Market risk
Finally, we have market risk, which is what is commonly thought of when we think of risk in algorithmic trading. This is the risk of trading against and losing money to more informed participants. Every market participant, at some point or the other, on some trade or the other, will lose money to a more informed participant. We discussed what makes an informed participant superior to a non-informed one in the previous section. Obviously, the only way to avoid market risk is to get access to more information, improve the trading edge, improve sophistication, and improve technology advantages. But since market risk is a truth of all algorithmic trading strategies, a very important aspect is to understand the behavior of the algorithmic ...
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