- 1999: Volume 8, No. 1 Data: The Right Tool for the Right Job

I have been trading now for over 10 years. As I wake up each morning to a new trading day, I focus various information from what government report is due out, to how the weather will affect certain commodities or stocks for the day. What I think about the least is probably what is most important-data. To technical and non-technical traders alike, data is one of the most important, if not the most important element of trading. Trading to all of us is based on a numbers game, between buying and selling. Not only do we mention to friends and family members what stock we may have bought, but at what price we bought it. Without historical data, technical analysis is virtually non existent. Historical data can be as simple as a weekly chart service to as complex as real-time tick data that arrives in as fast as seconds from the exchanges. So which data type should be used, real-time, delayed or end of day? These are the most common questions traders ask when they are ready to trade or even after they have been trading awhile. Before answering these questions, each trader needs to ask themselves some critical questions first. None of us would ever consider purchasing an Indy 500 car so that we go four wheeling. Nor would we use a baseball bat to play golf. The same principle applies when it comes to trading and which data type to use. Before defining the type of data to use, each trader needs to identify several factors first. These factors are: 1) the characteristics of trading system that will be used, 2) the exact markets one wants to trade, 3) the experience level of the trader, 4) the amount of money available to commit to their trading. Here is a breakdown of the different ways of receiving data, my experience with them, and the trader who is best suited for each particular type of data.

The Novice to Intermediate Trader

Obviously someone who is just starting out doesn't need to invest thousands of dollars on computer equipment, expensive software, and real-time software. In fact, thanks to the Internet, most novice traders can get away with a personal computer and a phone line to the Internet.

Although most Web sites do not offer real-time data, why in the world would a novice investor, new to trading, want to trade intraday? I remember my first year of trading, and it was not real-time. I traded right out of Investors Business Daily. In fact when I went to computer trading, I actually had a drawdown due to trying to trade out of my time frame. I worked for a living and could not commit the time to intraday trading. I soon realized this and moved back to end-of-day trading until my time could fit intraday. I believe that 90 percent of people trading could get away with an end-of-day service. This is because much of the money being invested in the marketplace is by people with full time careers not in the trading arena.

Hard Copy Chart Services—Yes folks, they still do exist, and you can also find eight-track tape players in some cars if you look hard enough. Charting Services that arrive via mail have lost their luster, although there are some good services still available. For futures and commodities the oldest and best-known service is CRB Futures Perspective, a product of CRB. This weekly magazine offers 96 pages of charts covering over 80 global futures markets and includes commentary and other items of interest. An on-line version, called CRBcharts, can be seen at www.crbtrader.com/crbcharts. For equities, one of the better services I have come across is called Daily Graphs. Daily Graphs was developed by William J. O'Neil, the founder of Investor's Business Daily. This publication comes to your doorstep every week and has extensive market information including O'Neil's proprietary stock picking indicators as well. This is one of the better reads although it is quite thick and I never could read it cover to cover before the next issue arrived. It is better suited to browsing through certain stocks that interest you. I have not run across a chart service that is as concise as Daily Graphs. They have an on-line version at www.dailygraphs.com for those of you who browse data on-line.

On-line Snapshot Data-On-line data comes in different formats. The first that comes to mind is what is called "request to send." This is simply a snapshot of a quote or chart that appears on your screen after you ask for a quote of that particular asset. Out of curiosity I decided to see how many "quote" pages are on the Web. As of this writing, my favorite server found over two million quote pages on-line. Amazing how many web pages offer on-line quotes these days. But data? That's tougher to find. Remember that historical data is a collection of quotes over time, to create a data series used for charting and analytical purposes. There are sites that provide historical data on an ongoing basis. For simple charts there are many. The one I always go back to is Yahoo Finance (quote.yahoo.com). This site provides all, from charts to real-time snapshot quotes. For stock options, unless you know all the symbols by heart, you will have a tough time with the Web sites that have quote access only. OptionsAnalysis.com (optionsanalysis.com) has a solution for that. How about typing in your favorite stock and getting a table of options strikes and prices with the stocks chart. But it doesn't stop there. Included in the tables are all the options greeks, as well as a model price of what the theoretical options price is. Other sites with stock and options quotes include the exchanges themselves.

End-of-Day Data—This data can be received many ways, but perhaps the most popular is by downloading data from a Web site or bulletin board service. CRB DataCenter provides end-of-day data through its Web site at www.crbtrader.com.

