A trading model or a plan is a set of defined rules on how the trader operates. It’s like a step-by-step instruction on what to do every time he trades.
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Today, we’ll try to understand why a trader needs a trading model and how to build one. Surely, there are many advantages to having a trading plan. You base it on the set of facts and your emotions will not intervene with the process.
In addition, you can try the plan out on the historical data and see if it’s legit. Then you can automate it and you won’t need to monitor the charts all the time.
In order to build this plan, there is no need to be the advanced trader with many years of experience. On the other hand, you must remember that unless you understand how the prices move and where the opportunities are waiting, you won’t succeed.
The first step in building the model will be to conceptualize it. You must study the history and tons of data on the trends in order to create a concept. It is likely to be your result of the research as it is based on the observations.
Then you identify the opportunities. Verify your concept based on the older data and you’ll easily identify the opportunities or stocks to trade.
Step no.3 involves the actual development of the plan. This is where you gather your knowledge together and create the variations based on the results of your research about the concept and opportunities. You still continue to check if it’s applicable to the historical data and add the changes if necessary. After you explore variations, you’ll be able to observe if there are positive results. The modern age of technology allows you to run the plan through the special software and predict the trends as well as analyze more data. Your aim must be to prove the positive result of the trading.
When you are done with that step you move on and test your trading plan. Find out if it leaves enough room for your profit, how often you can use it and if it matches the regulations.
Step no.5 is making a choice whether to keep it and go live or to leave it and start again. Based on the results of your test, it’ll be quite clear whether to keep it or forget about it.
Then you need to be ready for the failures and restarts. Sometimes you win, sometimes you lose and it’s fine. Moreover, with the flow of time, the model is likely to get outdated, so you must be open to improvements and changes. Be flexible and study the trends.
The final step is to make sure you accounted for the risks. Risk management is vital in this business.