Hello and welcome to my YouTube channel, Trading Software Tutorials.

The first video in this series provided an overview of the three software components necessary for online trading of financial instruments: data, charts and brokers. The second tutorial provided more detail about data: where and how it is generated, what data you need for trading, and which software platforms provide current and historical data.

This tutorial focuses on charts:

1. the difference between broker-generated charts and charts generated by independent entities
2. where you can get free charts and whether they are worth using
3. the difference between static and dynamic charts
4. what functionality to look for in a charting package and
5. which charts allow you to scan for entry setups and backtest trading systems.

But first, a little history. Charts of trading activities have been around for centuries, with the earliest known system developed by the Japanese to track rice market sales in the mid seventeen hundreds. Known as candlestick charting, this system was brought to the Western world of trading by Steve Nison and has become an integral part of decision-making for many traders when looking at price action.

The father of modern Western charting is William Delbert Gann who used mathematics, geometry and even astrology to create charts and predict events. He was highly successful in the financial markets. While his system produced quite complicated charts, some of his main principles and technical indicators, such as the Gann fan, are still followed by some of today’s professional traders.  

Prior to the widespread use of computers, charts were drawn by hand. Even when I first started trading online in the 1980s, people were encouraged to draw their own charts to get a better feel for the price action. Now, highly sophisticated software packages not only provide charts in multiple price and time options, but also provide traders with the capacity to apply a broad range of drawing tools and indicators, and to even create their own composite indicators, to assist them make decisions about buy and sell orders. In short, charts are the entry point to technical analysis and are absolutely essential for speed trading of financial instruments.

Charts vary in three fundamental ways:

• whether they are provided by a broker or by an independent source
• whether they are free or require payment of a subscription fee
• whether they are static or dynamic, including whether you can trade directly from the chart.

In theory, this results in eight possibilities. However, in practice the matrix is less complicated. This is because of the maxim that you get what you pay for. You are not likely to get dynamic charts on which you can apply lots of indicators, scan and backtest, plus trade from the chart, all for free. If you’re not paying anything, you’re most likely to get static charts with little functionality, and no ability to scan, backtest or trade from the chart.

If you do get this level of functionality, it is likely that the free trading platform that supports the charting package makes a profit by charging high commissions and other trading fees than platforms which charge a monthly or annual access fee.

However, there are instances where some free charting platforms are better than some paid charting platforms, and equally there are instances where you may want to use free charts with static data.

For example, I swing trade stocks through a broker that provides charts for free. If I don’t trade, I don’t pay anything to be able to look at ask and bid orders, the course of sales, and a static chart for any particular stock. I do this because I like to trade stocks through a highly reliable bank broker to minimise financial risk.

However, I also like to see the daily live price action at different timeframes and in different price modes, such as Heikin Ashi, to fine tune my entry and exit points, so I subscribe to a second broker service which provides dynamic charts through a third party. This way I get both high-level financial security and high-level trading functionality.

Let’s now go back to look in a bit more detail at the difference between using charts produced by a broker and those produced by an independent source because it is often hard to tell the difference.

Brokerage businesses, run by either a bank or a financial services company, usually offer their own trading platforms with associated charting functions. However, they may not necessarily offer sophisticated charting or live trading from its charts. These brokers will thus often form a partnership with one or several charting software providers. Examples include global broker IG Markets which offers high level charting though ProRealTime, and TD Ameritrade which offers Think or Swim.

On the other side of the fence sit the many charting software companies that have invested heavily in producing powerful charting packages and need to team up with a brokerage firm in order to be able to offer a trading platform. This has expanded to the extent that some charting packages offer access to a whole lot of different brokers. Esignal, for example, offers a choice of more than 50 brokers. However, these brokers vary in what financial instruments they offer, with many not offering stocks or stock options, and only some offering foreign exchange trading.

So what do you do?  What do you choose? Do you start with a broker or do you start with an independent chart provider? It actually doesn’t matter. What matters is that, either way, you choose a highly reliable, low-risk broker. If they supply an excellent charting package that allows you to trade directly from the chart, then that’s a great bonus. If they don’t have great charting functionality, or link to a platform that does, then add a charting service which does provide fully functional charts. The bottom line is, if you have never traded before, your priority is to find a good broker, then find the charts.

However, beware trading platforms that offer free charting services and fee-free trading, or offer gifts such as free fractional shares. You will end up paying for their services or for the free gift somehow, even if it is just in annoying pop-up advertisements, and you will especially pay if what you get  means a slow and unreliable service.

Before signing up to a trading platform, you must know exactly what you are likely to pay for its services over an annual period and when you will pay for them.

The range of fees can include:

• brokerage for buying and selling stocks which can vary dramatically from nothing to a percentage of your trade value
• commissions for buying and selling non-stock financial instruments
• paying the spread in foreign exchange and CFD instruments
• exchange fees for real-time data, and
• chart fees.

Even charting packages that charge a subscription fee may offer a confusing array of pricing packages which, at the high end, include many items that you can get for free elsewhere, and still have additional charges such as real-time exchange fees for all levels. 

There are numerous other problems with accessing free charts: You may find ads popping up and getting in your way or distracting you from your trading activities. You may not be able to apply indicators or annotate charts, or change to a specific timeframe, or save a template for a chart, or create your own watch list. Above all, you will be prompted to pay a fee to get advanced features, which you will want at some stage, so make sure that you are happy with the charts before making a commitment to paying for them.   

There are hundreds of charting packages many of which offer some level of free access to charts. The most popular ones include TradingView, StockCharts.com, ThinkorSwim, Yahoo Finance, Finviz, Webull, Incredible Charts, ForexTradingCharts.com, and Plus500. Please do note, however, that in some instances the free data may not be in real time. Also note that some charting and brokerage platforms pay people to refer others to their business. So if you’ve come via a referral by someone you follow on YouTube, make sure that the charts are exactly what you need for the type of trading you do.

