Forex Blog

There are many reports of scam brokers in the Forex industry. “Bucket-shop” companies attract customers’ funds and then simply run with them or they create unjust trading conditions, under which every trader loses money constantly. Those can be classified as true scams and are plain illegal. They deserve their own subject and are discussed throughout the Internet widely. But, unfortunately, legit (registered and regulated) Forex brokers have a developed arsenal of methods to get more from their traders in quite unethical way. Here I’ll try to list some of them.

“No fees, no commission, no hidden costs” – those are good words for the commercials but in reality every broker has a legal right to cut some extra pips or dollars in its favor from your position. I know at least 4 such methods:

1. Spread widening – all-time favorite of all Forex brokers. Spread widening usually happens during the periods of very high volatility. Broker may fail to allocate your position at a price it quotes (even if it’s completely up-to-date) and protects himself by imposing a wider than usual spread on the trader. There’s nothing wrong with that if, of course, the broker does it honestly. In reality nothing stops brokers from applying wider than needed spread to earn several pips from the traders. What can you do to avoid spread widening? Choose a broker that’s not known for excessive widening or simply try not to trade during the periods of high volatility (important news releases).
2. Slippage – isn’t dishonest itself, as the broker’s liquidity providers may change prices pretty fast and broker may simply have no choice than to execute your order at a slightly worse price. 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. The difference is their instant profit. It’s impossible to find a broker without slippages but you can try joining one with as little of them as possible. You can also try to avoid trading with market orders and switch to stop/limit orders; if you use EAs, apply reduced slippage parameter in orders.
3. Disproportionate swaps (overnight interest rates). Brokers charge and pay overnight swaps depending on the difference between the short-term interest rates associated with the currencies of the currency pair and set by the central banks. Unfortunately, the difference isn’t always strict – if the broker should charge the swap from trader, it will charge more than required, but if the broker should pay the swap, it will pay less than required. When the difference is quite low (for example, currently EUR/GBP has 1.0% and 0.5% interest rates; USD/JPY has 0–0.25% and 0.1%), the trader will have to pay swaps both ways – no matter if one is long or short on the pair. This trick can be avoided by trading strictly intraday, going for no-swap account, choosing a broker by studying their trading conditions for better swaps.
4. Overleveraging isn’t really a dishonest method of brokers – it’s usually traders who just fall for the bigger volumes. And the brokers are glad to offer those bigger volumes, as it will increase their earnings per pip of spread. Remember that and don’t overleverage yourself. If you can afford it – trade without leverage at all (1:1).

If you want to add something on the topic of the legally cheating brokers the traders or have some questions, please, use the commentary form below.