Chapter 12. Market Drivers and Risk Management

In today’s rapidly evolving markets, understanding market drivers and risk management is essential for achieving success in trading and investing endeavors.

Market drivers are the factors that influence financial markets, such as economic indicators, corporate performance, geopolitical events, central bank policies, and technological advancements. By understanding these drivers, investors can make informed decisions and anticipate market trends. Algorithmic traders must be aware of these events that may cause turbulence in their models. Risk management is the backbone of a solid investment strategy. It encompasses diversification, stop-loss orders, position sizing, risk-reward assessment, and emotional discipline.

By combining a deep understanding of market drivers with effective risk management techniques, traders can navigate the complexities of financial markets and increase the likelihood of a successful trading algorithm.

This chapter is divided into two main sections. The first section talks about market drivers in a fundamental sense, and the second section discusses risk management from a general point of view.

Market Drivers

Knowledge of market drivers is essential to develop a healthy and sound trading system. Failing to understand what pushes the markets will inevitably cause the demise of the whole process. Up to this point you have seen quantitative trading algorithms that use either lagged values of the same time series ...

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