As traders, we are forced to rely upon Forex brokers to be able to trade. Without them we would have no way of placing orders and no way of earning money. The trouble is that there are some bad brokers out there in the world, and likely there are more bad brokers than there are good forex brokers. You need to carefully evaluate and sort through several different brokers to find the right one sometimes. If you have a good tip from a friend who is also in forex then this might be your golden ticket to a good broker.
But yet a challenge here is that different brokers are sometimes good for different countries. Those from the US will have the hardest time finding a good broker due to the very restrictive rules placed on forex trading activities there. Brokers offer various deals to their traders and while the investment is your decision, you must rely on your broker to make the transactions for the trade. This article helps you to distinguish swindling brokers from honest ones. Not all major commercial banks have the same quoted price.
Brokerage firms take all these price feeds from major commercial banks and publish the approximate average of the exchange rates into the broker platforms. These online brokerage firms opened doors to the retail market. Forex brokers act as mediator between the interbank market and the retail market, in return for a commission. Trading directly with the exchange market and avoiding the intervention of the Forex broker in the trading process is nearly impossible for individual retail traders since it requires a large amount of capital.
However, not all brokers are conducting the same business equally. It all depends on the business model the broker uses. Of course they need that to trade against their customers. They have all the information about the trading of their customers so it is very easy for them to reverse their trades on another account. There are two main types of Forex brokers. Market Makers make money through spreads and provide liquidity to their clients. While these types of brokers often display their own quotes, they are legally obliged by national and international regulatory authorities to show the best possible price to their clients.
Prices they offer may differ to the actual market prices. These market participants could be banks, hedge funds, financial institutions, retail traders, and even other brokers. True DMA uses automated systems to place your trade automatically to the interbank market, while one-Touch DMA requires human intervention for your trade to get placed on the interbank market. However, since some countries do not allow the use of True DMA due to fraud, some brokers are obliged to check every trade before placing it into the exchange market.
Small brokerage firms also use One-Touch DMA to make sure they have enough funds to cover the position. Most STP brokers generate their revenue by adding the spread to the price that they obtained from the liquidity providers. Now that you understand more about brokerages in general we can take a look at some of the troubles you might run into with them. We as traders, after all, have to fend for our own. Some brokers are out to take advantage of foolish and unknowing traders so we want to not be one of them.
Brokerage firms might look great on the outside, but once you get in and make some profit and try to withdraw your funds all the rules might change. You can see how this is not in the best interest of the trader, but rather only in the interest of the broker. Brokers charge and pay disproportionate swaps based on the gap between short-term interest rates associated with currencies pairs set by central banks. This gap is not fixed; if the broker spends the swap from the customer, it will charge more than needed and if the broker pays the swap, it will pay less than needed.
When the gap is small, the customer pays the swap both ways; it will not matter if one is long or short on the pair. This mostly occurs during times of high volatility.
The broker may fail to allocate your position, even if it is completely updated, at the price it quotes, and saves himself by applying a wider than usual spread on the customer. Nothing can really keep the broker from imposing a wider than usual spread to earn profit from the trader.
If the broker can do this, honestly, there is not much that you can do to stop him. One way brokers trick traders is over-leveraging. The brokers are more than happy to offer larger volumes and most traders fall for these large volumes. Traders who get attracted by larger volumes end up benefiting the broker and harming themselves. Once again, there is nothing much that you can do to prevent this from happening except making smarter choices and trusting your instincts.
But some brokers use slippage for their own advantage and offer you to buy a currency pair at a slightly higher or sell at a slightly lower price than they could have. The difference is the profit they end up getting. Sometimes, brokers even boycott the traders and try to boycott them completely. This usually happens when a trader is receiving a significant profit.
The moment your profit history becomes consistent, brokers do whatever they can do to stop you from gaining more profits through them. This may sound unprofessional and even strange but it is true. There was a very large lawsuit and federal suit against a particular brokerage in the United States because they actually sued some of their clients.
Yes, the broker sued their own clients… and why? Because the clients had earned a profit. The broker accused them of tampering with the price feeds or some other ridiculous accusation. Needless to say, the very sound of an online broker is fishy.
These online brokers use special kinds of software that help them scam you out of your money. As mentioned earlier in the article, their main aim is to somehow transfer your money into their own pockets. With all the websites these days, this makes it easier for them to do. Customer service and support is incredibly important for any type of business, including a Forex broker. In Forex trading, you want your broker to be able to answer all of your questions and queries.
If your broker cannot respond to your messages and problems, move on. Make sure that your chosen broker has a good customer service team — if a broker does not, this will indicate that they are a cheat. If you notice any suspicious activity regarding your investments and your broker cannot or does not even bother to explain, then a good suggestion would be to replace him.
Suppose you think a currency is heading up. You enter a position at Unfortunately, the trade begins to go against you and breaks down through support. Your stop is hit and you are out. This is when you might start to feel relief that you had that stop in place. Who knows how far it could drop, right? Guess what happens next. After taking out your stop, the price turns back and heads north, just as you originally thought. This is how your broker makes his money.
It is not guaranteed to help, but at least you will be sure that your broker does not see your stop loss and have a chance to take it out through dishonest means. Without the real transactions, the client is actually betting against the bucket shop operators also known as bucketeers. This is another dangerous type of broker strategy that is both dishonest and illegal in most countries. The following pointers help you to distinguish swindling brokers from honest ones.
These are just some ideas on what to look for in the broker you are selecting. Some of these you will be able to research on your own and some of these are not so easy to identify. The first and foremost distinction of a trustworthy broker from the fraudulent ones is the high level of security. You should choose a broker that is registered with a regulatory agency.
Below is a list of countries with their corresponding regulatory agencies that checks the credibility of the Forex broker. Forex regulatory agencies provide investors and traders with protection and security from fraud, scam, manipulation and abusive trade practices.
To be registered, the broker has to pass the screening done by the regulatory agency and comply with the standards and regulations. If the broker is under-capitalized, your funds are at extreme risk. Because broker accounts are not insured, there is a very little recourse for the individual retail trader if the broker goes bankrupt. You have to study the company in general terms: This is not the easiest thing to do, however, and once again you are back to reading online reviews and researching whatever info you can find online.
However, not all countries have the same regulatory policies and requirements when it comes to financial registration.
Smaller Forex brokers can be hard to assess and there are no very strict regulations for Forex brokers in other countries and capital requirements are not closely monitored. Brokers in major economies such US, UK, Australia and Europe have more mature system set to regulate financial companies. And even this, however, is not enough to stop some brokers from acting dishonestly.
There was a broker in the United States that broke many laws and was fined several million dollars for these practices. Therefore, it is very important for any trader or investor to choose a Forex broker that based in a country where their activities are closely monitored by a regulatory agency.
K, Australia and Hong Kong. The MetaTrader trading platform is commonly used by most forex brokers, which has hundreds of custom-made indicators and templates for every trading strategy. Other brokers have more powerful custom trading platforms. The trading platform that suits you best is critical. The reliability should be more of a concern than how the platform looks and feels. The platform should not crash or freeze during important economic news or events. Placing and closing an order should be done immediately with just one or two mouse clicks.More...