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<P><FONT size=2>JW<BR>"Try? No try - do" -
Yoda<BR><BR>---------------------<BR><A
href="http://www.thestreet.com/funds/toolsofthetrade/1025508.html";
target=_blank>http://www.thestreet.com/funds/toolsofthetrade/1025508.html</A><BR></P><BR>
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<TD vAlign=bottom width="100%"><FONT color=#000066
face="arial, helvetica, sans serif" size=4><B>Test Your Trading Strategies
at These Web Sites</B><BR></FONT><IMG height=20
src="http://www.thestreet.com/TscRetail/images/spacer.gif"; width=1><FONT
color=#000000 face="arial, helvetica" size=2><B>By <A
href="mailto:mingebretsen@xxxxxxxxxxxxx";>Mark Ingebretsen </A><BR>Special
to TheStreet.com</B></FONT><BR><FONT color=#000000 face="arial, geneva"
size=1><B>8/3/00 8:34 AM ET </B></FONT></FONT></TD>
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<P>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?
<P>In fact, software letting you do just that has existed for years.
Problem is, the programs have largely been so clunky 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.
<P>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 any number of 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.
<H4>Robotrader</H4>
<P>First, what exactly are analytical programs and how do they work? Many
function a little like the stock screens I wrote about <A
href="http://www.thestreet.com/funds/toolsofthetrade/962295.html";
target=_top>in June</A>. To use them, you first devise a series of rules
you think should govern your trading. An example might be: "I'll only buy
stocks of optical-component companies with high double-digit earnings
growth that are currently trading below their 50-day moving average." I'm
only using stocks as an example. Different programs also let you 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.
<P>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
broke. The term for this is back testing.
<P>As a next step, analytical programs will paper trade stocks that
currently 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
scans through terabytes of real-time market data and alerts you when a
trading opportunity arises -- as always, based on the rules you've
defined.
<P>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 <A
href="http://www.cnbc.com/tools/stock_quick_search_stocks.asp";
target=_top><I>CNBC</I></A> lets you build a fairly complex search that
brings up a list of companies. In addition, a nice graph comes up to show
you how well your strategy would have performed month to month over the
past year.
<P>Another site, <A href="http://www.tradetrek.com/";
target=_top>Tradetrek.com</A> actually picks stocks for you with its
analytical software. And in that way the site is similar to <A
href="http://www.sixer.com/"; target=_top>siXer.cOm</A>, <A
href="http://www.equitytrader.com/"; target=_top>EquityTrader</A> and <A
href="http://www.stockconsultant.com/";
target=_top>StockConsultant.com</A>. All these free sites use analytical
software to generate buy and sell signals. Tradetrek.com differs slightly
since it incorporates a back-testing feature that lets you see how well
the software has performed in the past. Just choose a date, click on one
of the stock recommendations that appeared on that date and then click
"next day." And you see whether the program's recommendation would have
made or lost you money. (It would be nice if more financial Web sites were
this forthcoming.) Tradetrek.com's free if you use delayed data.
Subscriptions give you access to real-time data and cost $25 per month.
<P>AboveTrade.com
goes further still by letting you devise and back test trading strategies
for individual stocks. So let's say you choose <B>America Online</B> (<A
href="http://tscquote.thestreet.com/StockQuotes.jhtml?tkr=AOL";>AOL</A>:NYSE
- news).
Tell the program how much of a gain you want each time you enter a long
position. Let's say you'd like to make 4% on each trade.
<P>Now here's where AboveTrade.com gets a little cartoonish. You then
choose from a handful of canned strategies. Each has a descriptive name,
such as the "Cautious Dr. Trend" or the "Aggressive Major Bullmaker." Then
you choose an industry analyst calculator that gives special weight to,
say, interest rates or the sector your stock falls within, in this case
the Internet sector. Press the "See Results" button and you see how well
your strategy for the stock might have worked over the course of up to two
years. Specifically, a graph of the stock comes up showing you
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.
<P>Devising even this sort of simplified strategy can be time consuming.
The trading systems I built on AboveTrade.com invariably came back showing
negative returns. Maybe that was just my luck. Fortunately, AboveTrade.com
has a feature that shows you the winning strategies picked by other
members. I discovered, for example, that a member's strategy, dubbed "AOL
and asha," would have given me a 104% gain over the past year through
Wednesday (vs. a 12.5% return if you had bought and held the stock over
that period). This feature reminds me of the amateur stock recommendations
you find at sites like <A href="http://www.clearstation.com/";
target=_top>ClearStation.com</A> and <A href="http://www.iexchange.com/";
target=_top>iexchange.com</A>. Except that instead of swapping stock
recommendations, people at AboveTrade.com are able to swap trading
strategies.
<P>It's all a lot of fun. But as I hinted earlier, AboveTrade.com seems
more like a toy than a serious application. For one thing, I have no idea
what specific criteria "Aggressive Major Bullmaker" bases trading
decisions on. For that matter, I wouldn't bet the house on a strategy spit
out by the <I>CNBC</I> stock screen or the Tradetrek.com stock-tip engine,
either -- not without doing a lot more due diligence myself.
<H4>Serious Stuff</H4>
<P>Lots of companies market more serious analytical programs on the Net.
The magazine <I>Technical Analysis of Stocks and Commodities</I> (<A
href="http://traders.com/"; target=_top>traders.com</A> ) contains what's
probably the most <A
href="http://technical.traders.com/Products/categoryhome.asp?cat=120";
target=_top>complete list</A> available. The leader in this category has
long been TradeStation from <B>Omega Research</B>. TradeStation has its
own programming language, as well as an extensive list of canned
strategies you may choose from. The program's users have always been a
close-knit subculture, like <B>Airstream</B> 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.
<P>Until recently, the complete TradeStation suite of programs would have
cost you about $5,000. But sometime in September, Omega Research plans to
merge with the Internet active-trader brokerage <A
href="http://www.onlinetrading.com/"; target=_top>OnlineTrading.com</A>.
When that happens, TradeStation won't be sold as a stand-alone package.
Instead, it will be integrated with OnlineTrading.com's execution
platform, which takes a commission per trade and already contains the
bells and whistles daytraders look for.
<P>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 45,000 strong customer base to be
among the first to migrate to the new service, which will be called <A
href="http://www.tradestation.com/"; target=_top>TradeStation.com</A>.
<P>"You could think of TradeStation as a <B>CyBerCorp.com</B> competitor,"
says Cruz. A popular daytrading brokerage, <A
href="http://www.cybercorp.com/"; target=_top>CyBerCorp.com</A> has a
professional-level execution platform that also includes an analytical
program called CyBerQuant. CyBerQuant currently lets you do real-time
stock screening, but it doesn't back test the results.
<P>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 from the job. "Traders now are
overwhelmed with information," he says. "But deep down they realize that
ultimately the greatest obstacle to their own success are their own
emotions, specifically fear and greed. TradeStation is based on the
premise that the best way to be successful is to isolate your emotions
from your decision making." </FONT><BR>
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<TD><FONT face="arial, helvetica, sans-serif" size=2><I>Mark Ingebretsen
is editor-at-large with <A href="http://www.onlineinvestor.com/";
target=_top>Online Investor</A> magazine. He has written for a wide
variety of business and financial publications. Currently he holds no
positions in the stocks of companies mentioned in this column. While
Ingebretsen cannot provide investment advice or recommendations, he
welcomes your feedback at <A
href="http://www.thestreet.com/funds/toolsofthetrade/mingebretsen@xxxxxxxxxxxxxxxxxx";
target=_top>mingebretsen@xxxxxxxxxxxxxxxxxx</A>.
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