How Forex Brokers Cheat Traders
There are hundreds, if not thousands of forex brokers offering services to retail clients in 2017. Sadly, not all of these brokers operate in an ethical manner and many actually go out of their way to cheat traders. In this article we will discuss some of the ways unscrupulous brokers cheat traders and why it’s important to trade with a true ECN broker like Vantage FX.
| Broker | Min Account Size | Leverage | Spread | US Traders | Review | Open Account |
|---|---|---|---|---|---|---|
| $1000 | EUR/USD: 0.6 | Review | Free AccountDemo |
Forex Bonuses
Forex bonuses are a promotional tool used to entice new traders into the forex market. There are two types of bonuses: ‘no deposit bonuses’ and ‘deposit bonuses’. No deposit bonuses are an extremely effective way of recruiting new traders. A broker offering a no deposit bonus will typically apply a small trading credit to a new client’s account ($30 – $100). Though this ‘free money’ sounds like a great deal, brokers aren’t charities, they have done the math and these promotions always benefit them in the long run. This is because most traders lose money.
Brokers offer new clients a no deposit bonus, knowing that most of them will lose anyway. The idea here, similar to a drug dealer offering you your first hit for free, is to get the client hooked. New traders average first deposit is $3000 and the vast majority of new traders will lose this money. Even if some clients do experience a run of beginners luck and manage to withdraw some profits, they will likely follow up with a much larger deposit which they end up losing.
Deposit bonuses on the other hand target both brand new traders and traders near the start of the journey. If the client funds their account with a certain amount, the broker applies a trading credit equal to a percentage of the client’s initial deposit. The idea here is that the client will deposit more money than they otherwise would – the more you deposit, the more ‘free money’ will be credited to your account. Secondly, having these trading credits on your account allows you take much larger positions.
Both deposit and no deposit bonuses usually have a whole range of tricky terms and conditions attached to them. Some brokers require you to trade a certain number of lots before you can withdraw the bonus (encouraging overtrading), others will never let you withdraw the bonus and some brokers will cancel your bonus if you withdraw any money from your account. Though even if there are no hidden conditions attached to a bonus promotion, it’s important to remember that the broker always wins at the end of the day, because most new traders lose.
Encouraging excessive use of leverage
If you’re a professional scalper, 500:1 leverage is essential, but if you are just starting out, or trading longer time-frames, this degree of leverage is not at all necessary and just encourages excessive risk taking. Australian brokers like Vantage FX all have to question new clients and ensure they have a sufficient level of understanding and experience with margin trading before offering them account. Less scrupulous brokers in lightly regulated jurisdictions have no such requirement and offer high leverage margin trading accounts to everyone and anyone.
Most new forex traders lose eventually anyway, offering them 500:1 leverage just speeds up this process and gets their money into the unscrupulous broker’s pockets sooner rather than later.
Requotes, cancellations and stop hunting
There are a range of tactics unscrupulous brokers can employ to interfere with a client’s traders. Some brokers will deliberately quote their traders a slow price feed, so they know in advance what is going to occur in the market. This allows them to re-quote the client’s trade at a disadvantageous price or fill them at the requested price if they otherwise would have gotten a better deal. If the market moves significantly in the client’s favour before the trade is accepted, the broker can just outright cancel the order, refusing to fill it at any price.
The sort of manipulation mentioned above are quite common amongst unscrupulous brokers, but some of the worst brokers will also manipulate their price feeds and cause their clients stops to get triggered. This is especially likely to occur during volatile times like NFPs, when the broker can use real volatility to cover their tracks.
Refusing to process withdrawals and cancelling profits
Some brokers, not content with just profiting of losing traders and interfering with client’s trades, will actually refuse to pay out withdrawals to profitable traders; cancelling trades, profits and even entire balances. There are numerous horror stories regarding this all over the internet, where people have deposited quite large sums of money, made decent returns and then the broker has refused to process their withdrawals. Scam brokers like this nearly always operate in jurisdictions with little to no regulation, where the client has no recourse. As soon as you deposit with a broker like this, your money is gone – they never intended on paying you out in the first place. Brokers behaving in this manner will often accuse the trader of arbitrage or scalping and direct them to a clause in the terms and conditions prohibiting this sort of trading. This is why it is extremely important to trade with a true ECN broker like Vantage FX that is regulated in Australia and allows clients to trade whatever strategy they choose.
Switch to ECN
Brokers that employ the above tactics are always market-makers – they have a vested interest in their clients losing as they profit off client losses. ECN brokers on the other hand, simply operate as a middleman between their clients and the real forex market. ECN brokers do not profit if their clients lose, as they are not acting as a counterparty to the client’s trades. In fact, if a client loses their money and stops trading, the ECN broker has lost a client and is no longer profiting from commission charges. This is why ECN brokers are becoming extremely popular and why the market-maker model is on the way out.
Sick of being cheated? Switch to Vantage FX today and experience the ECN difference. Article provided by Vantage FX, Regulated Australian Forex Broker.