Trading platforms have made it easy to automate your investing, especially for short term and intensive day trading. But how do you go about choosing the right day-trading software?
In addition to understanding the benefits you’ll get from a particular trading platform, it pays to keep in mind the costs of using them. You may still pay brokerage fees and commissions (although many brokers have gone to zero commissions for various securities).
Balance the costs with the benefits. Assess how well a system matches up with your individual trading needs and strategies. Consider whether it offers the features and functions you require to trade efficiently and effectively.
Key Takeaways
- Day trading software is accessed by traders and investors via trading platforms delivered by mobile apps, websites, and systems downloaded to personal computers.
- This trading software provides trading tools that help day traders operate in an efficient and consistent manner.
- Platforms often include automated trading based on parameters set by the day trader, allowing orders to be sent to the market instantly.
- Trading platforms can also provide a range of charting tools and research options.
- To choose the right day trading software, you should understand the costs and benefits of each product and whether you’ll get the value you seek from the features and functionality.
What Is Day-Trading Software?
Day-trading software is a complex computer system that’s usually provided by brokerage firms. It helps clients carry out their day-trading in an efficient and timely manner.
These systems often automate analysis and trading to enable traders to reap profits that would be difficult to achieve before such software became available.
For example, a day trader may find it impossible to track two technical indicators manually (like the 50- and 200-day moving averages) on three different stocks, but a day-trading system can do it easily. And it can place trades automatically once the set criteria are met.
The features and functions available may differ from one trading software system to the next, and may come in different versions. Apart from brokers, independent vendors also may provide day-trading software.
Note
Day trading is a time-bound trading activity where positions are taken and closed on the same trading day. The goal is to make profits on small price differentials and large order volumes by frequent buying and selling, usually using leverage.
Understand How Day-Trading Software Works
Three basic features of any day-trading software should include:
- Functionality allowing the setup of a trading strategy (based on technical indicators, news, trading signals or pattern recognition)
- An automated order-placing function (usually with direct market access) once a trader’s criteria are met
- Analytical tools to assess any securities you might trade, any existing holdings, and market developments; plus features that act on the analyses.
Day-trading software requires a one-time setup of a trading strategy along with trading limits, the activation of live data feeds, and the go-ahead to execute trades.
Example
Assume stock ABC is dual-listed on the New York Stock Exchange (NYSE) and on Nasdaq. You are looking for arbitrage opportunities. Using the trading platform, you do the following:
- Select stock ABC for arbitrage and select two markets (NYSE and Nasdaq) for trading.
- Assuming both legs of an intraday trade cost you a total of $0.10 per share for brokerage and commission, you aim for price differentials between the two markets in excess of that amount. So you set as the price differential $0.20 or above. That means the software should execute a simultaneous buy and sell order only if the bid and ask prices on the two markets differ by $0.20 or more.
- Set the number of shares to be bought and sold in one order (e.g., 10,000 shares).
- Submit this setup.
Now let’s say that the software finds that ABC has quotes of $62.10 on the NYSE and $62.35 on Nasdaq (a differential of $0.25) for orders of 10,000 shares. The day-trading software will initiate a trade because the criteria matches the defined strategy. It will send orders to the two exchanges (buy at lower priced and sell at higher priced).
If everything goes well, the trader will make $1,500 net profit ((62.35 – 62.10) – 0.10 = 0.15 x 10,000).
Other Options
The software may include stop-loss features. Say that only your order to buy gets executed. Your order to sell does not. How should the day-trading software proceed with the long position? The software could:
- Continue to look for sell opportunities at identified prices for a specific time. If no opportunities are identified in the specified time, it will close out the position at a loss.
- Set stop loss limits and close out the buy order, if the limit is hit
- Switch to an averaging technique—buy more stocks at lower prices to reduce the overall price
Important
It is very important to test your trading strategies on historical data (discounting the brokerage costs). Many brokers offer the opportunity to backtest functionality on their software platforms.
Evaluate All Features and Functionality
The example above depicts arbitrage, where trading opportunities are short-lived. As demonstrated, many day-trading activities can be set up with trading software. So, it’s extremely important to select the right trading platform for your particular trading needs.
