One of the most important areas where microcomputers (computers) have been applied is in the trading of financial markets. In the early 1980s, a single trade of futures or options could take days to complete. Today, using a computer to place trades can be done from home in seconds and in 2022, it’s possible to quickly and easily place a trade with ease using your mobile phone.
As you start to trade more, you will find that you need more specific tools to help you trade. A few years ago, you could get by with very basic free charting and analytical tools, but these days you need more advanced tools to help you make better trading decisions. (Unless you have a lot of money to spend on trading software, which is a whole different story…)
In the day trading world, the stock trading tools available to you are your main weapons in the battle to make money from stocks.
Having the right tools gives you a major advantage, as it allows you to make more money, be more efficient, and spend less time worrying about your trades. #2 – Use the Right Words When you are writing, you should always be aware of the words you are using. Don’t take shortcuts and use an easier word when a more specific word would make a big difference. #3 – Make Your Content Targeted When you are writing a blog post, you should always be writing with an audience in mind. It is very easy to get lost in the minutia and forget that your
Trading tools play a big role in maximising profits and minimising losses. You can lose all of your investments in stock or forex trading if you don’t have proper knowledge of trading tools.
Indeed, buying and selling of stocks or other asset classes is quite challenging for seasoned investors if they don’t have access to trading tools. Trading tools help in making buying, holding, and selling decisions. With technological advancement, investors can easily access several types of trading tools according to their investing styles.
Trading tools are different for technical and fundamental analysis. Day and options traders like to take advantage of short-term price movements while long-term investors find a better entry point or exit point to maximize returns in the long term.
Let’s start examining trading tools for both technical and fundamentals analysis. We will also discuss stock scanners and trading software later. We will also highlight quantitative trading tools in the article.
What Are Trading Tools for Fundamental Analysis?
The majority of market analysts only consider fundamental factors when picking or selling stocks. The fundamental analysis not only includes the analysis of key ratios, it also includes looking at a business at the most basic level. The market position, end markets outlook, and financial analysis are the key aspects of fundamental analysis.
Fundamental analysis helps in understanding whether the stock is accurately priced and what the future prospects are.
If we look at the current stock market environment, investors have been ignoring technical aspects and price movement on charts. The investors are basing their trade ideas purely on future fundamentals.
For instance, Tesla’s stock price rallied more than 750% in the last twelve months, but investors are still chasing the stock because its future fundamentals are robust. Investors are looking at Tesla’s operational performance and consumers move towards electric vehicles instead of lofty valuations.
Similarly, several tech stocks have rallied sharply in the past twelve months as pandemic related lockdowns have significantly improved demand for tech products. These stocks, however, have started cooling off in the past two months due to the launch of the coronavirus vaccine and easing social distancing policies.
For instance, the pandemic darling Zoom Video Communication stock price fell more than 35% in the past couple of months as the market analysts believe it will be difficult for Zoom to sustain revenue growth trends in 2021.
Let’s start reviewing the key trading tools for fundamentals analysis:
Business Model: The business model is the primary tool when it comes to fundamental analysis. This trading tool helps investors in understanding how the company’s plan to make a profit and what products and services it is offering to consumers. Business models are important for both new and established businesses. Business models also help investors in understanding end markets, competitors, and anticipated growth rates.
Financial Reports: Financial numbers play a key role in stock price movements and in setting price target estimates. Thus, it is one of the most important trading tools when it comes to fundamental analysis. Traders can easily access financial reports from the company’s website or other free online platforms. The income statement, balance sheet, and cash flows are among the main financial reports.
Press releases: Some stocks are very responsive to market speculations and market reports. For instance, if the company is seeking to make a big acquisition, the news release about that acquisition could have a big impact on the share price. Similarly, news releases related to monthly performance and managerial changes, and industry outlook have a major impact on the stock price.
Global industry review: Industry reviews always have a big impact on the performance of stocks. For instance, if you are planning to invest in an Airline Company, you need to understand that the industry is going through a challenging time amid the coronavirus pandemic. Similarly, if you plan to invest in the tech industry, you need to make sure whether the stock has the potential to sustain momentum in post-pandemic life.
External policies of the government: This is also very important if you are planning to invest in a multinational company. Trade tariffs and business restrictions could negatively impact the stock performance of few companies. For instance, Donald Trump’s strategy of enforcing restrictions on trade with China has significantly impacted several companies. This is because China is the world’s second-largest economy.
Valuations: It is among key trading tools when it comes to fundamental analysis. Valuation represents the performance of stock compared to its financial numbers. Valuations help the user in finding the true value of the stock. There several metrics that investors use for valuing the stocks. These include price to earnings ratio, price to book ratio, price to sales ratio, and price to cash flow ratio.
What are Trading tools for technical analysis?
Technical analysis plays a vital role when you are making short-term bets on Forex, Stock, and Futures trading. Technical analysis helps users in identifying the entry and exit posts.
Technical analysis is defined as the process of evaluating investments and identifying trading opportunities only by using statistical trends, price movements on charts, and volumes. The technical analysis mainly uses historical data to figure out what will happen in the future. This is contrary to fundamental analysis, which uses future data and does not depend on past performance. Technical analysis is based on three assumptions
The market discounts everything: Technical analysts believe that everything from a company’s fundamentals to broad market factors to market psychology are already priced into the stock.
Price moves in trends: Technical analysts always believe the price of securities is following trends. This means that a stock price has the potential to continue a past trend rather than move erratically. Most technical trading strategies are based on this assumption.