The third variable to look at is whether the charts themselves are static or dynamic. Static charts provide closing price and volume data at the end of a specific time period, such as a day, or they may be updated on a regular basis, perhaps hourly. Static charts are often provided by brokers at a base level of entry. If you do not have a broker, a number of specialist chart platforms provide free charts which, although also static, may allow you to select such features as time periods and price format.

Having a static-data chart means you can see the graph of the daily closing price and the volume for that day. For some people, this is all that they need to swing trade stocks. However, static charts have limited functionality and are often slow to upload. Thus most traders end up, sooner or later, moving to dynamic charts.

Dynamic charts update in real time. That is, they continuously move up and down with buy and sell orders. They can be simple or complex. This is a relatively simple dynamic chart, taken from IG Markets charting platform. It has the capacity to add indicators, but only about 30 of the hundreds that are available on other trading platforms. There’s no capacity to trade directly from the chart, nor see the ask and bid stack. To trade, I have to open a ticket and fill in the parameters which is too slow for scalping.

However, IG Markets provides access to ProRealTime which is a level up in terms of dynamic charting, especially as you can trade directly from the chart. To do this, the parameters of the trade, such as contract size, stop loss and profit target, are pre-set. I can also put in a conditional order for a long or short trade which is triggered if the price reaches a certain point.

So if we want more from our charts other than just end-of-day price and volume, what else are we looking for?

• Firstly, we want to be able to be able to reconfigure charts, duplicate and overlay them, and to quickly look at different timeframes. In reconfiguring the charts, it’s good to be able to change the way the chart looks in terms of colour and size. For example, many traders who work through the night prefer to have a black or gray background to their charts instead of white to reduce the glare from the screen.
• Then we want to be able to annotate charts with drawing tools, including text and graphics such as lines, boxes, circles and ellipses, as well as measure distances between specific points on the chart.
• We want to be able to be able to easily add and remove volume histograms and a broad suite of technical indicators.
• We also want to be able to create, modify and delete watchlists of financial instruments.
• We want to be able to create, modify and delete chart templates.
• We also want to be able to open and close trades directly from the charts, and to change trade parameters, such as number of contracts, as well as change stop loss and price target orders quickly and easily.
• We want to have alerts and buy orders that are triggered by price moves.

Finally, we want to be able to scan end-of-day data for particular chart patterns and entry signals, such as a new 12-month high, a significant price gap at open, a moving average or MACD crossover or for particular candle stick patterns such as bullish engulfing or morning star.

Another functionality that advanced traders want from charts is backtesting. This is the process of assessing the probability of success of a particular trade entry and exit system by using historical data to see when the entry was triggered and what the result was. This can be done manually by working though charts on a trade-by-trade basis, one instrument at a time, and recording your results in a spreadsheet.

Alternatively, backtesting can be done automatically using backtesting software.

Many charting packages include backtesting functions, including MetaTrader 4, NinjaTrader, TradeStation, TradingView, Trade Brains, Trend Spider, QuantConnect and ProRealTime.

However, some of this software is quite basic, allowing you to only  carry out one test at a time on one financial instrument. Problems can also arise in backtesting if the data that you are accessing isn’t complete or has integrity problems, with is such as survivorship bias. Foreign exchange and commodity data is less prone to problems than equities data.

Being based on computer code, backtesting can be difficult to understand and carry out as a coding activity. Some platforms provide a system where you can insert your instructions with code-free tools using a drag-and-drop interface that will create code for you, though these too can be difficult to operate effectively and you may have to pay extra for it. 

The most sophisticated backtesting software is AmiBroker, but this has a steep learning curve, must be purchased and downloaded to your computer, and even then you will need to buy data.

One final group to mention are the trading platforms that offer recommendations about whether a particular financial instrument is a buy or sell proposition. For example, for stocks in Australia, the independent market advisory service, AussieBulls, gives a daily market status report for most ASX stocks based on candlestick pattern analysis. And for foreign exchange, indices and commodities, the broker IG Markets offers buy and sell signals generated by the providers autochartist.com and PIA first.

There are many advisory services out there, and while they provide appropriate disclaimers about risk, please take do care and don’t put money into someone else’s trading suggestions. In the end, while it’s useful to look at what they offer to learn and get ideas, all successful traders do all their own analysis so that they can make fully-informed decisions.

In conclusion, when deciding what charting package to use, above all, you need user-friendly charts. A charting platform may supply all of this functionality, but is it easy to learn and intuitive to use? And is it quick to load? These are the most important factors in choosing charting software.

In addition, it is vital to consider the reliability of the charting service provider. If you use charts supplied by a highly reputable broker, the chances of that service crashing, or having an outage for critical periods of time is much lower than it is if you use an independent service that has only been on the scene for a few years. This becomes critical if you are going to trade large amounts of money, or trade frequently. Second-tier and third-tier brokers can and do go broke and while you might eventually get your money back, it may take a long time, or you may only get part of it. So when choosing a charting platform to trade from, you must also consider the brokerage firm that underpins your trading activities. The topic of brokers in considered in detail in Tutorial 4.

DISCLAIMER

This video is made available for educational purposes only. It does not provide financial advice of any sort to any person. The narrator of this video is not a qualified financial advisor. Any opinions expressed during this tutorial are the personal views of the narrator and you should not take anything that is said on this video to be advice regarding any investment in any financial product. Should you wish to invest in any financial market, you should seek professional advice from a qualified financial advisor or broker.