INVESTMENT software packages have revolutionised retail investment. The awesome power of modern computers, the instantaneous speed of high bandwidth and the cornucopia of information available in the blink of an eye over the internet all offer investors undreamt-of ability to choose, track and manage an investment portfolio, from the comfort of their own study — without, if they so choose, ever talking to an adviser.

Most investment software is based on technical analysis — the study of share price and volume charts, also known as charting — and lends itself so readily to short-term directional trading that it is usually known as “trading” software.

The trading software instantly throws up charts and is laden with indicators, studies and overlays to help identify chart patterns that can be used to predict where the price is going.

Software packages are often advertised on the basis of the money that their users purportedly make in the stock market, but they are not a “magic bullet” for share trading success, says Charles Browne, president of the Australian Technical Analysts Association (ATAA). “You can’t buy a trading software package and simply expect it to make you money on its own. They are good tools to have in the toolbox, but they require quite a bit of knowledge and experience to use well.”

For investors who favour a fundamental approach to investing, software programs also crunch the numbers they need — digesting and comparing companies’ reported sales revenue, cash flow, earnings, dividends, assets and liabilities.

Programs such as Stock Doctor, Conscious Investor, Value Gain, Bourse Data, Market Scan, Insight Trader and MetaMarket+ have made it easy for an investor to sift quickly through large numbers of companies to find those that meet their specific investment criteria.

Investors can “screen” the entire market for a list of the best — or worst — stocks on any fundamental number or ratio they choose. But just as with the technical analysis software, while the instant ability to identify, classify and list stocks by any fundamental criterion makes the investment task easier, it doesn’t do it for you.

The ATAA offers a very helpful trading software survey (available to non-members for $19.95, through the association’s website at ataa.com.au), which compares the features of more than 50 trading-related software packages and stock market data vendors available in Australia. The ATAA divides charting software into three categories:

* Tool boxes: (or “white boxes”): Software that creates charts from a database of market prices, volumes, open interest and other specialised data series. A tool box also calculates indicators from the database and draws charts, but doesn’t tell its user to buy or sell shares: the user performs the analysis and makes their own decisions. A tool box describes the reasoning it uses, (that is, the algorithms, or methods of computation, which analyse price and volume data from the market) and allows the user to incorporate their own trading rules, by changing the settings. The ATAA says tool boxes are by far the biggest sellers.

* Black boxes: Software systems that generate buy and sell recommendations through proprietary (undisclosed) algorithms. Investors using a “black box” are relying totally on the program. If the black box reasoning is wrong or unreliable, you won’t know; nor will you have any control over the settings. You will also not be able to properly assess the level of risk in the program, and whether the risk matches your own risk tolerance. The Australian Securities & Investments Commission (ASIC) requires software vendors to be licensed if their program generates buying and selling advice. An ASIC licence means that the people involved meet basic standards, including membership in a complaints resolution scheme.

* Grey boxes: These systems resemble a black box in that they generate trade suggestions from proprietary algorithms, but they provide a general idea of how the formula works and sometimes allow the user to modify the settings or parameters. They may also have an associated tool box component. If they are expensive, they are probably disguised black boxes, says the ATAA, which recommends that they should be evaluated the same way as a black box.

Sean Dostal, managing director of online investment store Moneybags.com.au, says the first step in choosing a package is to decide which features you need. Then, the investor must determine how experienced they are, and what is their investment style.

“You’re a beginner if you have a basic understanding of the stock market and you’re looking for a tool to more easily display information and organise your trading. You’re ‘intermediate’ if you’ve been educating yourself and trading for a reasonable amount of time. You have a trading plan that incorporates a consistent strategy to buy and sell, and manage risk for each trade.

“You’re ‘advanced’ if you have a detailed understanding of trading, and a rigorously tested trading system that you have tested against many different types of markets. At this level, you’re probably looking for customised scans and build-your-own indicators.”

Dostal says most investors fit into either the beginner or intermediate categories, and shouldn’t be fooled into thinking that they need “all the bells and whistles” of the more complex — and expensive — packages.

Before buying a software program, investors must ensure that their computer hardware, operating system, memory and hard drive will run the software, and that their internet connection will handle the data traffic. If any of these elements falls short, you may not be able to run the software, or it may run slowly or be difficult to use.

Whatever software program you buy, it’s useless without the numerical data. The choice of data supply is important: the cost of the data feed can blow your budget easily if you don’t choose the right software. End-of-day data — downloaded after the close of the trading day — is much cheaper than live intraday data.

Most software packages on the market come bundled together with data supply, at least for the first year. Dostal has provided a table of the most popular tool box software packages, with their prices, including one year’s supply of data.

