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http://www.thestreet.com/funds/toolsofthetrade/1025508.html
Test Your Trading Strategies at These Web Sites
By Mark Ingebretsen
Special to TheStreet.com
8/3/00 8:34 AM ET
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 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.
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.
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: "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.
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.
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.
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 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.
Another site, Tradetrek.com actually picks stocks for you with its
analytical software. And in that way the site is similar to siXer.cOm,
EquityTrader and StockConsultant.com. 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.
AboveTrade.com goes further still by letting you devise and back test
trading strategies for individual stocks. So let's say you choose America
Online (AOL: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.
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.
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 ClearStation.com and iexchange.com. Except that instead of swapping
stock recommendations, people at AboveTrade.com are able to swap trading
strategies.
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 CNBC
stock screen or the Tradetrek.com stock-tip engine, either -- not without
doing a lot more due diligence myself.
Serious Stuff
Lots of companies market more serious analytical programs on the Net. The
magazine Technical Analysis of Stocks and Commodities (traders.com )
contains what's probably the most complete list available. 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 you may 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.
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 OnlineTrading.com. 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.
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
TradeStation.com.
"You could think of TradeStation as a CyBerCorp.com competitor," says Cruz.
A popular daytrading brokerage, CyBerCorp.com 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.
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."
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Mark Ingebretsen is editor-at-large with Online Investor 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 mingebretsen@xxxxxxxxxxxxxxxxxxx
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