Winning Edge Trading: Successful and Profitable Short- and Long-Term Trading Systems and Strategies

CHAPTER 9

The Winning Edge Trading System Market Model

Regardless of the type of trading system you employ, a key component for a system’s success is its underlying market model. The term market model refers to the manner in which your system deciphers market price behavior. Your model explains factors that may cause a security’s price to go up and down. The more realistic your market model, the better you could explore and benefit from its operation.

A sound market theory and model describes the inner workings of capital markets based on a set of assumptions. A theoretical model, therefore, analyzes the behavioral regularities by reducing them to more basic components and quantitative terms. If the assumptions are more realistic and reflect the dynamics of the real world and everyday experience, the accuracy of the model increases. Furthermore, a model insinuates how certain principles govern market functions. Thus a model should explain the working of the market. However, the real test for a model is its practical implications. In other words, the value for a market theory is measured based on the accuracy of the representation it offers. For a trader, this means how useful and functional the proposed model is for profitable and successful trading. Finally, a theoretical model should be compared and contrasted with other established models to point out its advantage over the others.

The principles governing capital market functions and behavior according to my Winning Edge Market ...