Today, however, the technology that was once reserved for the exchanges and institutional traders is available to retail traders: faster computers, high-speed Internet, all-electronic markets and direct-access trading have all helped the independent retail trader. Additional advancements such as trade automation, innovative market research tools and sophisticated testing platforms give traders even more technology to work with.
To get started trading, you will need a computer, a high-speed Internet connection and trading software:
A computer is your primary tool. This is where the action takes place and where you will research, test and trade your plan. In a perfect world, your trading computer would be used for one thing: trading. The reality, however, is that most computers will have various applications running and be used for things like gaming and Internet surfing.
That said, if you must use your trading computer for pursuits beyond trading, be sure it is adequately protected with anti-virus software. Many companies offer free or trial versions of their virus protection software. Regardless of the software that you select, the key is to install it, update it often, and perform regular scans to keep your computer healthy.
Your computer should have the fastest processor and the maximum amount of memory that you can reasonably afford (the shorter-term your style of trading, the more important this becomes). If at all possible, your computer should be capable of supporting multiple monitors. Trading with two (or more) monitors gives you the “real estate” needed to view multiple markets and trading charts, while having a dedicated order entry window. This can improve your situational awareness and allow for more precision in your trading.
As a rule of thumb, all your connections – including keyboard, speakers, Internet and mouse – should be hardwired into the computer. In addition, it is a good idea to have a phone that still works even if the electricity is out. That way, you can call in an order to your broker if you have lost power. Keep your broker’s trading desk phone number in your speed dial and have your account information handy.
It is important to have a back-up battery for your computer – an uninterruptible power supply (UPS). Think about how long you would need to keep your computer and other essential equipment running to properly manage and/or close out trades in the event of a power loss, and shop for a UPS based on that criteria, as well as the number of inputs you will need.
Investors can get by with dial-up Internet connections because they are less concerned with up-to-the-second quotes and the ability to place orders that will be immediately filled. Traders, however, do not have this luxury and absolutely need high-speed Internet connections to be competitive in the markets. In fast-moving markets, it will obviously be to your advantage to have a fast connection so that your trade orders are submitted and filled as quickly as possible. Even a lag time of just a few seconds can mean the difference between a winning and losing trade.
Many trading platforms offer Web-based apps that allow you to manage and place trades from mobile devices. Even if you do not plan on trading from your phone, it is still a good idea to install the app and be able to use it as a backup if you are unable to use your computer for any reason.
Trading software should serve three main purposes:
• Market analysis
• Order execution
The market analysis component of trading software is what allows you to view and customize price charts and display price quotes. Depending on your style of trading, you will require end-of-day market analysis (with delayed quotes) or real-time data versions that instantly update as conditions in the market change. Longer-term traders (position and some swing traders) may be able to use the EOD data; shorter-term traders (some swing, and all day and scalp traders) will need access to real-time data.
The next component is the software’s backtesting application. Not that long ago, the ability to backtest at all was a fairly advanced feature of trading software. Today, however, traders can not only backtest, but also perform multivariable optimizations and walkforward optimizations/testing. These tools can greatly improve your ability to accurately test a trading system.
Lastly, the trading software has an order execution interface. Some trading software offers very basic order entry, while others support multiple and advanced interfaces. Many platforms support various levels of trade automation, from conditional orders to fully automated strategies.
Many trading platforms – the software that provides market analysis, testing and trade entry capabilities – provide a simulated environment where you can practice taking trades and try out trading ideas. These “sim” accounts provide valuable experience for new traders, but it is important to remember that sim trading and live trading are different animals. Sim trading, for example, often generates order fills that would never happen in live trading (giving you a false sense of profitability in many cases), and the emotions involved in sim trading can never be relied upon to represent how you will feel and act in live trading. That said, however, sim trading is an excellent way for traders to gain experience in the markets and with actual order entry placement.
While some trading software is sold as a complete package, most is leased on a monthly basis (from your broker, for example). It is important to note that in addition to any software/platform fees, you may also have to pay for certain data feeds, such as to receive e-mini quotes or ETF quotes. These fees differ depending on your status as a trader: in general, the fees are relatively low for individual traders, but can be quite high if you are considered a “professional” trader.
Brokers and Trading Accounts
Brokers are an essential partner in the trading business and allow us to interact with the markets. As a retail trader, you cannot buy and sell directly at the exchanges, and must therefore work with a broker to act as an intermediary. Selecting a broker requires research and you may want to consider factors such as:
• Do they provide their own order execution software and is there a platform fee?
• Do they service markets that you want to trade (i.e., stocks, futures or forex)?
• Do they support simulated trading?
• How do they handle order execution?
• How efficient is their customer service?
• What are their commissions and fees, including “hidden charges?”
• What are their hold times when calling?
• What are their margin requirements?
• What type of data feed do they provide?
Once you have decided on a broker, you will be able to open and if desired, fund, a trading account.