Operational risk in forex markets
Even the best forex strategy can be ruined by operational failures. The hazard of these errors occurring are called operational risk, and this kind of risk is well known among professional or company traders.
We would like to illustrate this with an example:
Assuming that upon expecting a price increase, you open a long position at 1100 and plan to close it manually around 1150. Let’s assume your expectations become justified: the price begins to rise and almost reaches your Take-Profit level. However, just a few seconds before you get to close the position your computer crashes.
After rebooting, you notice that although the price had reached your target level, it has fallen a bit lower and is now around 1140. You could still close the position profitably, but it is not exactly as you had planned.
This example illustrates Operational Risk perfectly:
Despite doing everything well, you still could not realize the profit because of a technical failure.
It’s easy to avoid such a problem by using several computers and market-placed Take-Profits, but there are some failures which are more challenging to avoid, because they are inherent to the nature of Forex markets.
The real operational risk: The effect of slippage
Slippage occurs when an order is executed at a price different from the requested one.
At first sight it appears not to be a big deal, because it’s just about a few pips. But if it happens at the wrong time, it could be much more:
In the picture above, the price never reached the stop-loss level, but the broker closed the position. The slippage was just a few pips.
The question is: what happened afterwards?
The price turned back and reached the Take-Profit level. This shows that because of the slip of a few pips, you lost the whole position instead of profiting.
The real operational risk on the Forex Market depends on the accuracy of your broker company.
Tus the questions to be asked are:
Is your broker always able to fill the orders at the price you request them?
What are the effects of operational errors on your strategy?
If you are also interested in knowing more about slippage, read this article.