software - overview

Today a computer plus software are basic tools used by most traders. If you have software plus a trading system that works for you, you have nothing to learn here.
Software comprises two parts: design and functionality. This discussion will focus on the design aspects. Most software contains the functionality claimed of it.
There are two type of software: graphics-based charting packages, and numerics-based quote screens. The aspect focused on here is how we see and process the information in front of us. The subject of sight and seeing is covered elsewhere.
The beauty of a chart is it's visually seductive. The strength of a chart is it's easy to read. It conveys a clear picture. It conveys the truth of what has happened to price. Most people are visual, in that they learn and take information in by seeing. A chart is one-dimensional in that it shows the behaviour of price only. Charting (technical analysis) has taken on a life of its own. Many of the popular charting software packages evolved in America during the 1980s at a time when volume was not available in a lot of the data feeds. Consequently, an entire technical analysis industry has matured around price, and price alone.

Indicators are an important add-on to charts. An indicator merely adds one level of indirection to a one-dimensional picture. Additional indicators add further levels of indirection. A level of indirection is a one-level move away from the raw data it is based upon. An indicator behaves as a black box. If it is not understood or doesn't work all the time, the trader is unable to dissect it, or understand the reasons it doesn't work.
While volume is now available, the "industry" has not embraced it. When US markets become busy and trading volumes soar, broker services and data vendors drop volume from data transmissions. Some charting packages have added time as a second dimension. The danger of indicators is they are easy to see. Charting so dominates the industry it predisposes all newcomers to adopt it as their medium of choice. Rarely are alternatives considered. Do any technical analysis courses offer instruction on black box theory ?
Quote screens contain important information essential to making valid trading decisions. Quote screens are not easy to see. Because of this, the design of the screen is critical. Information should be presented in such a way that the brain can absorb, understand, and act on it. All related items that impact on one another should be presented as close together as possible, and in a way the brain can "see" the interaction. A close examination of the few quote screens available will show this doesn't happen.

Trading platforms perform three functions. (a) connectivity from user to broker/exchange (b) transmit data from exchange to user (c) visual tools at the user end.

Technological advances in (a) and (b) have been extensive. The advances in (c) have been minimal. Old technology that has not advanced.


decision tables - the foundation of any system.
Decision tables are a precise, and compact method of modeling complicated logic.

A mechanical trading system, is in reality a discretionary (attended) computerized (mechanized) decision table .. change the words a bit and a mechanical system becomes an attended probability engine, or simply a discretionary probability engine.

Have been surprised at the number of clients that did not know what a decision table was. Technical analysis sites don't mention them. When I first started programming we were taught flow-charting and decision-tables. Rules and Conditions. Programming is a series of decisions. Programming for the obvious is easy. The skill is to anticipate every non-obvious condition. Decision-tables were once a part of learning how to program. How to plan, anticipate, provide for, and expect the unexpected. Trading involves the same processes. A decision table is a simple device that assists in the assessment of complex conditions. Search the web and there is not a lot of information about what they are, and how they are used. The few sites that provide them assume the enquirer knows what they are looking for.

Which leads to the following interesting extracts from two of John Sandford's "Kidd" novels. It reinforces the above paragraph. If you are not technically inclined it may seem meaningless. However, if you are technically inclined and it rings a bell it's worth it.
extract from "The Devils Code" source www.johnsandford.org

Kidd .. I took the box out of my pocket. Inside I kept a Ryder-Waite tarot deck. I'm not superstitious. More than that, I reject superstition. Ghosts, astrology, numerology, phrenology, and all the new age bullsh**t etc; the world would be a happier place without it. Tarot is different. Tarot is - can be - a kind of gaming system that forces you out of a particular mind-set. Let's say youre trying to .. oh say steal something. Your mind-set says X is a danger, and Y is a danger, but the Tarot says "think about Z". So you start thinking about things outside the mind-set, and when you finally do the entry, you've considered a whole spread of possibilities that otherwise would have gone unsuspected. Nothing magic about it, and it will definitely save your backside. So I did one quick spread, of my own invention, working toward a key card. The card came up. The Devil. interesting ..
extract from "Hanged Mans Song" source www.johnsandford.org
Kidd .. I got out my cards, a Rider-Waite deck. I'm not exactly a scientist - I was trained as an engineer - but I've studied the philosophy of science, and I am a true believer .. in science that is. The Tarot as a predictive system is the same sort of nonsense as astrology. The deck is useful as a gaming device, and thats how I use it. Like this: when we are forced to deal with complicated problems, when some of the facets of the problem are unknown or unreachable, we deal with them in terms of past experience. That's almost inescapable. But approaches that are useful with some problems don't work with others. The Tarot deck, when used as a gaming system pushes you outside past experience and encourages you to think of new ways to deal with it. It is simply a subtle way to "game" a problem.


