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3 Fintech > Intelligent Algorithmic Trading > Flashcards

Intelligent Algorithmic Trading Flashcards

(106 cards)

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1
Q

What is a financial market?

A

A place where traders gather to trade instruments, bringing buyers and sellers together.

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2
Q

How has technology influenced markets?

A

Enabled electronic systems for trader communication, replacing or complementing physical trading floors.

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3
Q

What is an example of a physical trading market?

A

New York Stock Exchange (NYSE), where traders meet on trading floors.

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4
Q

What is an example of an electronic market?

A

NASDAQ, an electronically linked market.

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5
Q

What is market microstructure?

A

Study of organized trading in instruments, focusing on transaction services and pricing.

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6
Q

What instruments are traded in markets?

A

Stocks, bonds, warrants, options, futures, commodities, betting contracts.

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7
Q

What happens to assets in trading markets?

A

Assets are transferred between investors, not transformed.

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8
Q

What is the bid-ask spread?

A

The difference between the highest buy price and lowest sell price, reflecting transaction costs.

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9
Q

What is trading from a search perspective?

A

A process where buyers find sellers and sellers find buyers at desired prices and quantities.

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10
Q

Why do traders seek specific counterparts?

A

To trade at favorable prices and desired quantities, especially for large trades.

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11
Q

What percentage of US capital wealth is in stocks?

A

About 20%; most wealth is in rarely traded real estate.

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12
Q

Why understand market structure?

A

It affects liquidity, price efficiency, volatility, and trading profits.

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13
Q

Who are brokers in trading?

A

Individuals trading on behalf of clients.

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14
Q

What are investment sponsors?

A

Entities like pension funds, mutual funds, trusts managing investments.

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15
Q

Who employs investment advisors?

A

Investment sponsors, to manage their funds.

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16
Q

What do buy-side traders do?

A

Implement strategies for investment advisors.

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17
Q

Who are beneficiaries in trading?

A

People who ultimately benefit from investment sponsors’ funds.

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18
Q

What is a dealer in trading?

A

A person buying/selling securities on their own account.

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19
Q

What is a long position?

A

Owning an asset, profiting when prices rise by buying low, selling high.

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20
Q

What is a short position?

A

Selling an asset not owned, profiting when prices fall by selling high, buying low.

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21
Q

What is covering a short position?

A

Repurchasing the asset to close a short position.

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22
Q

What is the buy side in trading?

A

Traders buying exchange services, primarily liquidity.

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23
Q

What is liquidity in trading?

A

The ability to trade when desired.

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24
Q

What is the sell side in trading?

A

Firms creating, promoting, selling financial instruments, providing market liquidity.

