Is your broker honest? Check out these forex broker cheats, how to tips identify and recover from them. After all, trading with a fair and reliable forex broker is crucial to ensure your success.
Trading with a good broker is one of the main keys to ensure the success of your trading. Imagine if you had a well-planned trading strategy and controlled psychology, but your broker cheated you in the back. All your efforts and hard work will certainly be wasted.
The main trading facilities such as platform, price quotes, and order execution tools are all provided by the broker. If the broker intends to manipulate their clients' trades, no matter how good their trading strategies or how calm their mental states, their capital will always be in danger. Not because of the risk of loss from the market's perspective, but because the broker plays its part to steal their clients' money discreetly.
- Types of Forex Broker Cheats
- Identifying the Reasons
- How to Protect Yourself
6 Common Forex Broker Cheats
Normally, forex brokers profit either from commission fees or spreads from their clients' transactions. Still, some brokers use fraudulent ways to try and get bigger profits. It sounds terrible, but it's a real issue in the forex brokerage business. Of the many ways those forex brokers can trick you, here are 6 of the most common forex broker cheats:
1. Stop Loss Hunting
Brokers who frequently do this are also known as "stop loss hunters". With the help of a particular type of software, the broker monitors clients' trades and manipulate the spreads. This trick is not limited to the use of certain software. Sometimes, brokers also employ special experts to carry out their fraudulent acts. This trick is to make sure that the clients' trading positions are quickly hit by stop loss when the market price moves against their orders.
For example, a short EUR/USD position at 1.2180 is placed with a stop loss at 1.2280. When the price moves up to 1.2275, the difference between the current market price with the stop loss is only 5 pips away. Say the initial spread costs 2 pips, there are only 3 pips left before the order hits the stop loss. In a situation like this, a stop loss hunter will widen the spread from 2 pips to 5 pips, so that the short position is closed with a stop loss.
Forex broker cheat like this is difficult to identify because most traders will think that they are the ones who miscalculate the price movement.
2. Mark-up Spreads
Well, this one has to do with ECN/STP brokers. Although they claim to be able to transfer orders directly to liquidity providers, not all brokers of this category apply the provider's original spreads. As a matter of fact, some of them want to earn a bigger income and end up marking up the spread.
An unreliable ECN/STP broker will add some extra pips to the raw spread from the liquidity provider. For example, the EUR/USD spread can be increased from 0.5 pips to 1.5 pips and no clients will know that the spread has been marked up.
How do you find out if your broker likes to mark up the spread? Believe it or not, you can ask the broker directly. Some ECN/STP brokers openly state that they mark up spreads because they feel they have the right to do so. You can also check the authenticity of spreads from an ECN/STP broker that (perhaps) covers up its spread mark-up by directly comparing the broker's spread with the actual market spread.
The normal spread in the market is usually very low. Even for crosses such as GBP/JPY, the spreads offered by liquidity providers can only be up to 3 pips.
Here is an example of a case that retail traders often talk about. Slippage is the execution of an order at the price that was not ordered. This condition can occur when the market is very active due to a surge in volatility. However, this naturally only applies to ECN/STP brokers, given the system that allows them to connect the clients' orders directly to the liquidity providers.
The process does run automatically, but obviously, it takes time because of latency (the time interval in which data is transferred from the client to the liquidity provider server). When the market is very active, price volatility will increase rapidly, so it's no wonder that orders can be executed at a different level from the price you ordered previously. In this case, slippage is reasonable.
But it can be modified into a forex broker cheat, especially when the slippage frequently occurs when the price movement is relatively steady. This way, slippage can be one of the ways for scheming brokes to take a lot of advantage from clients' losses.
For example, a buy position of EUR/USD is ordered at 1.3120. But after clicking the buy button, the order is executed at the level of 1.3135. If the price then goes up to 1.3140, the profit will be only 5 pips instead of 20 pips. But if the price goes down, for example to 1.3110, then your loss can accumulate to 35 pips, when the loss from the initial price will only be limited to 10 pips. Take a note that we haven't included the spread fee yet.