back-testing - 1   by the scientist
note: what makes this quote-worthy are references to, (a) claims based on backtesting alone, (offline and not realtime), (b) importance of volume versus system, (c) discretionary, (d) conditioning (repetition) and (e) observation. All in one paragraph. Says it all.

Two contributors "scientist" and "dt-waw" from the EliteTrader trading forum December 2002.
dt-waw Well, first of all this system is back-tested, it trades 1 contract at a time. The average profit per 1 contract per year was 80k. Is that not enough to make a living? scientist replies. You should just get a bit real man - You think any automated system can make 80K a year on 1 contract? You know little. I have programmed systems for years. I even posted a shot here on EliteTrader, which far "outperformed" the results of your system. Yet I never traded it much for real. Why?. Because it's not worth it. You and your friends with your silly systems are never going to be making anything like that. Why? Because markets follow the volume, as opposed to systems. You may be able to get a small razor-thin edge trading a (lagging!) system, but you'll never be able to top-perform unless you trade what you call "discretionary", namely conditioning yourself to be objective and observant and then go with the flow and take exactly what the market is willing to give you.


back-testing - 2   by the day-trader
Extract from diary Of a Day Trader Sydney Morning Herald - SMH 8 January 2005
Wednesday, 5 Jan 2005. Back in the real world of daytrading. Encountered the following advice from an American Professor of Charting: "The magnitudes and decay pattern of the first 12 auto-correlations and the statistical significance of the Box-Pierce Q-Statistic suggest the presence of a high-frequency predictable component in stock returns". This means past prices are a guide to the future, Yogi claimed, triumphantly adding, "contrary to every warning that appears on every share price or unit trust recommendation. I back-tested the professor's study on 750 stocks over the past 50 years. It works. In short, we've been had".


law of unintended consequences
quote - The Concise Encyclopedia of Economics, Rob Norton:
The law of unintended consequences, often cited but rarely defined, is that actions of people always have effects that are unanticipated or "unintended". Economists and other social scientists have heeded its power for centuries. The concept of unintended consequences is one of the building blocks of economics. Adam Smith's "invisible hand", the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, "is led by an invisible hand to promote an end which was no part of his intention".

example : When beer sales were banned at football games, the number of people arriving at the stadium intoxicated, increased. Associated Press Nov 1.
the apprentice
There were these two old time floor traders. Spending their days in the sun, sitting under a mango tree, drinking mango juice, waiting for the surf to come up, watching the prices go by on their laptops. When along comes a fresh-faced graduate, straight out of the Academy of Trading with a Degree in Charting and a Diploma in Technical Analysis. Knew where support and resistance were, and all the indicators, moving averages, and Gann Theory. The old-timers look at one another and pat their $2 million lines of credit. And smile. One says to the other, whaddya reckon mate, reckon we can send this one down the paint store for some striped paint. The other replies .. yeah mate, reckon we can. They reach for their mobile cell phones ..

elliot's wave - goodbye
On 11 November 2004 the spi neared 3866, a technical hedge fund called a major elliot wave top at 3866 announcing they would stake their reputation on it (a fatal mistake) having shorted 4500 spi contracts. The bull elephants set about proving the call wrong. The phones went white hot. The best exit offer obtained was 3920. The hedge fund spent the next 2 weeks getting out at a significant loss. A true story.
a key technical level
One of our clients ("A") keeps a careful note of where key technical levels are. As it nears a key level "A" monitors commercial activity at that level. If a retracement down, and commercials start buying at the key level "A" will buy and follow in the slip-stream. If the commercials don't start buying, "A" leaves it alone.
 
globalisation - big brother - george orwell - 1984
One hundred years ago, Henry Ford said you can have any colour you want, so long as its black.
One color suits all. And so it was. The model-T Ford came in one take-it or leave-it colour.
The same is happening in trading as brokers discover broking is a Warren Buffet toll-bridge.