The Experienced Trader

This is the person that is a full-time trader. Most traders I know who like to collect tick data for analysis at night do so by a delayed method. This delayed feed version will not be real-time, but delayed from 10 to 20 minutes. If you are only analyzing the markets in the evening what do you care what time it comes in? Using delayed feeds for receiving data can save you 80 percent on fees when compared to real-time feeds. Traders should always match their trading systems and methods to their personality. This is one of the reasons many purchased systems fail to make money. Their trading style doesn't match the system. Okay, assuming you've identified your trading style and system, simply look at how often the system trades. If the system makes only a few trades a week, or month, end-of-day data will be more than sufficient. If you position trade, again end of day data is all that is required. The monthly cost for end of day normally runs about the cost of two or three trades. If your system makes several trades a day, or often trades once a day, a real-time data feed would be required.

Satellite Feeds—This is the way I receive data. This is a great way to collect tick-by-tick data, however there are some drawbacks. There is a cost for the reception equipment, to be billed in advance by the data vendor. Also, make room for a three foot satellite dish, complete with stand, which needs concrete blocks to secure it to the ground. You could secure it to the side of a building such as your house, but putting it in a clear, level spot works for me. Your next task will be to instantly become an engineer as you direct the satellite disk to the approximate height, longitude and latitude. Once this is finished you merely install the data collection software you plan to use and start collecting data.

Cable Feeds—A much easiermethod to receive data if you have cable access. Basically just plug in the box and go. Certain cable feeds may have a limit on the amount of symbols that you can track at one time. Signal is one of those such vendors. BMI happens to have unlimited symbol tracking. Keep in mind that the more symbols you track, the longer it may take to update the software you are using.

On-line Collection Data—This type of data is continuous feed which will be collected and stored at your PC for review and analysis. Until recently, getting real-time tick data via the Internet was a fable. But thanks to technology and a growing demand, tick-by-tick streaming data is a reality. Data Broadcasting (www.dbc.com) is one of these such vendors that resells data in real-time format over the Internet. There is a limitation on how many symbols you can collect continuous data for, but this type of connection does not require any additional hardware or receiver connections.

There are a few other considerations before deciding which data service to subscribe to. One such consideration is the markets you trade. Most traders can easily identify fast moving markets. For example, most traders can see a difference in volatility between the S&P 500 futures and the corn futures. If you want to day trade, you shouldn't be trading a market like Oats. The markets you trade should also be linked to your trading system and method. A rule of thumb that we use is the higher the margin of the market you're trading, the faster the information needs to be fed to you. A trap many traders fall into is the desire to use delayed data feeds to day trade in order to save money. If you're going to trade and compete with the commercial and professional traders, you need to have the same data, tools and edge as they do.

Your experience level can help determine the type of data feed to use.

Experience Level

Luckily, no first year medical students are allowed to start cutting on live patients. These students always learn on cadavers. To allow them to operate on live patients would be considered absurd and dangerous. Yet, I'm always amazed when a new trader tells me he has signed up with a real-time service so they can day trade. The siren's song of real-time data feeds and day trading is very sexy and seductive. However, if one believes they can start trading using real-time data with little or no experience, they become first year med students operating on live patients. Unfortunately, they are operating on themselves. New traders should be using end of day data to learn the methods of their trading systems, how to make enter and exit trades, and how they deal with trading as a whole. As the saying goes, "Learn to walk before running." As their experience level increases, an increase in the data speed can then be considered.

Available Funds

An additional consideration is the funding requirements of data feeds and market margins. If you were to start a new business, you may not want to lease the high rise office with all the luxurious settings if you haven't sold any product. Nor would you try and design a new product to compete with Microsoft with only a few hundred dollars in your bank account. The same principle applies to your trading account. Trading is a business. If you sign up for real-time data feed, expect to pay (including exchange fees) anywhere from $300 to over $1000 a month depending on the markets you want to trade. This monthly expense almost immediately forces the trader to make trades to generate profits to cover their data cost. When a trader has a defined need for a minimum amount of money that needs to be made, they've already lost. Forced trades seldom are profitable. As in all businesses, conservation of capital through controlled expenses is a must.

Which data is best for each trader really isn't a simple answer. Each trader needs to review these key factors before deciding which data type is best for them.

Tom Gentile is the Chief Options Strategist for Global Investment Research Corp., as well as a full time trader. He is a co-instructor for the Optionetics seminars with George Fontanills. He is a frequent contributor of articles to many publications as well as the OptionsAnalysis.com Web site. You can contact Tom by e-mailing him at hedgehunter@optionsanalysis.com