A trading model refers to a computer generated forecasting tool that is used to predict future price movements in the forex market. A trading model uses historical data to create a virtual copy of the market. Then the trading model identifies patterns and uses them to project future movements. Trading models generally use gross simplifications to reduce the amount of data crunching and processing power needed to make forecasts.
Trading models were once seen as the future of forex trading. However, to run in a timely manner, many trading models require short cuts that simplify data for processing. The limitations of the data going into to the trading model can lead to errors (deviations) in the forecasting. Instead of attempting to model a market as large and diverse as the forex market, software makers have created algorithmic programs that take a rule-based approach to identifying patterns in real time data. These algorithms then make suggestions to traders rather than trying to model the future.
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