How to Build a Forex Trading Model?

In foreign exchange market, it is very necessary to establish a suitable forex trading model, which can help you reduce loss to a certain extent and make more profit. Today, let’s talk about how to build a foreign exchange trading model.

1. Determine trading strategy

Creating a trading model requires suitable opportunities, which in turn involves choosing a strategy that has been determined, or conceptualizing the new strategy as a variation of the standard strategy. Trading strategy remains central to any trading model because it clearly defines the rules to follow, entry and exit points, profit potential, duration of trading, risk management criteria, etc.

2. Confirm the asset type to be traded

The specific strategy of forex trading needs to be carefully selected in the following aspects:

Will the transaction only involve currency transactions, or include foreign exchange futures, foreign exchange options and more advanced foreign exchange derivatives (such as barrier options) transactions? Whether the currency pairs, such as Euro, US dollar, Japanese yen, Australian dollar, etc. are worth trading should be determined according to the strategy. What kind of currency does the selected currency pair belong to? Is it the primary, secondary, or foreign currency? Each of these categories owns specific characteristics.

1. Insert forex specific parameters

Trading timing: the foreign exchange trading model should take time dependence into consideration, for example:

Opening positions before the release of macroeconomic data;

Trading in more volatile currency pairs during the after-hours, for example, Australian traders make transactions of Euro dollar currency pairs at night of;

Foreign currency transactions are only conducted in designated banks and OTC markets during intraday hours.

Technical tools, fundamental factors and monitoring requirements: If the selected strategy requires continuous monitoring of DMA charts or Bollinger Bands, or needs to be calculated based on fundamental macroeconomic data, the foreign exchange trading model should have all the necessary tools for these requirements.

2. Set a trading target.

This step focuses on locating the most suitable among different values and merging the following basic characteristics into the trading model, including profit level (such as the movement of points); stop loss level; fund management method: how much money to bet per transaction , How to bet (a fixed amount per transaction, or a progressively changing amount of change);

Risk management and scenario analysis considerations, if applicable, can be started with some hypotheses and conduct more iterative tests, so as to find the most profitable hypothesis and fine-tune it.

5. Back test the model

Any trading model developed by an individual reflects the characteristics, thinking process, character and experience of the builder. Important aspects are sometimes overlooked by traders, due to the constant constraints of knowledge and even personal challenges to blind beliefs in creating models by oneself. Therefore, it is particularly important to test the model with historical data, identify errors, and avoid losses in real transactions. Retrospective testing also allows customization within the set goals (profit target, stop loss, etc.) to further optimize the developed models and strategies to ensure the realization of maximum profit potential.

6. Iterative analysis of the transaction model

The development of a trading model requires patient analysis, including numerous iterations through repeated changes to mathematical parameters and changes to basic theoretical concepts. In this cycle, it is helpful to keep track of successes and failures, so that you can record which are valid and which are invalid, and there are useful in a long trading career.

The establishment of a good, suitable trading model can eliminate the negative effects of many transactions, making the transaction more rational and objective, so as to reduce losses and achieve the ultimate goal of profitability.