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25
What is speculative trading?
Trading to profit from predictions about future prices based on information.
26
Why is technical analysis used in speculative trading?
Analyzes price trends using statistical measures and charts to predict short-term moves.
27
What are continuous markets?
Markets where traders can trade anytime during open hours.
28
What are call markets?
Markets where all traders trade simultaneously when the market is called.
29
What is the advantage of call markets?
Focuses all traders’ attention on an instrument at the same time.
30
What is the advantage of continuous trading?
Allows traders to trade whenever they want.
31
What are orders in trading?
Instructions traders give to brokers/exchanges to arrange trades.
32
What is a market order?
An order to trade at the best current price, taking liquidity.
33
What is the benefit of a market order?
Likely executed immediately if the security is actively traded.
34
What is the risk of a market order?
Price is not guaranteed, especially in volatile markets.
35
What is a limit order?
An order to trade at a specified price or better, offering price protection.
36
What is an aggressively priced limit order?
Buy orders with high prices or sell orders with low prices, easier to fill.
37
What is the benefit of a limit order?
Sets a minimum sale or maximum purchase price.
38
What is the risk of a limit order?
May not execute if the market price doesn’t meet the limit.
39
What is a stop order?
An order to exit a position when a specific price is reached.
40
What is a day order?
An order valid only for the trading day it’s placed.
41
What is a good-till-cancel order?
An order that remains active until executed or canceled.
42
What is an immediate-or-cancel order?
An order that must be filled immediately or canceled.
43
What are marketable limit orders?
The most aggressively priced limit orders, likely to execute quickly.
44
What is price formation?
The process of determining an asset’s price based on supply and demand.
45
What drives price formation?
Investors’ views on future asset value, influenced by market structure.
46
What is price discovery?
The intersection of supply and demand determining an asset’s price.
47
What drives price discovery?
Information available to traders and their deductions.
48
What is technical analysis?
Analysis of price charts and indicators, ignoring fundamental company data.
49
What is fundamental analysis?
Evaluation of a company’s value using financial statements to find intrinsic value.
50
What are fundamental indicators?
Revenue trends, gross profit margin, net margin, dividend yield, current ratio, debt ratio.
51
What are combination indicators?
Price-to-earnings (P/E) and price-to-sales (P/S) ratios.
52
What does a technical analyst believe?
All relevant market information is reflected in price, except shocking news.
53
Why is technical analysis called behavioral finance?
It analyzes human mass psychology through price movements.
54
What is a quote-driven market?
A market where dealers quote prices and broker all trades, like NASDAQ.
55
What is an order-driven market?
A market where buyers/sellers trade directly without dealers, often via auctions.
56
What is a hybrid market?
A market mixing quote-driven and order-driven characteristics, like NASDAQ.
57
What is the advantage of an order-driven market?
Transparency, showing all bids and asks.
58
What is the advantage of a quote-driven market?
Liquidity, as market makers guarantee order execution.
59
What is diversifiable risk?
Risk from firm-specific events, eliminated through diversification.
60
What is non-diversifiable risk?
Risk from market-wide factors like war or inflation, not eliminated by diversification.
61
What is the risk-return tradeoff?
Higher risk investments offer higher potential returns, and vice versa.
62
What does volatility measure?
Dispersion of price changes, not their direction.
63
What is excess return?
The difference between an investment’s return and a risk-free Treasury bill return.
64
How have computing advancements impacted trading?
Enabled sophisticated algorithms for quick intraday profit opportunities.
65
What is a complete trading system?
Covers markets, position sizing, entries, stops, exits, and tactics.
66
What are the pros of ML in trading?
Removes emotion, provides clear strategy, mathematically optimal.
67
What are the cons of ML in trading?
Markets dominated by algorithms, optimal only for assumptions, no profit guarantee.
68
What is an efficient capital market?
A market that quickly and correctly adjusts prices to new information.
69
What is the weak form of EMH?
Past prices and volume provide no predictive information; supports random price changes.
70
What is the semi-strong form of EMH?
Prices reflect all public information; old information cannot yield superior returns.
71
What is the strong form of EMH?
Prices reflect all information, public or private; insider info offers no advantage.
72
Which EMH form is most supported?
Weak form; strong form is generally not supported.
73
What does a trading robot automate?
Trading decisions based on technical signals or ML/AI algorithms.
74
What are transaction costs?
Costs like broker commissions incurred when buying/selling securities.
75
What is slippage?
The cost from the difference between order price and execution price due to delays or liquidity.
76
How is slippage calculated for small orders?
Typically the bid-ask spread.
77
What is the goal of a trading algorithm?
Balance good returns with acceptable risk.
78
What is the profit factor?
Total profit on winning trades divided by total loss on losing trades.
79
What is the Sharpe ratio?
A measure of risk-adjusted return, comparing excess return to volatility.
80
What is maximum drawdown?
The largest peak-to-trough decline in portfolio value.
81
What is a zero-intelligence benchmark model?
A non-AI model to assess AI trading strategy performance.
82
What is the buy-and-hold method (period)?
Buy at period’s opening price, sell at closing price.
83
What is the random model in trading?
Generates random trading signals to mimic compared models’ trade frequency.
84
Why check liquidity in instrument selection?
Ensures trade volume aligns with trading frequency to avoid unrealistic simulations.
85
Why check data distribution in trading?
Ensures varied trends in data to avoid biased AI training.
86
What is a normalized price chart?
Price series divided by the first price, showing trends in-sample and out-of-sample.
87
What is an example of a regression forecast?
Predicting price change, log return, or max price change over a period.
88
What is an example of a classification forecast?
Predicting up/down movement or action (buy, sell, no action).
89
Why does variable selection depend on trading horizon?
Long-term trading uses fundamental indicators; short-term uses technical indicators.
90
What are typical features for short-term trading?
Technical indicators, chart patterns, market factors, sentiment indicators.
91
Why scale data in ML trading models?
Improves neural network performance by equalizing variable influence.
92
What is a common data scaling mistake?
Scaling entire dataset before train-test split, using future data in forecasting.
93
Why avoid random feature selection?
Unrelated features lead to overfitting; start with intuitive, correlated features.
94
What is iterative model design in trading?
Repeatedly refining inputs, targets, and algorithms based on validation results.
95
How much data is needed for trading models?
More relevant data reduces overfitting, but market changes over long periods.
96
What is bias in trading models?
The difference between average model predictions and correct values.
97
What is variance in trading models?
The variability of model predictions across different realizations.
98
How to address high variance in models?
Use more training data or reduce features.
99
What is an entry in trading?
The decision to buy or sell at a specific price or condition.
100
What is a stop in trading?
A predefined point to exit a losing position to cut losses.
101
What is an exit in trading?
The decision to close a winning position to secure profits.
102
What is a trailing stop?
A stop that adjusts, exiting if the position loses a set percentage at any point.
103
Why adjust position size in trading?
Reflects changing risk or confidence in predictions, optimizing returns.
104
How can trade numbers be controlled?
Using a predicted return threshold to filter unprofitable trades.
105
What is a disadvantage of high trade thresholds?
Reduces trading opportunities, potentially lowering overall profit.
106
Why track trading activity?
To monitor open/closed positions’ data and time for performance analysis.

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