How to Protect Forex Orders From Unexpected Volatility

Market anomalies can happen any time with or without any proper warning. It is our duty as traders to know how to protect our forex orders from such events? These extreme unpredictable events (market anomalies) can be the main reason why some traders can’t become profitable, only because they are trading at the wrong time. They may also leave limit orders on the markets, even if conditions and market mentality is changed. A trader can protect himself if he knows when it’s better not to trade. At the end of this post, we will look at some solutions which solve the following problems.

This article is an educational guest post, it was composed by the developer of the TradingBox EA. The5ers had review this tool, and find it’s concept interesting and useful for managing position risk.  If you decide to implement this tool, do it with your own risk, test it and then test some more before you use it under your own responsibility.

Lack of liquidity can be a trader’s nightmare

Every trader knows that widen spread means increased the trading cost if you are trading with ECN broker (variable spread). Usually spread is widened before big news, after NY close (after hours) and around market open. Widened spread means low liquidity and this is the reason why we see price spiking up and down during this time. One of the problems with widened spread is the Ask price, which is not printed on the chart and every broker can manipulate this price. Knowing when this market anomalies can occur is crucial for your trading career, health, stress, and profitability. You cannot avoid every mistake, but a lot of them you can. It is just a matter of discipline and your trading plan.

As a trader you are exposed to different price events where low liquidity and widespread are the cause of the problem:

1. Opened sell orders are in danger because Ask price can jump up and take your SL without printing price on the chart
2. When there is big news you will have a big chance to have order fill slippage. Usually, your order will get filled when the main move is already over
3. The market opening gap can fill your order with a big spread (high cost) and instantly close your position because of SL order. Forex opening gap occurs because retailer clients trade only 24/5 but the intrabank market is working 24/7. When the market opens the price jumps to the place where is most liquidity in the market. In this price jump, the spread wideness and strange things are happening. You don’t want to trade at this time because it is hard to make some profitable trades
4. Usually, in the Sydney forex session, there are big spikes because of AUD and NZD big news. This happens because of low liquidity on the market at that time and consequently, the price is free to go to the next liquidity zone.

Three different events (anomalies) that regularly occur in forex markets

Example 1: Big spike in the middle of Sydney session

On the chart below, we can see a big spike that occurred inside a one-minute candle. We cannot see what was the highest Ask price inside this minute candle. The biggest problem is that even if you enter at the top of this spike (entry to the pip) there is a big chance that you will lose this trade because the Ask price will hit your tight SL. These are the trades you don’t want to trade because you will become frustrated. This big spike is the result of one big order in the low liquidity market. Ask yourself who will profit from this big move.

Example 2: Big news release in low liquidity times

In this example, we can see that the fresh demand level was formed and used as a marketing level to trap retailers who believe that the bear flag is in creation. Retailers have more than enough time to place buy limit orders and SL. More advanced traders recognize the compression approach towards demand and this is a great opportunity for them to buy. There is no problem with trading levels like this. The usual trader will put SL below demand and now he thinks that he is risking around 50 pips. But what happened next is big news release where the spread is extremely big and order execution price slippage is also very wide. Due to these extreme market conditions, a trader may lose around 100 pips. But in this example of a wide demand zone where fixed risk per order gives us a small lot size, we will lose maybe 100% more than we expected. If this demand zone was smaller for example 5 pips, then we will have a ten times bigger position for the same risk percentage. That means that we can lose also 1000% more than we expected. So, therefore it is better to avoid events like this.

Example 3: Opening gap

Some traders would recognize the demand level in the picture below. It is true that the whole Flag was already tested a few times but there is still some chance that price can go and take the last orders in this Flag and then go up. Let’s say that for some reason you put your order in demand zone and your risk will be around 5 pips. You leave your buy limit order in the market and go to sleep. After you wake up, you open your account and there is 20 pips loss instead of 5 pips. What just happened is that when your order was opened there was spread around 10 pips and price slippage for your SL was around 10 pips. Your loss is now 300% bigger than expected. This is the main reason why day traders close all positions and delete all orders when they finish the trading day. Because a lot of traders are intraday traders, the liquidity on the market goes down when markets are closed. Every big order in the market can now significantly move price to the next liquidity zone. This is how big spikes are created.

What are the possible solutions to Protect Forex Orders?

One solution for these problems is to get yourself Trading box EA which threat orders as objects (rectangles) that can be controlled by a trader. If you don’t want to invest in this tool, then you need discipline and time to manage all limit orders. You also need to remove them from the market every time you go to sleep, before big news, before market close… This administration work with limit orders is redundant work and this is why traders then leave limit orders on the market. They are in subconscious stress because limit orders are exposed 24/5 to all market anomalies. When you calculate you invested time into this placing and removing limit orders, you will find out that you are not efficient enough. You spent your time on unnecessary work instead of living life. Time management is also a very important factor for a long time trading career. Most of the traders quickly burn out after they learn how to trade. They never learn how to execute trades day in and day out. The worst solution to protect yourself before the invisible Ask price is to never use SL. I saw traders that were trading without SL for some time and when the market suddenly go against them on a higher scale, their account was empty in a few days. They suffered emotional pain and disappointment.

Trading box EA has many functionalities and some of them solve problems related to this post topic. It uses four different variables (time, spread, bid price, and trader decision) to offer you safe trading on the forex markets. So here are the main advantages:

1. Orders and SL are executed within the Bid price. This solves the problem of spread SL hunt for Sell positions when ask price can easily hit your SL during big news and around market open or close (low liquidity)
2. Price is executed inside the order block if the spread is below defined value from EA input parameters. For example, the trade will be opened only with 0.0 spread on EURUSD. This functionality will prevent order execution for big spikes which occur because of low liquidity in the market
3. Orders don’t execute if a gap occurs beyond your order block (news, Monday gap, market open…). If we take buy order block for example, then if the price will open below your order block, then orders will not be opened and order block will be deleted
4. You can disable all order blocks on all charts before big news with one global variable (time interval). For example, you can disable executing all orders in your MT4 from 2:15 PM to 2:45 PM on all charts. You can also disable all order blocks overnight with a global variable when you go to sleep. This is how you will have good night sleep without worries because your orders will not be executed
5. The trader can also enable or disable order block when the market is closed (for example on Saturday)

Here is a short video where all main functionalities of Trading box EA are presented:

https://youtu.be/eT-HyQce1b8

I hope that I helped you with understanding what are extreme market events that can dramatically affect your profitability over time. This is especially for position traders who are not trading intraday or scalping the forex markets. These scalpers are safer against these market anomalies, but they have another administrative problem like risk calculation, risk-reward calculation, and market overview. Trading box EA also solves these problems, but this is out of this topic right now.

Free EA tool for The5ers community

Everyone who reads this post can get FREE Trading box Dashboard which is an extension for Trading box EA. The price of this Dashboard tool is 149$ on the MQL5 marketplace. Please write me a request on email [email protected] and mention the promotional code FIVERSDASHFREE.

Link to Trading box Dashboard video: https://www.youtube.com/watch?v=jnnnft6r9fQ

Trading box EA Link: https://www.mql5.com/en/market/product/44001

Trading box Dashboard Link: https://www.mql5.com/en/market/product/44018

Enjoy your life and happy trading!

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