Fifteen years ago, electronic trading systems didn't exist. Floor traders, pits, data vendors, phone broking, software vendors, educators. Traders assembled the parts themselves. Now brokers provide the lot with electronic trading platforms, taking over the money making add-ons, but leaving education. Independent data vendors and software developers have gone. Education is being squeezed,

As a general rule brokers do not and should not provide trading education. While brokers trade large house-accounts there are ethics-conflict issues. Preferably the industry should establish chairs, fund scholarships and courses at universities and colleges. Successful SEC prosecutions against the broking industry over statements made with reckless disregard to their accuracy, makes it difficult to undertake education unless they have absolute belief in it, and base it on their own verifiable methods.

Up-side is, services become standardized and cheaper as brokers add-value to their services. Down-side is services are commoditized. Less distinguishing features, variety, choice. More people using identical products. Pulling the same levers. Looking at the same indicators. All at the same time. And the danger?. All together now. Simon-says do this.

Looking five years into the future. Standardization of services, one size fits all.
Globalization is a reality. Once there were hundreds of small to medium sized auditing firms around the world. They merged to become known as the "big six". The SEC caught Arthur Anderson with its thumb in the pie, and they became 5. With globalization and electronic systems, broking is heading down the same road as the big-six. Each with 1/6th global market share. Monitoring the flow of orders flashing across their screens. Powerful stuff. Open to abuse, front run, tailgate, take the other side. Be hard to ignore. Large scale self-sanctioned spy-ware. Private traders cutting their own throats.

Don't be surprised. It's happening now. Just not global yet. That will come.
We know of one broker with exchange access, "skimmimg data".


globalisation - next - 2006
Consolidation is gathering pace. Watch Macquarie Bank's bid for London Stock Exchange. Macquarie is already big on Toll Roads (distribution). An exchange, any exchange, is just another "toll road". Punch the ticket. Collect the toll, as traffic passes through. Add in TradingPlatform fees (above) and it becomes a future dual carriageway. With two toll collectors.


global technology - now
It's happening, now. On a small scale. Here is how it's done.

Watching a Globex Forex Feed during off peak times where the market-maker is almost the only participant, continuously populating both sides of the queue with tease-orders. Being mesmerised how the market-maker is able to move out of the way of an incoming order execution.

A trading platform is a software process with data inputs and outputs. A "box" with data inputs entering on the left and data outputs exiting on the right. The processes are performed inside the box, based on the requirements of the incoming data stream (orders)

enter the marketmaker

example - Incoming order - sell 20 lots at market
status of market depth bid queue prior to order transmission

before

 

Market maker

Market maker

Natural Buyer

Market Maker

 

 

10 @ 5006

10 @ 5005

20 @ 5002

10 @ 5000

1 second later

 

Market maker

Market maker

Market Maker

 

 

10 @ 4990

10 @ 4988

10 @ 4995

 

 

The market-maker miraculously disappears. In nano-seconds. The trade is executed at 5002. Such behaviour is clear evidence the market-maker has access to the incoming order stream, and is able to remove the front orders, allowing the natural buyer to be hit. It's a question of the location of the market. During market hours, exchange and market-maker are separated. During non-pit hours they merge. Market-Making is electronic. The market-maker not only operates the market, they are the market.

If you decide to hit a market-maker sitting in the market, there is nothing to guarantee the order will be there when your transaction arrives. The market-maker can see your order coming. It can simply move out of the way and not be there when your order arrives. If your order is an "at market" order you will be dismayed at the result. You will hit the nearest natural buyer/seller

Ask the question - what question ?
What happens when a "participating broker", who is a market-maker, also owns the market (exchange) ?.

Additional information