How Can Forex Brokers Cheat You Legally?
There are many reports of scam brokers in the Forex industry. "
"No fees, no commission, no hidden costs" – those are good words for we hear in commercials, but in reality, every broker has a legal right to cut some extra pips or dollars in its favor from your position. Here is the list of four such methods:
- Spread widening – an
all-timefavorite of all Forex brokers. Spread widening usually happens during the periods of very high volatility. A broker may fail to allocate your position at a price it quotes (even if it is completely up-to-date) and protects itself by imposing a wider than usual spread on its traders. There is nothing wrong with that if, of course, the broker does it honestly. In reality, nothing stops brokers from applying a wider than necessary spread to earn several pips from traders. What can you do to avoid spread widening? Choose a broker that is not known for excessive widening or simply try not to trade during the periods of high volatility (important news releases).
- Slippage – isn't dishonest by itself because the broker's liquidity providers may change prices pretty fast, and the broker may simply have no choice other than to execute your order at a slightly worse price. However, 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 is impossible to find a broker without slippage but you can try registering with the one with as little slippage as possible. You can also try to avoid trading with market and stop orders and switch to limit orders; if you use expert advisors, you can apply reduced slippage parameter in orders.
- Disproportionate swaps (overnight interest rates). Brokers charge and pay overnight swaps depending on the difference between the
short-terminterest rates associated with the currencies in the pair and set by 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, the interest rates associated the USD/JPY pair's constituents are 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. You can avoid this brokers' trick by trading strictly intraday, going for a no-swapaccount, or choosing a broker by studying their trading conditions for better swaps.
- Overleveraging isn't really a broker's fault – it is usually traders who just fall for bigger trading volumes. And the brokers are only glad to offer those bigger volumes as it will increase their earnings per pip of spread. Remember this and do not overleverage your trading positions. If you can afford it, you might want to opt for trading 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, you can use our Forex forum to discuss this issue.