Since the very first exchange of stock for money, investors have dreamed of a machine that could automatically identify entry points and selling levels on a consistent basis. In other words, identify winners before they can.
Thus far history has defied any attempt to create such a device, and while the advent of computing technology and the software that makes it run takes us orders of magnitude closer to that dream than ever before, the elusive golden calf of automated profitability remains unfilled.
This is no less true of options trading software, which applies the same principles of algorhythmic database management to traded options as it does with stocks.
The Role of Trading Software
Trading software – both for stocks and for options contracts – allows investors to establish criteria to identify stocks that, due to price swings and volume indicators, become more attractive buying opportunities, and conversely, using the same variables, urgent selling points.
The software used real-time market data to monitor a relationship between historical data for a selected stock and the current conditions of the market, both in terms of volume and directional momentum.
Of course, no software program yet developed can interpret and implement fundamental research and market forecasting into this model, which means these trading programs address the prospect of buying and selling strictly from a technical basis.
These programs monitor the trading range of a given stock, and when the current price reaches either an upper or lower threshold within that range, and with sufficient volume and in context to the overall market, it program flags it as a prospective buy or sell.
Who Buys, Who Sells
Some programs can be automated to execute trades based on these signals, others require manual implementation by the user.
In either case, 100 percent reliability remains elusive because the market, especially in the short term, is a combination of short and long term factors, both fundamental (company-specific financial data and forecasts) and technical (trading ranges and volume).
However, for active investors who don’t have time to closely monitor stocks to see when their trading ranges are coming into near-term proximity, these programs are a valuable screening tool.
Programs that Optimize Options Trading
Applying them to options is perhaps even riskier, because price fluctuations are leveraged and exaggerated by relatively small percentage moves in an underlying stock. Which means options prices move quicker and more unexpectedly.
Options trading software used to monitor both existing holdings and companies on a prospective buy list becomes an invaluable tool for active investors, who are charged with not only watching the price movements of contracts, but of the underlying stock itself.
The sophistication of these programs comes in a wide variance of complexity and price, meaning buyers need to understand how they intend to apply this tool within their overall strategy. The more pervasive and comprehensive the program, the more it costs, amounting to the tens of thousands of dollars in some cases.
One thing, however, remains constant. The need for human judgment and intuition can never be undervalued, nor can it ever be fully automated.
