easy while others seem to struggle with trading. Maybe you are just smarter than most people? Maybe you have the trading instinct etched indelibly in your brain.

Whatever the reason you finish learning to trade with the stock trading simulator and then decide it is time to start making the big money so you open an account and begin to trade.

Can you guess what happens to most people once they put that first trade on and it starts to go against them? They get that deer in the headlights look and freeze. They are afraid to get out of the position with a loss. They feel that they can will the trade to go the way they want.

All of a sudden those many hours of practicing have flown out the window and now when there is real money on the line they panic. Some will tell themselves that they will get out if the stock can just get back to where they can break even. They never do though thinking that the trade is finally starting to go their way.

Others, and I myself have done this, get the ostrich attitude and bury their heads in the sand and ignore the trade as it continues to deteriorate because they cannot stand the pain.

These people usually wait until the trade is so far gone that there is little hope of any meaningful recovery and then they finally get the courage to close the position telling themselves they now have a nice tax loss to offset all of the profitable trades they have made.

So, the moral of the story is this…

If you do use a stock trading simulator realize that even though it is technically the same as trading with real money the reality is it is not the same and you need to be aware of this before you start to risk any trading capital or you will quickly find that you really haven’t learned anything.

Years ago whe I was heavily involved in learning stock chart patterns for trading purposes I bought many stock pattern software programs that were supposed to automate the stock pattern recognition process.

Stock patterns have been a long time staple in the technical analyst’s toolbox and while many fundamental stock traders and academics with no real-world trading experience will try and tell you that stock chart patterns do not exist and are not a valid way of trading there is enough empirical evidence to show that trading with stock chart patterns can be a profitable endeavor if done correctly.

The main problem with any program that attempts to discern stock chart patterns is that while a trained eye can quite easily identify discrete patterns on a stock chart it is extremely difficult to program a computer to recognize them.

This is because modern computers with all of their vast computational powers cannot even come close to mimicking the human brain in “seeing” patterns on a chart. This is in direct contrast to software that identifies setups on a chart based on a mathematical analysis of technical indicators like MACD or a moving average.

These algorithms form the basis for most trading systems in use today and they are actually quite easy to program once you define the rules that make up the system.

Back to stock chart patterns…

Once you learn to identify something like a head and shoulders or double bottom pattern you can begin to see the complexity in trying to program them into a stock pattern scanner because on one chart you might have a head and shoulders pattern that develops over 50 bars of data while on another chart it develops over 80 bars.

Does a double bottom have to occur within 10 price bars or is it still valid if it is within 20? These are the questions that are subjective for the most part and thus it makes it difficult to express the answers in a chart pattern recognition program.
I have seen some software do a decent job at identifying some basic patterns but that is because they have established tight tolerances for each pattern so as to get the most accurate hits.

This of course means that other equally valid patterns will not be identified because they might have fallen one price bar outside the parameters set by the programmer. This is neither good nor bad, it just is the nature of the beast and you must keep that in mind if you try and automatically identify patterns on charts.

In closing I would say that if you find a good stock chart pattern scanner that gives you the results you want please do not use it as a mechanical trading system or you will most likely end up on the losing side of most of your trades.

Instead, use it to identify potential trades or to confirm a trade you are contemplating as for now this is the best way to use stock chart patterns in your trading business.

Many traders are discretionary traders in that they scan stock charts looking for trade setups and then put on a trade if they feel there is a good enough risk to reward ratio.This type of stock trading is more subjective and takes a lot more skill than system trading and those that are successful at it have lots of practice at identifying profitable chart patterns with many trades under their belt.

I have read countless books on trendlines and chart patterns and have come to the conclusion that trend lines, support and resistance lines and various chart patterns do exist and repeat themselves over and over again allowing a savvy “chart reader” to make profitable trades.

One of the downsides to this type of trading is that the eager trader looking for action often sees patterns on a chart that just aren’t there because they want to get in the game instead of waiting on the sidelines.

Not taking a trade is just as valid as taking a trade from a professional trader’s perspective. A wise trader knows when to pass on a trade and stand aside. They know that they do not have to be in the market every day.

One of the main problems is trying to quantify just what makes up a chart pattern. While it might be relatively easy for the human mind to quickly determine if a triple bottom has formed on a chart it is extremely difficult to create an algorithm to mimic what our brains can do so effortlessly.

There are a few software programs available that do a pretty good job of automatically identifying trendlines and patterns like OmniTrader’s Chart Pattern Recognition Module and another that I would like to talk about.

About four years ago I stumbled on a program called RAMP that did basic trend line and support and resistance scanning. I trialed the product and while I thought it was pretty good I did not buy it because it did not fit into my trading plans.

