Propose a trading strategy suited to given facts and defend the choice
The idea
Start from the facts: order size relative to average daily volume, liquidity, volatility, urgency implied by alpha decay, and the manager's risk aversion. Then match a strategy. High urgency or fast alpha: trade aggressively with an arrival price benchmark and accept impact. Large order, low urgency: schedule-based (VWAP or TWAP) or liquidity-seeking execution that minimises impact, possibly over days. Index-driven trades benchmarked to the close: trade at or near the close, often in the closing auction. Multi-asset rebalancing or cash equitisation: portfolio trades or futures. A strong justification names the benchmark, explains how the strategy balances market impact against execution risk, and ties urgency to the alpha signal. The trap is recommending a strategy without the benchmark that matches it.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Trade Strategy and Execution
- Explain why investors trade and how the reason shapes the trading approach
- Explain the factors that feed into choosing a trading strategy
- Contrast the reference prices used to judge trade execution
- Explain what usually decides which class of trading algorithm is chosen
- Contrast trade implementation features across spot currency, OTC derivative, futures and options, fixed-income and equity markets
- Explain how the cost of a trade is measured and work out that cost
- Judge how well a trade was executed
- Assess whether a firm's trading processes, disclosures and records meet good governance standards