At the very least, it is useful to have charts of a stock's price as they do give a convenient at a glance picture of the history of a company's share price and at any rate, even the most hardcore of financial analysts and value investors should be cautioned against buying right in the middle of a powerful down move. Having a share's price history on computer will give a good idea of how the company has fared before, and when compared to fundamental information it can be possible to gauge how the stock has appreciated against the general market. Historical out-performers are usually better stocks to buy today than stocks which greatly underperform the market as a whole.
There are essentially three types of software used by traders and investors. Toolbox programs bring together technical or fundamental indicators and information and allow an analyst to run whatever tests he requires. They don't tell you what to do, they just do what you tell them to do. I would recommend toolbox software to anyone, you can spend a few hundred dollars or up to one thousand for a commercial package like Metastock, but then again I would wonder why you would want to when there are superb packages like Simon Haynes' Freecharts, which is a fairly accomplished package available for free (a slightly better version with more features is available at a very reasonable price). There are also fundamental analysis programs available, and many people make extensive use of Microsoft Excel, which can be programmed to do pretty much anything you want it to if you know what you are doing.
Grey box programs are automated versions of tool boxes. You run automated searches using criteria of your own choosing, or pre set systems. For example a grey box could identify all stocks that have been trading in a congested trading range for a week and have just broken out on the upside. Whether or not you were the one that programmed the search, you do know what a grey box is doing, and the system is always fully disclosed. Many toolbox programs can become grey boxes, for example Metastock is programmable and you can ask it to find stocks meeting your criteria, Freecharts also has similar functionality. If the trading system is one you have confidence in, even if you would seek confirmation from other data sources, a grey box can be handy as something to dig through thousands of stocks trying to find the sort of trade setups that you like.
A black box is a grey box program taken further. When you know nothing about how the program works, but it spits out buy and sell signals at you, it is a black box. I do not recommend you pay money for a black box program unless you can get an audited trading statement proving the profitability of the system in actual trading.
There are really three types of black boxes:
Again though, it should be mentioned that automatic stock picking systems that are commonly available at a high price have a terrible track record, and that you should know that despite decades of research, none of the black box trading systems that gained such popularity and were widely sold over the years are still in use. There are always new black boxes being written, but they feed on the inexperienced investor's gullibility and greed. The thought of laying out a sum of money and then making it all back in a few weeks plus a few thousand more gets in the way of a new investor's usual caution.
Alexander Elder, author of Trading for a Living doesn't think much more highly of black box packages than I do. On page 117, this is what he says about black box trading packages:
Black box software tells you what to buy and sell and when to buy or sell it without telling you why. You put data into a black box, lights blink, gears click, and out comes a piece of paper telling you what to do. Thousands of traders pay good money for this.Most black boxes are sold by hustlers to gullible or insecure traders. Black boxes always come with impressive track records showing profitable past performance. Every black box self-destructs because markets keep changing. Even systems with built-in optimisation do not work because we do not know what kind of optimisation will be needed in the future. There is no substitute for mature judgement in trading. The only way to make money from a black box is to sell one.
Each black box is guaranteed to fail, even if sold by an honest developer. Complex human activities such as trading cannot be automated. Machines can help but not replace humans.
Trading with a black box means using a slice of someone else's intelligence, as it existed at some point in the past. Markets change, and experts change their minds, but a black box keeps churning out its buy and sell signals. Trading with a black box is like having sex using a penile implant - you may deceive your partner for a while, but you will never deceive yourself.
(A quote from Elder can always be relied on to add colour to any investment web site!)
A typical tactic used by the slimeballs that sell black boxes is to disguise their sales pitches as "free beginners' trading seminars". The concept of the evening is entirely uninformative, it isn't as if they teach you technical analysis or anything, just tell you how great their software is. If these evenings are trading seminars, then a Palmolive ad is a Doctorate in Chemistry. By advertising a "free beginners' trading seminar", they can be guaranteed that absolute beginners will attend, as most experienced investors wouldn't bother going to some beginner event like that.
This way they get the undivided attention of dozens of total beginners, who are unaware that software like this costs much less than these guys sell it for, or that much better software is available. Anyone who advertises a product sales pitch as an educational night should be immediately suspected. This is a common trick, and I see these ads in the paper all the time. I even went to one for fun one night, I didn't know if I should sit up the back and heckle the lecturer/salesman or leave these poor fools to their fate. I asked a few questions and the salesman brushed them aside by pleading ignorance of the workings of the product, and went back to aus.invest to tell everyone what a hilarious load of bull it all was. If you are not experienced in shares you might be vulnerable to this stuff, but if you are a little more savvy these nights can provide endless amusement, and are worth attending for giggles alone.
It isn't even really illegal to put out software as bad as this. You can make all manner of promises regarding what your software does, as long as you put a "trading always carries a risk, your results may vary" label. Just because it is sold off the shelf by reputable traders doesn't mean the software is any good. This is why it is so important to search the Internet for reviews before you buy software. A number of programs costing thousands of dollars that are absolutely useless are floating around, neural nets, exotic trading systems, black boxes. Save your money.
The most endearing trait of good software is that it is easy to pull up the chart you are looking for without a fuss. You can do a few different tests and draw in trend lines and run a few indicators if you want to. Other than that, the rest is really unnecessary. I have Metastock, a very powerful, very good software package that traders consider to be about as good as software can get. I probably use 1% of the functionality and that is not because I never bothered to learn it... but the more I learnt about trading and technical analysis, the less I was interested in running complicated systems and exotic indicators. Most traders can do without them completely and use very simple, very cheap software (although they probably are secretly a little bit jealous of Metastock users!!) If I could go back and have my time again, the first thing I would do differently is buy cheaper trading software! Your mileage may vary, I am sure someone out there has a use for all those hundreds of indicators...