Here are some characteristics of good day-trading software:
- Platform independence: Unless a trader is running highly complex algorithms for day-trading that require high-end, dedicated computers, it is often advisable to go with a web-based software offering. Benefits include connectivity from anywhere, no manual installations of upgrades and no maintenance costs. However, if your algorithms require advanced computing, then it is better to consider dedicated computer-based installable software, although that may be costly. Also, some brokerages offer downloadable desktop trading software for the average day trader.
- Features that meet a variety of day trading needs: Are you following a simple day-trading strategy of a moving-average tracking stocks, or are you looking to implement a complex delta-neutral trading strategy including options and stocks? Do you need a forex feed or are you trading on specific products like binary options? Don’t simply trust the claims about a trading platform’s features that you read on a brokerage website. Ask for a trial version and thoroughly assess it. Alternatively, check the screen-by-screen tutorial (if available) from the brokerage or vendor to decide if a platform fits your day-trading needs.
- Additional Features: Day trading attempts to capitalize on short-term price movements during the day. Such short-term price movements are in turn driven primarily by news and supply and demand (among other factors). Does your day-trading strategy require news, charts, Level 2 data, exclusive connectivity to particular markets (like OTC), specific data feeds, etc.? If so, are these included in the software or would the trader have to subscribe to them separately from other sources, thereby increasing the cost?
- Analytical Features: Examine the analytical features available on the trading platform. Here are a few you may need:
- Technical indicators/Pattern recognition: For traders who attempt to profit by predicting the future price level and direction of securities, a wealth of technical indicators should be available. Ensure that the day-trading software you’re evaluating supports the necessary automation for efficient processing of trades based on the desired technical indicator.
- Arbitrage opportunities recognition: To benefit from the slight price difference of a dual-listed share on multiple markets, simultaneous buying (at a low price exchange) and selling (at a high price market) is necessary. This requires a connection to both markets, the ability to check price differences as they occur and execute trades in a timely manner.
- Mathematical model-based strategies: Few automated trading strategies based on mathematical models exist—like the delta-neutral trading strategy—that allow the trading of a combination of options and their underlying security, where trades are placed to offset positive and negative deltas so that the portfolio delta is maintained at zero. The day-trading software should have the built-in intelligence to assess current holdings, verify available market prices, and execute trades for both equity and options as needed.
- Trend following indicators: Any strategy that involves taking positions in price movement trends requires the analytical tools that can identify and confirm these trends.
Consider Costs and Other Factors
Cost of Software
Is the software available as a part of standard brokerage account or does it come at a cost? Most trading software is free by default with a standard brokerage account but may not necessarily have all the required features for your trading needs.
Be sure to check the costs of other, more feature-packed versions of a trading platform.
Price Accuracy
Does the day-trading software support NBBO (national best bid and offer)? Brokers who are NBBO participants are required to execute client trades at the best available bid and ask price, ensuring price competitiveness.
Depending upon country-specific regulations, brokers may or may not be mandated to provide the best bid and ask prices. Traders of international securities with international brokers should confirm support for NBBO.
Protective Features
Find out if the trading platform of interest to you is vulnerable to “sniffing algorithms” that surreptitiously monitor market data to detect trading strategies and behaviors. Ask whether there are trading platform features that can protect the exposure of your strategies to other market participants.
What Are the Best Trading Platforms for Day Traders?
Interactive Brokers, E*Trade, and Webull are three well-known trading platforms that day traders use.
Do I Have To Use a Trading Platform on a Broker’s Website?
Not always. For example, Webull offers a desktop trading platform that can be downloaded by Mac, Windows, and Linux users. And certain brokers offer trading programs via mobile apps.
Does Anyone Regulate Day-Trading Software?
Yes, the trading platforms offered to customers by brokers would be included in the U.S. Securities and Exchange Commission oversight of broker-dealers.
The Bottom Line
To choose the right day-trading software, traders and investors should be experienced with day trading and understand how day-trading software platforms work. They also should do the research necessary to ensure that a trading platform offers the functionality they need for their day trading strategies, at a price that fits their profit goals.
Some popular day-trading platforms include those offered by Webull, E*Trade, Interactive Brokers, and tastytrade.