Requote is a delay in trade execution, wherein the broker will offer you a new (less profitable) quote so that you can continue the entry. This forex broker cheat usually aims to prevent traders from reaping profits from a position that goes well with the current price trend.
For example, when prices are falling sharply, you decide to step in with a sell entry. This winning scenario will be prevented by delaying the order's execution. In replace, the broker will offer a different price (requote) in which your sell order can be executed, only after the price has dropped to a lower level (when the bearish momentum is about to run out). You will find it difficult to get the maximum profit if the broker frequently requotes you.
5. Swap Manipulation
A swap is a commission you have to pay when you have an overnight position. The fee is calculated from the difference between the interest rates of a currency pair. In general, the swap can vary between brokers. But first, you can review the comparison between the broker’s swap rates and the actual differences of the central banks' benchmark rates. If the comparison is not too drastic, then it can be concluded that your broker doesn't manipulate the swap rates. However, if it is too extreme, this could be a sign that your broker is taking too much profit from overnight positions.
Long-term traders who usually leave their positions open for days are obviously the most affected, especially if the applied swap rates are not in favor with their orders.
6. High Leverage
Initially, leverage was considered to be a powerful feature, able to support a trader to take a trade size larger than his capital strength. But this facility can also leave an account vulnerable to margin calls when overused. When a market maker offers a leverage of up to thousands and even reaches 1:2000, instead of helping you, it may plunge your trading account to a very quick loss.
The broker type that is most likely to apply high leverage options is the market maker one. ECN/STP brokers are typically not allowed to provide the facility. How so? Liquidity providers are not allowed to handle the risk of using too much leverage, thus leaving ECN/ STP broker out of this type of forex broker cheat.
Think Before You Act
After knowing the 6 forex broker cheats above, it doesn't mean you can immediately accuse a forex broker of a scam when you experience losses either from frequent stop loss executions or slippage. Many traders immediately "feel cheated" by their brokers after reading a bit of information about the broker's fraudulent tricks without really getting the real lessons. Therefore, it's a good idea to pay attention to these following ideas:
1. Requote is the Deal Breaker
Requotes can be identified as the only cause of loss by a fraud broker, especially if this happens to your positions for most of the time. There's really no other words to defend this trick, so you may seek alternatives to open an account with another broker should your current broker gives you a lot of requotes.
2. Stop Loss Hunting or Just a Common Mistake?
"My broker cheated because the stop loss was hit even though it wasn't the time yet."
Firstly, you need to check what causes your stop loss to be hit faster. Could it be that you are trading when the volatility increases and the stop loss is placed too close to the entry level? Another possibility is that you don't have good trading psychology, which in turn causes you to frequently move your stop loss in the event of extreme price fluctuations.
On the other side, if your positions are often subject to stop losses due to spreads that suddenly increase, then this could be a warning signal. To confirm this, you can run 2 of the same positions on the forex demo account and live account simultaneously. Open buy positions with the same stop loss levels on the demo and live accounts.
When the price drops and approaches the stop loss, pay attention to whether the position on the live account has been hit by the stop loss first or not. If the buy position on the live account has been hit by a stop loss but the position on the demo account is still running, then it confirms that your broker is a stop loss hunter. But if not, you could be the one who miscalculates the stop loss and the market condition.
3. A Study of Slippage
"My broker is cheating because the slippages happen too often"
For this one, first, pay attention to the type of your broker. If it is an ECN/STP, then this kind of situation is ideal, and that the slippage is not always a disadvantage. In reality, inaccurate order executions from slippages can be profitable at times. For example, when you buy EUR/USD at 1.3250, the position can be executed at a lower price at 1.3240. It is still considered a slippage since the execution price is not at the ordered level. This is what you call a positive slippage.
In market makers, slippages are generally resulting in clients' losses (negative slippages). Don't believe their notion that the slippage is caused by increased volatility, because this type of broker can control their own pricing.
The important key here is, slippage in ECN/STP brokers can vary between positive or negative slippage, while slippage in market markers is mostly the negative one. If you open a buy position, then the slippage is always at a higher level, while for a sell, slippage always occurs at a lower level.
