DEFINITION of 'Trading Software'

Trading software facilitates the trading and analysis of financial products, such as stocks or currencies. Often times, brokerage firms provide their clients with trading software to easily place trades and manage their accounts, but traders can also purchase third party trading software that supplements or enhances what brokerages provide.

BREAKING DOWN 'Trading Software'

Trading software have proliferated in recent years due to the growing popularity of electronic communication networks, or ECNs, and the availability of application programming interfaces, or APIs. ECNs are alternative trading networks that enable trading outside of traditional stock exchanges or bourses, which have made it far more cost effective for discount brokers to offer their own trading software. At the same time, APIs that provide real-time price and fundamental data have made it easier for third-party software developers to enter the market.

Types of Trading Software

There are many different types of trading software with different features provided by both brokerages and third-party developers.

Some of the most common features include:

  • Placing Trades - Most trading software has the ability to place trades, including market orders, limit orders, and other advanced order types, as well as the ability to look up real-time quotes and view the Level II order book.
  • Technical Analysis - Most trading software includes interactive charting capabilities, including both chart patterns (e.g. trend lines and shapes) and technical indicators (e.g. moving averages or momentum oscillators).
  • Fundamental Analysis - Some trading software provides access to fundamental information, including financial statements, analyst ratings, and other proprietary tools designed for investors to simplify due diligence.
  • Programmatic Trading - Advanced trading software enables traders to develop trading systems that can be executed programmatically rather than having to manually click a button. In addition, these software solutions may provide backtesting functionality designed to help traders see how their automated trading systems would have performed in the past.
  • Paper Trading - Some trading software includes the ability to place faux trades, which is known as paper trading. That way, traders can test out their skills to see how they would perform before committing actual capital. This is especially common in the forex markets.

Before deciding on trading software, traders and investors should carefully consider what features they need. Active traders that rely on automated trading systems may choose entirely different trading software than an investor that only looking for the ability to place trades. In addition, these software applications may have different fee structures, performance characteristics, and other factors that impact profitability. Traders should consider all of these factors before making a decision to help maximize their profitability.

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