Nathaniel Daniel296 Sanchez#58

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What is model risk in forex trading systems?

Model risk arises when trading systems or risk models fail due to incorrect assumptions, poor data, or structural shifts. For example, a volatility model may assume normal distributions, but real forex returns show fat tails, leading to underestimated risk. Institutions mitigate model risk with independent validation, scenario testing, and limits on model reliance. Retail traders face model risk when using black-box indicators or unverified EAs. Benefits: structured frameworks for decision-making. Risks: misplaced confidence in flawed models can cause catastrophic losses. Recognizing model risk keeps traders humble, reminding them that models are tools, not guarantees