A trading model is a rule-based structure created to govern trading activities. Trading models help take some guesswork out of the markets while encouraging investors and traders to set risk parameters.
Models based on proven rules can remove human emotions from decision making. A thoroughly bench-tested statistical model can provide a framework for successful trading.
Some traders backtest their models using historical data and demo accounts to verify how well they work before committing real funds in live markets.
Example of a trading model
An example of a trading model could include trend trading forex pairs based on various criteria and rules that you decide not to breach.
To build the model, you’d decide what style, method and strategy to employ, how much money to risk on each trade and an acceptable level of market risk at any one time. You would also set profit and loss targets.
The trading rules would most likely include which conditions need to be met before you get in or get out of a market. You might use a combination of technical indicators for these entry and exit decisions.