While skill and strategy are essential to your trading success, choosing the right trading model is equally important (if not more).
Regardless of whether your strategy relies on quantitative analysis, automated systems, or good old gut instinct, selecting the appropriate trading model for your approach is guaranteed to improve your long-term profitability.
If you’re new to trading, looking to refresh your memory, or thinking it’s time to give another trading model a try, this article is for you. In this guide, we break down the main trading models, their advantages and challenges, and how to select one that aligns with your trading style and funding goals.
What Are Trading Models?
Even if you’re new to trading, you’ve probably heard of the term “trading model” before. In short, it’s a structured approach that helps you make market decisions.
It’s important to note that every trader has a unique approach to the game: some use fundamental analysis, others prefer to focus on price action, and some swear by algorithmic trading, preferring to remove emotion from the process.
That said, trading models can be divided into six main types: discretionary, algorithmic, quantitative, market-making, trend-following, and mean reversion. Regardless of your choice, the overarching goal remains consistent: managing risk and maximizing returns.
Types of Trading Models
To help you choose the best trading model for your needs, we’ve compiled a list of the leading trading models and their directions:
1. Discretionary Trading Models
Discretionary trading models put all the decision-making power in your hands, i.e., the trader. Traders who use this model rely on three main aspects to determine their entries and exits: market experience, live price action, and economic events.
While some traders find this model emotionally demanding, others who thrive in fast-paced environments swear by it. Either way, this approach works best for traders who can think quickly and adapt to unexpected market shifts.
If you’re someone who works well under pressure, this trading model may very well be your ticket to success.
2. Algorithmic Trading Models
Some traders like to eliminate emotion from the equation entirely, which is where algorithmic trading models come in.
These models execute trades using predefined rules and automation, eliminating human bias. Algorithms analyze market conditions and take action based on specific parameters, such as moving averages, price action triggers, or statistics.
If you’re wondering whether this trading model is for you, consider the following question: “Do you trust data over intuition and want to scale your trading activity?” If the answer is a solid “Yes,” you may have found your winning approach.
However, it’s important to mention that algorithmic trading models require coding knowledge, comprehensive backtesting, and consistent refinement. If all of this sounds like too much of a hassle, consider exploring the other four models detailed below.
3. Quantitative Trading Models
Commonly used by hedge funds and institutional traders, quantitative trading models apply mathematical and statistical analysis to analyze the market. These traders rely on historical data and probability to determine profitable steps, making them big supporters of Churchill’s famous quote: “The farther backward you can look, the farther forward you are likely to see.”
While this trading model may sound the most reliable, it’s important to keep two aspects in mind:
- Quantitative trading requires strong analytical skills
- It doesn’t always adapt well to unforeseen market events
4. Market-Making Trading Models
Traders who use market-making models focus on providing liquidity by simultaneously placing buy and sell orders. This strategy allows them to benefit from the bid-ask spread by capitalizing on high trade volumes and frequent transactions. As a result, market-making traders make small gains on each trade.
While this strategy may sound tempting, it requires fast execution speed, a comprehensive understanding of order flow, and, most importantly, stable access to high-frequency trading technology.
5. Trend-Following Trading Models
Similar to quantitative trading, these models operate on the principle that markets move in trends. Traders use trend-following models to analyze long-term price movements and take action in the direction of established trades. While this strategy can be beneficial in clear trending conditions, it can cause setbacks when the direction is unclear.
6. Mean Reversion Trading Models
Last but not least, some traders swear by the notion that asset prices will revert to their historical average after significant fluctuations. This is the main principle behind mean reversion models, where individuals anticipate price corrections when entering trades.
While this approach can have a high success rate in ranging markets, it can become a hindrance if risk is not managed correctly. In other words—proceed at your own discretion.
What Trading Model is Right For You?
Although this may not be the clear-cut answer you wanted, the honest response is it depends.
Choosing the right trading model depends on several factors, including risk tolerance, market preference, and your personal trading style. If you prefer a flexible approach that makes space for intuition, a discretionary trading model may be your best choice. On the contrary, traders who prefer structure and consistency may find more success with algorithmic or quantitative trading.
How Falcon Funded Supports Diverse Trading Styles
At Falcon Funded, we understand that everyone has a unique approach to trading. This is why we accept and even encourage our users to implement different trading models (or even a combination of several). Moreover, our approach is ideal for traders looking to refine their strategies without the pressure of using personal capital.
That said, familiarize yourself with our list of restricted trading strategies to avoid potential issues and ensure a hassle-free trading experience with Falcon.
Final Thoughts
Familiarizing yourself with trading models is a vital step in becoming a successful trader. While experience, skill, and intuition are excellent traits to have in your trading toolbox, choosing the right model for your approach will improve your decision-making and build confidence.
If you’re ready to put your trading model to the test or refine your strategy, Falcon Funded offers the freedom to do so with access to real capital. Join a prop firm challenge today and start making waves in the market.