Every now and then I get an email from Andy the author describing new features and capabilities so I thought I would take another look at RAMP to see what’s changed.

My impressions of RAMP have not changed. In fact, I think that a great program has gotten better and more powerful over the years. First, this shows that Andy is dedicated to making an excellent product and second it shows that he recognizes the need to keep adding features to the product in order to stay on the cutting edge.

Ramp will quickly scan from a wide variety of data sources and identify support and resistance lines, trendline breaks, Fibonacci retracements (cool) and some chart patterns.

It is fast and worked flawlessly while I was testing it and Andy was very responsive to any questions I had. While I do not own RAMP it is only because of my style of trading and not because it isn’t a great technical analysis program, it is.

I have never run across any mention of RAMP during my travels on the web that I can remember so I thought I would write a little post about it to raise awareness about a neat program that would benefit many traders.

[rating:4.0]

Several years ago I became fascinated with Darvas Boxes after reading “How I Made $2,000,000 In The Stock Market” by Nicolas Darvas.

This book is considered by many as a trading classic and I read it at least twice myself. It is an easy read but is filled with some great insights into price action and is a “must read” book.

Who was Nicolas Darvas?

Darvas was a world famous ballroom dancer in the 1950s that learned to trade stocks while touring the world performing with his sister.

What makes his story so interesting is that he devised a trading system that looked for stocks making new highs and traded them by telegram using closing stock prices.

Since he made his trading decisions without the normal market noise of news and intraday price fluctuations he could remain totally objective which is something we all need to achieve in our own trading isn’t it?

Darvas Box Method

Put simply, Darvas constructed “boxes” (similar to a channel breakout) around a stock’s price chart looking for price breakouts based on formulas that can be found in his book and based his trades on them.

Since I like looking at new trading methods I immediately started searching for a software tool that would automate the construction of the Darvas Boxes on my charts.

For the most part everything I could find was either biographical in nature or was an explanation of how to manually construct Darvas Boxes.

The only real tool I could find was a Tradestation system written by a private party that was for sale. I bought it and played around with it for a bit but the problem with Tradestation is that it is extremely limited in its ability to scan a universe of stocks so I shelved my research into Darvas Boxes.

As I was writing this article I did a quick search and it looks like today not much has changed. Most of the information on Nicolas Darvas is about him, his books or an explanation of his system rules.

While there are a couple of sites that sell Darvas Box packages I wasn’t very impressed with them. One site’s product offerings were all “out of stock” which makes me wonder if they are even selling software anymore.

Nirvana Systems to the rescue…

Fortunately, the folks at Nirvana Systems built a Darvas Box plug-in for OmniTrader a few years ago that not only implements the original Darvas Box rules but also includes some enhanced Darvas Box systems.

Being an OmniTrader user I bought the plug-in and I must say that it is a very nice implementation of the Darvas Box method, easily the best available on the market today.

Will it make you money?

That’s the $2,000,000 question isn’t it? Just as a power drill can make a hole in a board or a hole in your hand a trading tool can either make you money or lose you money, it’s all in how you use it.

There is no “magic bullet” or “Holy Grail” in trading, just tools we can use to help us trade better if we use them correctly.

So, if you are interested in using Darvas Boxes in your trading I would recommend taking a look at the Nirvana Darvas Box Plug-in for OmniTrader.

Note: Once you get to the site click on the Store link to find out more about the Darvas Box plug-in.

OmniTrader 2008 is Nirvana Systems latest and greatest version of their popular OmniTrader program and like prior releases this version is chocked full of new features.

My first experience with OmniTrader was the OmniTrader 2001 version. I was new to trading having decided to switch from being an investor where others make my financial decisions to being a trader where I make my own decisions.

I spent quite a few hours over several weeks trying to get the software to produce profitable trading signals. Frustrated, I asked for and received a prompt refund and that was it.

Looking back I see what I did wrong…

Despite Nirvana’s constant reminder that OmniTrader is a prospecting tool that you use to find trading candidates for further analysis I tried to make it into a trading system that produced buy and sell signals that could be taken without any further signal confirmation.

In other words, OmniTrader 2001 and subsequent releases was a prospecting tool that produced a list of trading candidates that you further analyze using your favorite technical analysis methods to make buy and sell decisions.

This is known as discretionary trading as opposed to systematic trading which is what I wanted to do.

I did find some comfort in knowing that I was not alone in my misuse of OmniTrader as many people bought the program thinking it was a trading system when it was not and then were dissatisfied with the program because “it didn’t work”.

