5 Ways to Spot a Scammy Forex Broker
If you are looking for a new Forex broker, or wondering if your broker is giving you an acceptable deal, then here’s a checklist of a few things for you to consider when making your evaluation.
1. Forex Brokers are not all Crooks!
It would be very unfair to take the attitude that Forex brokers are all crooks. What you should bear in mind though, is that most Forex brokers do not place their client’s trades in the real market, and charge spreads instead of commissions. This means that most Forex brokers are in a direct conflict of interest with their clients: the more their clients lose, the more money the brokers make. In fact, their business model is based upon the failure of their clients’ trading.
It is a sad fact that most retail Forex traders lose, but this is mainly due to their poor trading methods, and means at least that Forex brokers do not have to act dishonestly to make a profit.
However, more profit is always good news, so there are a few tricks that some brokers have up their sleeves to squeeze more money out of pliable clients, and here are some things you should watch out for:
2. High Spreads / Commissions
Spreads have come down a lot in recent years. Of course, the more money you can fund your account with, the better spreads you will probably have available to you. This is because brokers offering better spreads usually require higher minimum deposits. In any case, you really should shop around. The days of having to pay a 3 pip spread for EUR/USD are over.
Recently, more brokers have been introducing commission-based models, where clients pay a set cash amount per trade. When you encounter this, carefully calculate how much you usually risk on a trade per pip, and then from that extrapolate the “spread” you will be paying. Sometimes these spread plus commission deals are designed to make the offer look better than it really is, and you can only discover this once you make personalized calculations.
3. Overnight Financing
Unless you are a pure day trader and close all your positions before 10pm or Midnight London time every day, you will either be paying or receiving a small amount (usually less than 1 pip) on every open trade you have at this time. This is based upon interest rate differentials between the currencies making up that particular pair, but is structured by practically every broker as a net loser for the client. Some brokers are far worse than others, and many do not advertise these rates – you only see it on your statement the next day once the payment or deduction has been made. If you contact most brokers, they will usually be prepared to quote you their current overnight financing rates. Get a few quotes and compare them on the same currency pairs, and you might be surprised by the results. If you like to hold trades for the long-term, do a few calculations on how much you are likely to pay on this overnight financing. You might find that it significantly eats into or even erases your profits.
4. Running of Stops / Spikes
It is not widely understood that brokers control their own price feeds. There is no central exchange, and most brokers are not making the real trades, and they can quote you any price they want! Of course, they have to keep the prices fairly honest, as otherwise you could use other brokers’ price feeds to correctly forecast price movements, and they would lose money as a result. So you do not really have to worry that your broker is just going to make the price up.
What you might have to worry about, is that a broker can see where their clients are clustering their stop loss orders, and if the general market price comes very close to triggering these stops, the broker might be very tempted to just quickly nudge their price over that level and pocket the profits. This can be done even more easily during news announcements or sudden shocks which have the effect of spiking the general market price up or down. An unscrupulous broker can always send the price a little higher or lower at such times.
To be fair, mistakes are sometimes made, and brokers will often repay stopped-out trades after excessive spikes when enough of their clients complain. Nevertheless, it is something for you to watch out for.
There are times when the market is running away in one clear direction. If you want to place a trade and you cannot get a connection to your broker, or the trade is repeatedly rejected for some unknown technical reason, then watch out. This is a sign of a broker that is using unfair methods to prevent their clients placing winning trades. If it happens a lot, it is a suspicious sign.
These are not an exhaustive list of things to consider when choosing a Forex broker, but they are the most common brokerage issues that can make winning in Forex much more difficult than it needs to be if you do not consider them.