History tends to repeat itself: Technical analysts believe that history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology, which tends to be very predictable based on emotions like fear or excitement.
Technical analysts always have a full tool stash. They actually have several pointers and graph examples to use for picking stocks. Nonetheless, there is no chart or pattern which we could believe is 100% correct. Technical analysis is very important as several technical indicators rightly pick the future stock price performance. Investors can make technical analysis of any instrument, whose price movement is dependent on supply and demand forces. Stock, bond, currency pairs, indices, and other securities performance are highly dependent on the supply and demand factors.
Below is the list of trading tools used for technical analysis:
Price patterns: In technical analysis, price patterns are very important. Price patterns signal the transitions between rising and falling trends. Stock prices normally form a bullish, bearish, or range-bound pattern. When technical analysts see the change in price pattern, they call it a reversal pattern. Meanwhile, if the price of stock extends the move in a similar direction, it is known as a continuation pattern. Price patterns also help in identifying support and resistance on a price chart.
Chart patterns: The chart pattern is a shape within a price chart that helps to suggest what prices might do next, based on what they have done in the past. Chart patterns are the basis of technical analysis and require a trader to know exactly what they are looking at, as well as what they are looking for.
Support and resistance: Support and resistance are among the most significant signals in the technical analysis of the stock. Technical traders believe these are the levels at which the stock will move higher after declining (support) or stock will decline after increasing (resistance). Technical investors like to make an entry or exit from any stock based on these levels.
Moving averages: Moving averages can help investors to straightforwardly predict where the price of the stock is going, helping in cutting the clatter on a share price chart. If the average price is angled up, this means the price is generally moving up, while angled down means the price is going down. Sideways suggest the share price is range-bound. The moving average is important in technical analysis, as MA can also behave as resistance and support. In an uptrend, a 20 day, 50 days or 200 days, moving averages has the potential to operate as a support level. On the other hand, moving averages can also have the potential to act as a resistance.
Candlestick Patterns: In order to see the price data for various times into a single bar, there is no other way better than Candlestick charts. These are considerably valuable compared to traditional simple lines that connect the dots of closing prices and open-high, low-close bars (OHLC). Moreover, strong color-coding helps in getting better patterns from Candlesticks.
Volume indicators: It is also a key trading tool because volume suggests the demand for any stock. Higher volumes suggest the stock is in great demand while low volumes suggest a lack of investor optimism.
What is A Stock Screener?
It’s quite difficult to go through thousands of stocks to find the stocks of your choice. Thus, the market participants have developed a stock screener tool to quickly sort through the myriad of available stocks based on your criteria. Nowadays, traders can easily use this trading tool online free of cost. In addition, brokerage platforms also offer stock screeners to their users. You can use a stock screener for both technical and fundamental analysis. You can also expect to get alerts from the stock screening trading tools when any stock fits your criteria.
You need to insert trading parameters into the tool. These parameters include analyst recommendations, operating cash flow, EPS, dividend yield, and multi-year ROI. Moving average, RSI levels, chart patterns, and ADX readings are among major factors.
What are Automated Trading Tools?
Automated trading tools are one of the best ways for new traders to play with stock markets. Automated trading systems are also known as algorithmic trading. The users are only required to add trading parameters and the rest of the work will be done by trading software. The software will wait for the buying opportunity according to your parameters and once it locates that opportunity, the software will automatically execute the trade. Indeed, the automated trading software has the potential exit trade based on the set parameters.
What are Trading Robots?
Trading robots or computer powered trading is based on algorithm techniques that run through historical data to determine whether the stock or currency pair is presenting a buying or selling opportunity. Robots base their trading idea mainly on historical patterns. Trading robots are designed to remove the psychological element from trading. The majority of these robots are built with MetaTrader, which uses the MQL scripting language. One can easily purchase these robots or use their services through a subscription program.
What is Quantitative Trading?
Quantitative trading has gained significant confidence in the last decade. Indeed, hundreds of billions of dollars have been invested through Quantitative trading. This type of trading model is based on mathematical and statistical methods of identifying, buying or selling opportunities. This model runs a large historical data and trends to predict the price movements. Quant trading worked significantly well in a normal trading environment but it failed to generate desired results during the volatile and unprecedented environment. Quant Funds have lost billions of dollars in 2020.
Quant trading is different from algorithmic or automated trading. This is because automated systems run algorithm techniques and buy and sell securities on the trader’s behalf. On the other hand, Quant traders use statistical methods to identify, but not necessarily execute, opportunities.
Frequently Asked Questions about Trading Tools
Is trading tools important for maximizing returns?
One cannot succeed in trading without using proper trading tools. Trading tools play a big role in reducing the workload in finding the right stock picks. It also helps in enhancing profits and reducing losses.
Does brokerage offer trading tools?
Yes, the majority of the trading platform offers both technical and fundamental trading tools. These trading tools are usually free of cost. However, if you want to use advanced trading tools, you might have to pay the subscription fee.
What is the best trading platform?
Below are the trading platforms that offer extensive trading tools to traders:
TradeStation – Best platform technology.
TD Ameritrade – Best desktop platform.
Interactive Brokers – Best for professionals.
Fidelity – Best order execution.
E*TRADE – Best web-based platform.
MT4 and MT5
If you are into trading, then you would know about indicators. By definition, an indicator is an oscillator, a line or an average that changes its position in a certain way, and is used to predict the behaviour of the market. There are many indicators, ranging from simple to complex, and from basic to esoteric. On the other hand, there are also some indicators that are just plain stupid. In this article, I will be talking about 5 indicators that are both simple and useful.