If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part. - Ben Graham (The Intelligent Investor, page 96, 1973 edition)

A common question asked by many new investors is asking about the various stock picking systems available, that claim to lead you on a path to sure riches so long as you are willing to lay out money to them to buy their system or software.

There is no easy path to trading success, certainly no software has ever been developed at any price that will enable you to take money from the market at will. There are very many black box trading systems available at extraordinary prices claiming to have found some trading anomaly that will enable this software to make you rich, but none of them work. Black box trading systems have been around for decades already, and although decades have been spent on research, still nothing worthwhile has been found. Don't listen to the claims, don't bother reading the made-up testimonials, and in particular ignore the statistics they put forward for theoretical past profits that the system generated.

Curve fitting is a computer technique where the computer analyses the stock's past price patterns and generates a statistically optimised model that would have made a fortune back then, had the computer had the benefit of hindsight. This is easy to do, and computer programs can generate systems with incredible returns in this way, but the strange thing is that as soon as YOU start to use the program, it suddenly makes its first failure, and when you later on look at the model, you find that the computer model has updated and instead of telling you to buy the stock, with hindsight it is telling you to sell it. This is classical black box stuff, and despite huge advances in computer science, pattern recognition, neural networks, genetic algorithms, etc, these systems still cost thousands of dollars to buy, and thousands of dollars in trading losses to the user who buys them, until they stop using the system.

Some software is useful though. Traders who do their own analysis and trend following will need some sort of charting software so they can get a feel for the behaviour of the stock. Software packages that give analysis tools and then leave you to make the decision are more work than an automated system, but with practice a human can learn to become a good trader, and may make profits provided sensible trading choices are made and money and risk are carefully managed. Instead of spending a fortune on an auto stock picker which will just cost you another fortune later on, seasoned advice is that such money is better spent at the local book shop, where numerous good trading and investing books can be found.

A long time ago, someone sent me a spreadsheet comparing the costs of several software packages. I don't remember who it was or else I would credit the reference. Metastock, Omnitrader, Daytrader HQ and Trade Tech Market Analyser are among the best known examples of a toolkit program, a grey box, a coach/guru/mentor type program and a black box. For someone who bothered to go out and spend a hundred dollars on books and read them the usefulness of the programs falls as you drop down the list, but the price rises from Metastock through to TTMA, which retails for quite a lot more than all the other programs combined. To view the spreadsheet click here. Due to currency movements the American programs have gone up in price since then, the other (Australian) programs took advantage and jacked up the price. If you know the origin of this spreadsheet, or if you are the guy that sent it to me let me know and I'll provide the source.

In addition to computerised models, there are also people out there who claim to be able to predict the stock market with amazing accuracy, and if you subscribe to their newsletter fortune awaits. It is said that the average stock market guru has a shelf life of about two years, after which word gets around that they are not very good. If a newsletter has been around for more than this time, then it is more likely to be good advice. This doesn't mean that it will be commonly known to the general public though, for example a certain very high profile guru has been found guilty of fraud and admitted to putting strong buy recommendations on stocks he was trying to sell out of himself, and received a reprimand for doing so. He advertises widely on late night TV, and is one of the more recognisable names in the business.

Ask in aus.invest what people think of a guru and you will get more detailed information than the guy who relies on infomercials for all info! Be wary of anonymous posters in the newsgroup that speak up in defence of the guru though, they may be paid shills who spout this stuff to get you to pay hundreds of dollars to buy their lousy rag. Aus.invest readers are not all in on some kind of secret conspiracy to calumniate some fine gentleman who offers wonderful advice, if you see half a dozen people giving detailed arguments and providing links to news sites to back up their information warning you about someone, but some guy comes in with an anonymous Hotmail address, calls everyone liars and says he makes thousands a week trading on this fine newsletter... I'll leave it to you to decide who to trust.

Be wary of opinions and guesstimates. If someone says the market is going to do something, try to find out the reasoning behind this. Though sometimes techniques exist that will enable the analyst to state the likely extent of a move, the market is not always so abiding. An analyst can talk about probabilities and possibilities, but in the market nothing is definite. Yes, there exist techniques that enable some people to talk in advance about stock market crashes and guess their form, usually the crash will come in the form considered least likely by the analyst, and probably at a different time and place to where it was "supposed" to be.

There are successful traders and there are newsletter gurus. The old joke is that only those who can't be the former ever become the latter.

One of my favourite Warren Buffett quotes (and he's made a lot which are brilliant) relates to forecasters:
"We've long felt that the only value of stock forecasters is to make fortune tellers look good."