How Does Technical Analysis Software Work?

What is Technical Analysis Software?

Technical analysis software seeks to automate the visualization of the price and volume movements of assets in the financial markets.  The visualizations are represented as charts.  Investors or traders use the charts to attempt to predict the future movements of those assets based on the historical patterns, this is known as technical analysis.

What Types of Assets are Visualized in Technical Analysis Software?

Technical analysis software typically covers the following financial markets and tradable assets.

  • Stocks / Shares – individual share ownership in listed companies
  • Options – contracts to buy or sell the right to purchase a stock at a future price
  • Foreign Exchange Pairs – the exchange of currencies
  • Commodities & Futures – contracts to secure the future price of a physical commodity – e.g. Sugar or Cocoa
  • Exchange Traded Funds – the trading of shares in a fund covering a specific market segment – e.g. S&P500 Companies
  • Cryptocurrencies – the exchange of cryptocurrencies against actual currencies

What Types of Charts are used in Technical Analysis Software

There are 8 major variations of stock charts, most of which are available across the many software implementations of technical analysis

The 8 Main Types of Stock Chart

The Japanese Candlesticks give a great view of the future short term price movement
The Japanese Candlesticks give a great view of the future short-term price movement
  1. Line Stock Chart
  2. High Low Close Bar Stock Chart (HLC)
  3. Open High Low Close Bar Stock Chart (OHLC)
  4. Japanese Candlestick Charts
  5. Price at Volume Stock Chart
  6. EquiVolume Stock Charts
  7. Point and Figure (P&F) Charts
  8. Market Profile Stock Charts

[Related Article 8 Important Types of Stock Chart + Pro’s & Cons]

How Does Technical Analysis Software Work?

Technical analysis software is designed to download and transform the financial market data and visualize the history of the price movements.  In this example, we will use stock market data.

  • Stock prices are downloaded by the software from an exchange data provider, usually subject to an exchange fee.
  • The number (volume) of stocks purchased and sold at any specific price are also downloaded
  • The time of the purchase or selling of a stock, the volume of stock and the price of the stock are combined to provide the key data for building a stock chart.  Mathematical calculations used to plot the price and volume onto a chart
  • The chart consists of time on the X-axis, price on the Y-axis and volume typically represented in bars across the bottom of the chart.

What Data is Used in Technical Analysis Software?

To build a stock chart the important data required is:

  • Stock Price Open, Last, Close – the price a stock at every time segment from daily, hourly, per second and per real-time tick
  • Bid and Ask Spread & Quotes – these are the offers to buy and sell a stock
  • Volume – the number of stocks bought or sold at any given time and price

We not that pure technical analysis does not need more than the price and volume data over time to visualize the supply and demand of a stock into a chart.  But technical analysis software does more than that, it allows the user to select indicators based on price and volume to assist with future stock price prediction.

[Related Article – Stock Price – 20 Things You Don’t Know]

How are Stock Chart Indicators Calculated In Technical Analysis Software?

Moving Average Calculation Sheet
Moving Average Calculation Sheet

There are hundreds of different flavors of technical analysis indicators.  For this example, we will use the popular indicator, the moving average.

Moving Averages or “MA” are a simple mathematical calculation that takes the average price (mean) for a given period and plots this on a chart.

So the average price for the first 5 days = 3.8.  This is the sum of days 1 to 5 divided by 5.  The technical analysis software will calculate this and visualize it on a stock chart for you.

Beyond Technical Analysis – Fundamental Data

Most modern stock market analysis software packages will also collect the fundamental data for a company for analysis.  This included the important data from the following accounting data.

CNN Money Charts with EPS Plotted
CNN Money Charts with EPS Plotted
  • The Income Statement or Profit and Loss Account: this shows the revenue and the cost of revenue
  • The Balance Sheet: this shows the balance of the asset versus the liability plus the shareholder equity
  • The Cash Flow Statement: shows the amount of cash and cash equivalents flowing through the company.

The most popular fundamental data includes:

  • Earnings per share (EPS) = (Profit – Preferred Dividends) / Weighted Average Common Shares
  • PE Ratio = (Current Share Price) divided by (Earnings per Share EPS)

Technical Analysis Software Architecture

There are essentially two types of software architecture employed in the design of the applications.

Traditional Client Based Software Architecture

Client based architecture means that the software is downloaded and installed onto a PC or Mac.  The software runs locally on the system and downloads the stock market data from the data provider.  After the download, the software manipulates the data using the local storage and processing power of the machine to render the chart visualizations.

MetaStock - Client-based Software
MetaStock – Client-based Software

The positives of client-based technical analysis software:

  • After data download, the calculations can be done without an internet connection (offline)
  • Intensive back-testing and forecasting calculation can be completed
  • Highest levels of security as all of the analysts custom calculations are stored locally on the client device

The negatives of client-based architecture:

  • Configuring, troubleshooting and maintaining the downloaded data is cumbersome
  • The size of the data download is very large, especially for real-time data streams
  • Limited social networking available in this architecture as users are distributed

Ultimately, the deciding factor is the ability to create, backtest and forecast trading systems.

Leading client based software vendors are TC2000, MetaStock, Optuma, EquityFeed, and Quantshare

Modern Cloud-Based Software Architecture

This architecture type means that there is no client software to download and install, and all the stock exchange data resides on the vendor’s servers in the cloud. The charting and visualization are all stored and computed in the cloud, and only the chart to want to visualize is streamed to your client device.

Incredibly Detailed TradingView Power Charting on my Smartphone
Incredibly Detailed TradingView Power Charting on my Smartphone

The positives of cloud-based technical analysis software:

  • Zero client installation – very quick setup
  • Zero data downloads and data management required on the local client device
  • All processing and storage is managed on servers in the datacenter
  • Seamless social network integration, communications and messaging between users
  • Cross-device compatibility (PC, Mac, Tablet, Smartphone)

The negatives of cloud-based architecture:

  • Back-testing and forecasting calculations and system development is limited
  • Privacy & security, the analyst’s work is visible to the software vendor
  • The speed of data and responsiveness of the application is dependent on internet bandwidth

If you want to learn from other traders and share ideas with others then cloud-based software is the way forward.  The simplicity of setup and cross-device compatibility are also deciding factors in choosing cloud-based platforms.

The leading cloud-based software vendors are TradingView and TrendSpider.