The aftermath of critical news announcements can be an opportunity and risk at the same time. Markets can respond to certain news releases in an extremely volatile and irrational manner. For instance, if one takes a position on the market, it can be liquidated in the blink of an eye. For traders on the MT5 platform, one of the ways to cope with this market volatility is using reaction boxes. These tools enable traders to visually define key price areas immediately after the news is published, thus allowing them to separate the chaos from the structured market response and develop risk-averse trading plans. Automated reaction boxes can dramatically improve the timing of decisions and risk parameters on the trade, this is beneficial for both independent traders and those working in funded prop trading firms.
Understanding Post-News Chaos in Financial Markets
Financial markets are in a state of extreme uncertainty with the release of news. Related announcements are like marked candles on the price chart. Interest rate, inflation, unemployment figures, and even geopolitical news are a few of the many announcements known to cause sharp market moves. “Post-news chaos” happens from a few seconds to a couple of minutes after news is released and can be characterized with violent spikes, large and erratic candle wicks with a sudden burst in trading activity.
During specific times of market volatility, many traders attempt to enter the market with the aim of making quick profits. They usually get it wrong. Trailing breakouts often lead to intense and sudden moves in the opposite direction, and traders are left using the wrong strategy. This is even more problematic for traders with strict predefined risk protocols or those mandated by a funded firm. A single impulsive trade during a news surge can violate the firm’s rules, resulting in the loss of the account.
Risk boxes have been developed with the aim of stopping impulsive trading entries for this predefined time. They account for the structure of price forms, encouraging the trader to first watch, then engage when the price moves in a post-chaotic manner for a more orderly manner.
What Are Reaction Boxes?
Reaction boxes are a subset of risk boxes, and comprise rectangular areas drawn manually where the price volatility occurs during key news periods. Like all risk boxes, reaction boxes are drawn to visualize the price volatility. In this case, they capture the first volatility peak so traders have clear targets of where price is likely to oscillate.
Using the rectangle tool, you can create reaction boxes directly from the MT5 trading platform. Typically, the reaction zones are created around the high and low of the first 5 or 15 minute candle following the news. This area is the “reaction box” where traders anticipate high volatility.
After marking the box, traders wait for the price to breakout and subsequently confirm the breakout through retests, volume support, or other key indicators. This is useful for breakout and trend continuation strategies while protecting the trader from unnecessary risk brought about by preliminary “fake moves”.
Setting up reaction boxes on MT5 trading platform
Reaction boxes can be set up on the MT5 trading platform as the system provides the necessary tools to create them with accuracy. It is possible to set the rectangle to different colors, adjust transparency, and adjust the stroke, MT5 traders can create visual indicators on their graphs.
To create an effective reaction box, a trader must pinpoint the specific news event and its corresponding timeline. At the market’s opening, the candle made after the announcement’s release contains a high and a low. Those points can be utilized as the bounds of the box. Depending on the trader’s strategy, preference, and the volatility of the instrument, some may choose to utilize the range “reaction box” set during the first 5 or 15 minutes after the news release.
After creating the reaction box, it is advisable for the trader to refrain from taking any positions in the center of the box. Also, it is important to track the price movement between the bounds. If the price moves out and closes above the box, it can be a sign for bullish price action continuation especially when the movement has volume support or confirmation from higher timeframes. The converse is equally true for bearish moves that break down below the box.
Advantages for Traders Dealing With a Funded Firm
A trader employed by a funded firm must follow a set of strict rules. These include, but are not limited to, the maximum allowable drawdown, stop-loss restrictions, and news trading. With the use of reaction boxes, traders are able to comply with these rules by having a disciplined approach to engaging in post-news trading setups.
Instead of attempting to capture sudden spikes or responding to sharp movements with emotion, funded traders have the option of using the box as a waiting area. This adheres to the risk-first approach most proprietary firms advocate. It also minimizes the chances of revenge trading, overtrading, and emotional reactions during impactful news releases, all of which are common during these events.
In addition, traders who incorporate reaction boxes into their trade plans are likely to perform better and stand out to their firms, and therefore, better justify their approach during performance evaluations. Funded firms appreciate risk-aware traders who demonstrate sound judgment. Therefore, a clean chart with reaction boxes displaying calculated entries and exits showcases attention to detail and discipline.
Improving Strategy with Indicators and Volume
Aside from serving as a visual boundary, the reaction box can be enhanced further through the use of indicators and volume. On MT5, the built-in and customizable indicators greatly aid in confirming the strength of breakouts from the box.
Volume indicators are especially helpful for these kinds of setups. If price breaks out of a reaction box but volume is insufficient, the move is more likely to be a fakeout. Alternatively, a breakout following a retest of the box boundary is more likely to sustain price in the box if it occurs on high volume.
Confluence can also be drawn from momentum indicators like MACD or RSI. If the breakout aligns with increasing momentum or a trend shift, traders can be more aggressive in their entry.
Traders can also customize alerts on MT5 to notify them when the price approaches box bounds. This option allows traders not to have to remain glued to the screens for hours, improving their efficiency without compromising reactivity.
Using Reaction Boxes to Build Data and Improve Edge
Building a database of reaction box setups is one of the long-term benefits of using reaction boxes. With time, traders can analyze how particular pairs, commodities, or indices respond to certain news in their boxes, revealing underlying fundamentals.
As an example, a trader may observe that GBP/USD usually breaks out of its post-CPI reaction boxes after 20 minutes, continuing in the breakout direction. On gold, a trader may observe that the security often fakes a breakout before reversing. By analyzing screenshots and data from previous trades, a trader can adjust their reaction box strategies and pinpoint which ones are more profitable.
This is particularly salient to traders that are funded through a firm, where performance metrics need to be justified through consistent and replicable performance frameworks. Establishing a distinct competitive advantage through this type of visual backtesting can really help differentiate a trader from the rest of the practitioners operating in the same domain.
Preventing Common Mistakes with Reaction Boxes
Due to the nature of how reaction boxes are constructed, they can only be as effective as the discipline with which they are implemented. A notorious blunder is assuming that breakout and breakouts are both the same and, thus, tradable. Many breakouts are designed to fail and then subsequently retest before trying to break out again. The lack of confirmation at the applied zone is as risky as taking a position during the chaos zone.
Another error is applying different time intervals to draw the boxes. A 5-minute candle may form a very tight box that is repeatedly shattered, while a 15-minute range may form a box that is more durable. Traders need to backtest and see what timeframes are best suited for their instrument and the category of news.
It is also important not to overly simplify the reaction box. Some traders go to the opposite side and use excessive colors and indicators which work against them as it makes the chart more difficult to interpret. The aim is to create order out of chaos and not add to it.
Conclusion: Control the disorder, improve the clarity
There is going to be disorder brought to the financial markets by news events. For traders that use the MT5 trading platform, the drawing of reaction boxes is a very effective technique to bring order to chaos and enable them to trade more confidently. These boxes not only serve as visual limits, but they are also behavioral tools that train the trader to wait, watch, and act, not on emotions, but confirmations.
For individuals engaged with a funded firm, advantages are even more significant. The ability to track and respond to post-news changes shows control and foresight that is necessary in a proprietary trading firm. Professional traders are able to seize opportunities and, with the same discipline they apply when using MT5, can turn gamble into precision.
