Abstract:
In this paper we will discuss about how price moves in a trading system. Several price models are popular in the market. The traders have to choose the best one for developing their trading system, otherwise they will not be able to increase the profit level.Several models are available in the market to depict the price movements in a trading system. Some think that the price moves in a Gussian way while some do not support it. One thing is for sure that the price movements are not linear at all. Therefore, if a trader develops his or her own price on the basis of normal distribution, then there is every chance of loosing profits.
Some price movements do not notify any "tradable trend". These are termed as noise. A good trading system should be able to help the traders to differ an actual trend from a noise. Many trading systems use filters like, exponential moving average, to avoid the noises.
In case of moving average, the mean of the last few trading days, say n, where n is a positive integer, is taken. On the other hand, exponential moving average is almost like the moving averages with few exceptions. The crossing point of a long term and a short term moving average indicates a classical trading signal.
Filtering can be done in a more efficient way by using the digital trading signals. Although those signals are very complicated, but they provide the accurate results.
However, one of the most popular price movement models is the Breakout model. When the value of a currency pair exceeds its average price for a certain period then, it can be said that a breakout has occurred. Normally, the 20-day breakout is used in most of the cases.