How to Protect Yourself from Forex Broker Cheats
You can avoid them by choosing a broker more carefully. Here are things you can pay attention to avoid the mischief acts of a fraud broker:
1. Broker's License Does Not Guarantee Everything
Many people think that a regulated broker is always good and will never perform forex broker cheats. In reality, it is not actually true. Oftentimes, the license is only used by brokers to attract clients registering with the broker. In fact, behind the common assumption about prestigious regulators, there are phenomena as follows:
- There are always fraudulent acts that can be committed without being detected by regulatory agencies.
- Brokers can bribe regulators to hide their fraudulent acts.
- Some important figures who hold positions in regulatory agencies are the owners of brokerage companies.
Therefore, don't consider license and regulation as the only important factors when choosing a broker. You should understand the next points to further avoid forex broker cheats.
2. Testimonials and Reviews
Testimonials from traders can be a good indicator, as they offer some clients' firsthand experiences with brokers. You can browse various testimonials and broker reviews, especially regarding the 6 forex broker cheats above as well as the quality of the payment process. However, you need to be able to distinguish which ones are real complaints and which ones are just emotional complaints.
Sometimes, irrational traders or beginners who don't really understand anything give bad testimonials just to smear their brokers' reputation. Also, there is always a possibility of fake reviews and testimonials from competing brokers (if negative) or the broker itself (if positive).
3. Recognize the Difference Between a Market Maker and an ECN/STP Broker
The market maker acts as a dealer and seeks profit against the trades of his clients. They profit when you lose, and lose when you earn. On the other hand, an ECN/STP broker act as an intermediary and will not open positions against their clients because they do not get anything when their traders lose. The more clients growing their accounts, the more profitable the ECN/STP broker will be.
From a glimpse of the differences above, it is clear that forex broker cheats are ideally more practiced by market makers. If you are already trading at an ECN/STP broker and are still experiencing these problems, it could be that the ECN/STP status is just a cover. In other words, the broker is just a market maker who hides behind its ECN/STP claim to attract clients.
Meanwhile, the ECN/STP broker was also not immune to cheating. Marking up the spread is one example to get them more money discreetly. Market makers on the other hand will never mark up the spread because they control how much the spread costs to be fixed. To increase the spread, they can do it directly without having to mark up the actual market spread.
Apart from the methods above, only swap manipulation can apply to both types of brokers. Although both have the potential to be fraudulent, however, trading at an ECN/STP broker is much better and safer than a market maker broker. At least, this type of broker does not compete against your trading position so that there are fewer cheats that can be practiced against you.
4. Terms and Conditions
Have a good understanding of the broker's documents relating to the terms and conditions as well as the bonus programs. Brokers generally provide this file and can be accessed before you open an account with them.
5. Don't Be Quick to Trust
After examining a broker, don't immediately register an account with a large deposit. Test the trading service with a demo account or live account with a minimum deposit.
If you already trade in a problematic broker, the solution is not only limited to withdraw all funds and immediately close the trading account. Before deciding to reach the point of no return, consider these two things:
- When you are sure that the broker has cheated you, learn what caused your trading losses. Apply the tips we discussed earlier. After that, check the trading terms and conditions. If there are details in the document that "justify" the broker's fraudulent actions and they have escaped your attention, then the broker is not to blame. You must be prepared to face the risk of your own negligence. After that, withdraw all of your funds and close your trading account in this broker.
- If you have confirmed that the broker's fraudulent act cannot be "justified" by their terms and conditions, send a complaint to the broker’s customer service. You can be assertive, but don't be rude. Describe your problem and include the proofs. Also, state the actions you will take if there is no significant response from the broker. These threats may include the publication of broker's fraud on broker review websites, report to the regulatory agency (if the broker is regulated), or mark the broker on certain websites that warn against broker scams.
Fyi, you can also provide reviews and testimonials on the broker reviews at BrokerXplorer. Just type your broker's name in the available field and click on the "review" button to get there.