How To Build A Forex Trading Model By: Anthony Jerdine / January 23, 2016
Foreign exchange markets are global, 24/7 entities with few regulations and enormous opportunity.
Traders interested in taking the forex plunge need to know that rates move primarily due to news — like an issued statement from a government official — geo-political developments and other macroeconomic considerations. Price movements are often unpredictable. But a forex trading model with clear, step-by-step rules based on a sound strategy can help decrease losing trades.
The first step to building such a trading model is identifying a strategy. That will dictate the rules to follow, such as what entry and exit points to heed, the duration of trade, and so on.
An example of a strategy is the news fade. After news breaks, high volatility and price fluctuations frequently ensue in the forex market. But 15 minutes later, prices return to their earlier levels. A trading model can be built around these opportunities.
Next, decide which forex security to trade. It can be currency notes, or currency pairs such as the euro/U.S. dollar, or something else.
Then plug in specific parameters. They may include news dependency, which means the model should consider the impact of news on the economy, geo-political developments or other market aspects. Or they can refer to timing, like taking a position just before a nation reveals macroeconomic figures.
Next, set trading objectives. Those are considerations like profit or stop/loss levels.
Back-testing the model is essential, and requires applying it to historical data to see how it works.
The bottom line is a good trading model requires patience to craft, but once it’s ready, it can remove emotions and mental roadblocks that frequently cause a trader to fail. Wise traders will search endlessly for ways to improve their models.
Anthony Jerdine January 23, 2016