# Pre-trade analysis Pre-trade analysis is the assessment of a proposed stock order or basket before placement, estimating execution costs, liquidity and risk to inform the investor’s decision and execution approach. ## What it means A proposed stock trade has more dimensions than its quoted price. Before an order is placed, a pre-trade check examines its size, likely execution costs, available liquidity and relevant risks. For a basket, it also considers how the proposed lines fit together. This is an institutional execution discipline adapted to a private investor’s decision process—not a prediction of the stock’s return. Pre-trade analysis uses estimates available **before** execution. Post-trade analysis instead measures what happened using actual fills. Neither can establish in advance the price at which an order will fill. ## How it is calculated There is no single universal pre-trade-analysis formula or score. A practical check combines several measures. For example, an order’s share of typical daily trading volume is: `Participation rate (%) = (Q / ADV) × 100` - `Q` is the proposed order size, in shares. - `ADV` is average daily volume over a stated lookback period, in shares per trading day. A simple estimated execution-cost breakdown is: `Estimated cost (US$) = Q × P × (spread cost (bps) + market impact (bps)) / 10,000` - `P` is the reference price, in US$ per share; `Q × P` is the order’s reference value in US$. - `Spread cost` is the estimated cost of crossing the bid-ask spread, measured in basis points of order value. It is **not** necessarily the full quoted spread; a midpoint-to-quote estimate, for example, uses half the quoted spread. - `Market impact` is the estimated price effect of executing the order, also in basis points of order value. One basis point is 0.01%. These are illustrations, not a complete model. A fuller assessment may account for commissions, order conditions, volatility, data quality and basket concentration. Avoid adding cost components twice if an impact estimate already includes a spread component. ## Worked example Suppose, hypothetically, a proposed buy order is **1,000 shares** at a reference price of **US$50**. Assume the stock’s ADV is **100,000 shares per trading day**, estimated spread cost is **5 basis points**, and estimated market impact is **10 basis points**. 1. Reference order value: `1,000 × US$50 = US$50,000`. 2. Participation rate: `(1,000 / 100,000) × 100 = 1%` of ADV. 3. Combined estimated cost: `5 + 10 = 15 basis points`, or `0.15%` of reference value. 4. Estimated dollar cost: `US$50,000 × 15 / 10,000 = US$75`. The US$75 is a **hypothetical pre-trade estimate**, not a commission figure, guaranteed fill cost or expected profit or loss. Actual execution can differ as quotes, volume and market conditions change. ## Why it matters before you trade An order that looks small in dollars can still be large relative to a stock’s usual volume. A wider spread or greater estimated impact can make execution more costly; volatile prices and concentrated basket exposures add different risks. Checking these separately helps distinguish the question of **what the stock might do** from **what placing this particular order could involve**. Execution conditions matter too: order type, price limits, timing and partial-fill rules can change the trade-off between the chance of a fill and control over its price. A pre-trade estimate informs that trade-off but cannot guarantee an outcome. ## How PreTrAIde uses it PreTrAIde is AI pre-trade analysis software for stocks, not a broker or investment adviser. A user builds a basket with a buy or sell side, quantity and execution conditions for each stock. Before any order is placed, its PreTrade analysis returns a **GO, NO-GO or MODIFY** verdict for the basket and each line, alongside a model-estimated success probability, risk assessment, suggested execution strategy and plain-language reasoning. These verdicts support a decision; they are not recommendations. Its quantitative layer estimates spread, participation in daily volume, market impact, daily volatility and one-day 95% value at risk, among other measures. AI agents reason from quantitative scores, news and analyst ratings; guardrails can correct contradictory output in a conservative direction. PreTrAIde never receives, transmits or executes an order. Users place any trades themselves through their own broker. ## Common mistakes - **Treating an estimate as a fill price.** Costs and liquidity can change before and during execution. - **Confusing execution cost with investment return.** A cost estimate says nothing certain about the stock’s subsequent performance. - **Ignoring units or double-counting costs.** Share volume, dollar value and basis points are different measures; check what each model’s impact estimate includes. - **Assuming a verdict is an instruction.** PreTrAIde’s GO, NO-GO and MODIFY labels are decision support, not orders or investment advice. --- Source: https://pretraide.com/glossary/pre-trade-analysis