For traders ready to take the plunge, forex trading offers enormous opportunities on a global scale, running 24 hours a day. However, doing so before strategizing and implementing quality forex trading models can be ill-advised.
In this article, we discuss the guidelines and outline for building a forex or currency trading model. In addition, we discuss how forex trading differs from equity trading, as well as specific aspects to consider when building a forex trading model.
Markets offer tremendous opportunities for participants who follow a variety of patterns and principles to trade (fundamental, technical, price action, etc.). At any given moment, one is either losing or winning. A trading model built on a conceptualized strategy allows for reducing the number of losing trades and increasing the number of winning trades, thus enabling systematic profit-making.
The Difference Between Forex Trading and Other Markets
Purchasing power parity and interest rate parity are considered to be two fundamental concepts that drive forex rates. Forex trading differs significantly from stock trading in that it is global, operates 24/7, and has limited regulation. Consequently, forex price movements are highly sensitive, unpredictable, and susceptible. Economic developments, geopolitical developments, and inflation are among the primary influences on forex rates.
Conceptualize/Identify a Forex Trading Models
The process of building a trading model involves identifying suitable opportunities, which in turn requires selecting defined strategies or conceptualizing new ones as variants of standard ones. A trading strategy is at the core of any trading model since it specifies the rules to follow, entry/exit points, profit potential, length of trade, and risk management criteria. As an example, here are two popular forex trading strategies:
News fade: The irrational forex market often reacts to news after the release of official data (GDP, employment, non-farm payroll data, etc.). This results in significant price fluctuations immediately after a news release. Prices, however, often move back to earlier levels within 15 minutes after a news release. It is possible to build models that take advantage of these opportunities.
Inside-Day Breakout: Candlesticks show inside-day breakouts when today’s highs and lows are within the previous day’s highs and lows, indicating reduced volatility. Day after day, there can be multiple inside-day patterns, indicating that volatility is continuously decreasing and a breakout is increasingly likely. Based on this concept, forex traders develop models and strategies.
Choose the right Forex security to trade
It is important to carefully select the following strategies when trading forex:
The assets—will the trade involve trading currency notes or forex futures, forex options, or more advanced forex exotic derivatives (like barrier options)?
The currency pair(s) worth trading based on the identified strategy (e.g. EURUSD, JPYAUD).
Does the selected forex pair belong to a major, minor, or exotic forex currency group? Specific characteristics can be demonstrated by these categories.
The parameters specific to your forex trading models need to be input
To build a forex trading model, post-trade strategy and tradable security identification are the next steps:
No forex trader can ignore news related to geopolitical developments, the economy, or macroeconomic figures unless they are a long-term investor. Forex trading models should include news impact – wholly or partially, manually or automatically – to the extent that it fits into the trading model.
Forex trading models should account for timing dependencies, such as:
- Predict macroeconomic figures just before they are released.
- Trading a forex currency pair with high volatility during off-hours, like an Australian trading EURUSD in the night.
- Trading in exotic currencies only takes place during business hours at designated banks and over-the-counter markets.
Identify your trading objectives
To determine the best fit for the trading model, we must incorporate the following basic features:
- Profit Levels (like Pips movement)
- Stop Loss Levels
- The amount of money to bet on each trade, and how it should be bet (fixed amounts per trade or variable amounts with progressive increases).
- Analyzing scenarios and risk management, as appropriate
As more iterative tests are conducted to find the most profitable fit, assumptions may be fine-tuned.
Forex Trading Models Back-testing
Trading models are developed by individuals based on their characteristics, thought processes, temperaments, and experiences. As a result of knowledge limitations ego challenges or blind belief in self-developed models, traders sometimes overlook important aspects. This is why it is important to test the model on historical data, identify errors, and avoid such losses in real-world trading. Additionally, backtesting allows fine-tuning of the developed model and strategies to ensure maximum profit potential based on the set objectives (profit targets, stop-losses, etc.).
Analyzing forex trading models iteratively
The development of a trading model requires patient analysis, which involves numerous iterations by changing mathematical parameters in addition to varying underlying theoretical concepts. To maintain a useful record of what works and what doesn’t, it is helpful to keep a record of failures and successes during this cycle.
Automating trade and building models with computers
Nowadays, everything is automated. Remember: “A program is only as efficient as its underlying concepts and practical implementation.”
By searching for patterns in historical data, computers can develop new models based on those patterns. Using historical data in backtesting can also be helpful.
On a website like Telegram. forex, you can either use the available applications for free or purchase them. If you are familiar with computer programming, you can also build your applications. To avoid any pitfalls later, make sure you fully understand and apply the computer programs to your own chosen strategies.
When trading models are used, emotional attachments and mental roadblocks are removed, which are known to be the major reasons for trade failures and losses. Trading established models in a defined and systematic manner are always exciting, but wise traders are always considering the possibility of failure and adjusting their strategies based on market developments. Forex trading models can provide profitable opportunities through a pragmatic approach, monitored continuously, and improved.