Luckily, I learned from my mistake as my trading skills developed and when OmniTrader 2002 became available I bought it and have been using OmniTrader ever since.

Now the good news for those wanting to be system traders is that unlike some trading software Nirvana is committed to constantly improving their product and they have a major release each year with great new features that have slowly evolved the product to the point where it can now be used for system or mechanical trading if desired.

You see, besides adding new features to OmniTrader Nirvana has developed some major enhancements to the program that allows for the addition of optional plug-ins.

Some of these provide capabilities not found in any other trading software and include an innovative Chart Pattern Recognition System, an implementation of the Darvas Box method and a complete implementation of the Turtle Trading System.

There are quite a few others available and each one is easily installed so you can mix and match plug-ins with no adverse effects.

What’s more exciting is that Nirvana now sells two mechanical trading systems named NSP-31 and NSP-33 that have some pretty impressive backtest results and are reasonably priced compared to other lesser trading systems on the market today.

OmniTrader also allows you to build your own trading systems with the optional Strategy Builder Module and you can even write your own indicators, stops, etc. with the OmniTrader Professional version.

This makes OmniTrader 2008 one of the most powerful and complete trading software packages on the market today while still remaining very affordable.

With this tremendous power comes a learning curve so be prepared to spend some time learning the program.

The good news is OmniTrader 2008 now has a full set of help videos that are available at all times to walk you through the program and they also produce some of the best trading seminars you can buy that are also very reasonably priced and will give you an excellent education in how to use OmniTrader to its full potential as well as how to be a better trader overall.

I have personally met with most of the Nirvana staff at the annual “Bash” which is held for Nirvana Club members (more on that in another post) each year and I find them to be a very sincere, honest and open group of people that really care about their customers.

Nirvana Systems founder Ed Downs is probably one of the nicest people you will ever meet in this business and he is a class act as are the other Nirvana personnel.

If I had to choose one trading software package to use right now it would be OmniTrader 2008 hands down. Actually, it is the only one I am using along with TradeStation which I use primarily as a broker/trading platform.

My only criticism of OmniTrader is that over the years Nirvana has had a habit of releasing versions with minor bugs in them that I feel should have been caught during QA testing.

While all computer software has bugs it seems like Nirvana sometimes takes a few releases to fix a reported bug and the user forums show that others have similar opinions.

As an example, limit buy orders in trade plans not working correctly has been an ongoing issue that has not been fixed as I write this review.

Despite this criticism I would not let this dissuade you from taking a serious look at OmniTrader 2008 as your primary trading software package especially given their generous 30 day return policy.

Discretionary and system traders alike will find OmniTrader 2008 to be robust enough to handle pretty much any trading methodology and with proper use can be an indispensable part of your trading toolbox.

[rating:4.5]

This is going to be a high level overview of TradingSolutions by NeuroDimension because frankly, I cannot think of an easy way to explain how Neural Nets and Genetic Algorithms work. Rather this will be my personal impressions of the product.

If you want a good overview check out their FAQ pages on the TradingSolutions site.

Since I already own another similar (but more complicated to use) program I did not buy TradingSolutions but I did test it extensively over the 30 day trial period and came to the conclusion that I liked the program more than the one I owned because it was so much easier to use.

I have spent over 30 years designing, writing and testing software and I know when something is junk and in the case of TradingSolutions I was very impressed with the “fit and finish” of the product.

In fact, I remember telling my wife that this was one of the most integrated, well thought out trading software packages I had seen in a long time.

It is obvious that the program’s designers knew what they were doing when they specd it out and it shows throughout the program.

As an example, there are many video help clips available throughout the program which I found to be extremely helpful in learning how to use TradingSolutions.

Something else that stood out was the way the program works. It breaks tasks into chunks that run in a little scheduler that let’s you stop and resume at will.

I found that to be not only unusual as most packages must run their calculations to completion but extremely handy if you want to turn your computer off and resume your calculations later. Neat.

The reporting capabilities of TradingSolutions are equally impressive with some nice statistical and graphical reports available and the charts produced by the program were easy to work with and include all of the standard indicators and drawing tools.

One of the things that always make a favorable impression on me is the ability to download a program’s manuals or help files before purchasing a product to get a feel for the program.

NeuroDimension has them readily available on their site along with other training aids so you know exactly what the software can do even if you don’t download the demo version (which I highly recommend). I liked that a lot.

Overall, I think that NeuroDimension has taken a very complex trading concept and simplified it to the point where anyone wanting to utilize Neural Nets and Genetic Algorithms in their trading would be able to do so with TradingSolutions without getting an advanced degree in artificial intelligence.

[rating:4.5]