Operational risk: A thing that can ruin your success

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:

Let’s suppose you are trading with gold.
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:

the price

Fx-operational-risk
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?

Fx-operational-risk-step2
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 want to know the answers, pleasesign up here.

If you are also interested in knowing more about slippage, read this article.

1 Comment

  1. August 5, 2015 - Reply

    Great article and very useful information.
    However, it seems there is a small confusion.

    In the example picture the stop loss is below the open price, which indicates that this order is a BUY order. This means, for it to hit the stop loss and be closed, market BID price should touch or cross the stop loss level.

    As you know, BID price is what used to draw price bars/candles, but in your picture it is clearly seen that price bar does not even touch the stop loss. This means the BUY order should not have closed.

    If BUY order hits stop loss without BID price touching the stop loss level, this means error on the broker server or some suspicious activities on the broker side. Such case should be reported to the broker and should be resolved. If they refuse to investigate and fix the problem customer can contact regulatory company and report illegal activity.

    On the other side, it might just be error in your example. If this BUY order would have closed due to slippage, it would clearly be visible on the chart that the BID price touches/crosses the stop loss level. Slippage in this case would mean that order was closed at a bigger loss than what was expected when setting the stop loss level.

    This is what happened to tens of thousands of traders during the CHF crash in January 2015. Price slipped that much that all stop loss levels were executed hundreds of pips away from what was expected. My LONG trade during that time was on a live account with Sensus Capital Markets and it slipped below my stop loss level about 50 pips. So I’ve experienced smaller loss than some of my clients following my Vavatrade signal. For example one of the clients on FXCM had price slipped around 2000 pips which resulted in a loss of around $2000 USD.

    Another important thing to understand, is that your example was about the SELL trade (stop loss obviously would be above the open price), there’s a change to have stop loss hit without price bar/candle actually touching it. This would be clearly seen on the chart, that the price bar did not touched the stop loss level, yet it was executed and trade closed in loss.

    Such thing simply happens because of the spread. SELL trades are closed at ASK price, which is above the BID price. ASK prices are also no were tracked on the chart and you cannot see what ASK price you had before. It is no where recorded in the price bar or anything like that. You can only see current ASK price if you enable it from the Chart Properties window and usually it is displayed as a red horizontal line pips above the current market BID price.

    Obviously the difference between ASK and BID prices is called The Spread.

    I have a really clear explanation with example images on this. I’ve posted this article on my blog few months ago and my clients thanked me a lot for this information. Most of currency traders do not know this. To read the article click on my name above this answer or copy/paste the link below into your browser.

    https://www.ea-coder.com/forex-trade-executed-without-price-touch/

    Hope this information helps you all.

    Regards,
    Rimantas Petrauskas

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