Alex Douglas, chief technical analyst at independent stock market advice firm Fat Prophets, says there is a very real element of “buyer beware” in trading software. “The number one thing is that under no circumstances should you buy ‘black box’ software, or sign up for expensive courses. You shouldn’t have to spend thousands of dollars on a trading system.

“The thing is that most of the trading software packages that you buy completely oversupply you with indicators, studies and overlays. There are literally hundreds on some programs, and most people will find that they’re inundated with indicators that they might not use. Unless they’re a hard-core intraday professional trader, they’ll only use a few of them, and that will be all they need.

“Also, these days most people will get, through their account with their online broker or CFD provider, a pretty good charting package. These vary in quality and features, but for most people, they will be enough.”

And if you don’t have access to a package through your broker, you can get very good programs for not very much, says Douglas. “I use a package called AmiBroker, which was created by a guy living in Poland. It’s fantastic software, its standard version costs $US199 ($250) as a one-time fee (the “Professional” version costs $US279), and you’ve got to add a data feed to that. You can use free end-of-day data from Yahoo, but you get what you pay for. Really, for 97 per cent of retail traders, something like AmiBroker is all they’re going to need.

“You don’t have to spend big amounts of money. You can easily buy something that is well beyond your capabilities, but overcharges accordingly. AmiBroker has all the bells and whistles you could want, it’s very fast, but it doesn’t cost you an arm and a leg,” says Douglas.

Andrew Doig, senior analyst at charting and technical analysis education firm SpiWatch, says investors who want to explore the field beyond what their broker or CFD provider offers still don’t have to spend money.

“There’s a plethora of free stuff available on the internet. I would recommend that the average investor who wanted to look at charting and trading software firstly spends a bit of time on brokerage sites and gets up to speed on the stuff that’s offered for free,” he says.

“There are plenty of websites — dozens and dozens — that investors can go to and learn all about the studies and indicators that might be offered on their brokerage sites. Just plug the name of the indicator into a search engine.”

In this way, says Doig, investors don’t have to spend money to find all they need. “Unfortunately, trading software has a well-deserved reputation as a rip-off area. If you’re not satisfied with what your broker or CFD provider gives you for free, by all means buy something like MetaStock.

“That’s one of the most used software packages around the world: to get MetaStock and an adequate data package, you wouldn’t need to spend more than $1200-$1300. For that, you really would get a system that flies, but bear in mind, there is a bucketload to learn. But don’t get sucked into expensive software packages and courses, because they’re not worth it. You can’t learn technical analysis on a whiteboard.”

But a course can help, says Dostal. “The software is only a tool — it doesn’t tell you what to buy and sell. To say “I’ve bought this software and I’ll just play around with it’ is flying a bit blind. You’ve got to understand the strategies and the reasoning behind the investment you’re doing.

“We recommend to beginners the Interactive Trading course, which is a multi-media course, priced at $440, which gives you some basic strategies in both technical and fundamental analysis, to get you started and give you a bit of understanding about what you’re doing.

“It’s a home-study course, with more than 100 tutorials, on two multimedia CDs that we send out. We think that’s money well spent.”

Doig is especially critical of the diploma of share trading and investment course, offered by market education and investment advice provider Wealth Within.

“The very notion that once someone has completed a pseudo-course and has a diploma of share trading, and they can go off and trade successfully forever, that is a joke,” he says.

Not surprisingly, Dale Gillham, chief analyst at Wealth Within, has a different view. “Ninety per cent of traders don’t make money, because they don’t really understand what they’re doing.

“They learn some really basic things like a moving average or a relative strength index (RSI) stochastic, but they don’t understand trends and movements and confirmation. That’s where our course can really help.”

The diploma of share trading and investment — which will set you back $5795 — is conducted in five modules, taught online, with “webinars” and monthly live teaching by Gillham and Wealth Within’s two senior traders.

Although the course is aligned with the Market Analyst program, Gillham says people can use its precepts with any software program they like.

“Our course is the only accredited share market trading course in Australia. It is accredited through the Australian Training Quality Framework (AQTF) and we’re a registered training organisation (RTO), the same as any technical college.

“The Financial Planning Association (FPA) has also given planners 75 continuing professional development (CPD) points for doing the course and the CPA (certified practising accountants) give their members one CPD point per hour.”

Most of Wealth Within’s students are retail investors, but Gillham says the industry is now recognising the course. “We’re now getting financial planners and accountants and stockbrokers putting staff through the course as part of their job.

“Of the retail element, a lot of them run self-managed superannuation funds (SMSFs) and want to do it so that they can be the investment manager of their fund — they want to know how the market works,” he says.