Should You Use Stock Picking Software?
In today’s market, everyone is looking for an edge. From raw beginners to advanced traders, people want to use just about any bit of technology to give them an advantage – and this includes stock-picking software.
Stock-picking software really took off over the last decade, as online trading exploded. Now, it’s hard to turn on the TV or browse the internet without finding some reference to software that, among other claims, is supposed to give you a near-automatic way to profit in the market.
Does this software actually work? Or, is it just a high-tech, computerized version of strategies that have been used for decades?
Here, I’ll cover stock-picking software and see if it is something you should consider – or if it is something you should leave by the side of the road in favor of another approach altogether. Alternatively, if you’d like to see a review of MarketClub, which is one of the more popular stock picking programs, click here.
What is Stock-Picking Software?
Stock-picking software is basically a computer program that helps to select the best stocks for the market for a particular situation. They began decades ago when people created computer scripts that would automatically select stocks based off certain criteria, like market price, market capitalization, volume, moving averages, trends, reversals, price-to-earnings ratios, and a million other metrics.
Today, it’s basically the same; thousands of programs exist in the market today that either claim to help you navigate and filter the data to find the best stocks based off your input or to actually choose the stocks for you – something that is pretty dubious, as we’ll explore.
In essence, most forms of stock-picking software today provide some way to analyze large amounts of data and narrow down stock choices to those that fit the criteria you use.
Does Stock-Picking Software Work?
I’ll admit that there’s something to the idea of using computers, scripts, and algorithms to help you select stocks, analyze data, make use of indicators, and provide some kind of framework to your trading. But, I think the mistake most people make when they think of this software is that they believe it will do everything – or even most things – for them.
The truth is, stock-picking software really is only as good as the trader using it. It’s a do-it-yourself system that relies heavily on your input. At least, the software that actually works does; the kind that doesn’t work is generally the type you see in infomercials.
This particular category of software falls shortly of directly promising results (because that would be illegal), yet comes very close to that line – which is misleading.
Really, what I’m mostly talking about here when I refer to software that works is nothing more than a stock screener – a piece of software that takes the thousands of stocks on major exchanges and narrows them down to a manageable list based off the technical and fundamental factors you want to use.
Stock screeners are terrific to use for investors who rely on their own research and judgment and know what metrics they want to use – and why. But, they do not choose stocks for you; they only give you options.
Should I Use Stock-Picking Software?
Generally, I advise against using software that claims to pick stocks or to make it easier for you to pick stocks. These programs tend to be misleading and almost never live up to their claims. Besides, if a system actually generated impressive results on a consistent basis, that program probably wouldn’t be up for sale anyway (since you could make far more money with it than by selling it).
The best way to earn money in the stock market is through a tried-and-true formula:
- Solid research of the company’s financial data
- Firm understanding of technical indicators and trends
- A disciplined approach built on a strategy
That’s how Warren Buffett earned his billions, and the most successful traders follow that pattern. Substituting the judgment of stock-picking software for your own is not a good idea because the market can’t be beat by a system. Only a disciplined, knowledgeable, and savvy trader can earn a profit consistently – without relying on software.
The same goes for non-software versions of stock-pickers – you know, newsletters and sales pages and emails that promise a can’t-miss system for earning tons of money in the market. Always be skeptical of these and other approaches.
It’s one thing to look at a system like CAN SLIM, which gives you the fundamentals of a value-based strategy; it’s another to trust someone who claims you can consistently “beat the market” if only you download this program, or buy this DVD, or pay for this subscription.
When looking at stock-picking software, remember two words: Buyer beware.