A flash crash is a sudden and extremely rapid decline in prices in the financial market, often followed by an equally quick recovery. Such a price drop usually occurs within minutes or even seconds and is characterized by extreme volatility.
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A flash crash often arises from a combination of automated trading and a lack of liquidity.
During a flash crash, large sell orders or algorithmic trading programs can trigger a chain reaction. When many automated systems sell at the same time, prices fall rapidly. Other trading systems may respond by also selling, which intensifies the decline. If there are few active buyers at that moment, the price can drop even further.
Once confidence returns or trading systems are halted, prices can recover quickly. For investors, a flash crash can lead to unexpected losses, especially when stop loss orders are triggered at strongly deviating prices.
Short example:
Suppose a share is normally traded around €50.
Due to a large automated sell order, the price drops to €40 within a few minutes.
Other trading systems react and also sell, causing the price to briefly fall to €35 before buyers step in and push the price back toward €48.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.