Forex Blog

First-hand Forex trading experience and information about foreign exchange market that will be useful to traders

Archives

How Can Forex Brokers Cheat You Legally?

November 2, 2010 by

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 wideningall-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.

9 Responses to “How Can Forex Brokers Cheat You Legally?”

  1. Nathalie Bowen

    Very good article. Very straight to the point. Clear and concise. Hope to read more articles from you regarding the basics of Forex.

    Reply

  2. bedalu

    sometimes when we take a position, it is beyond ask line and bid line. It is not spread widening, it is spread stealing.

    Reply

    admin Reply:

    That’s called slippage.

    Reply

  3. Michael Miller

    I was cheated by a forex broker yesterday. When I placed 2 identical trades on 2 separate brokerage accounts. The price on one account went on to take profit, while the price on my second account froze until it eventually turned against me and stopped out. Which makes market manipulation just another method brokers use to cheat traders.

    Reply

    Andriy Moraru Reply:

    First, there is nothing legal in price manipulation.
    Second, why do you think it was manipulation by the broker? Brokers use different data feeds, so their price quotes are not necessarily identical.

    Reply

  4. Dimitri Xavier Meri

    Some get your stop loss by walking down to the location where you have your stops set up. The market is 10 pips above on all of the other websites. I have three MT4 ECN Brokers accounts and all are getting traded by me some with EA’s and some manually and some on demo trade with an EA that I develop. You can see the extension of the tick on the tick chart or the One Minute Chart.

    Reply

    Andriy Moraru Reply:

    I would not call stop-hunting a legal practice. Manipulating the Forex rates inside the trading platform to put traders into loss is a criminal activity.

    Reply

  5. Mario

    Hi, if the spread is increased from 21 to 199, in GBPUSD, with no market all, no volatility, and they say it’s due to “lack of liquidity”, is it a scam, or not? Many times, from the late hours of Friday, and the early hours of Sunday.. Is it legal? I don’t think so.. some people say it’s legal..

    Reply

    Andriy Moraru Reply:

    Not only this is legal, it is also quite normal. I would worry if a broker did not widen spreads during those periods and not result in huge slippage / execution failures instead.

    Reply

Leave a Reply

required
required (will not be published)