Once you achieved a certain level of self-esteem with demo trading, it is time to go live and open a real forex account. The next couple of days will probably be filled with the headache of searching for forex brokers reviews and observing the feedback and suggestions from other traders. However, you might notice a peculiar tendency in some of the reviews to claim that forex brokers trade against you and their main agenda is to wipe out your account. For a new little fish in the huge pond this information is very discomforting.
There are many Forex Brokers out there and most of them have Reviews on the net. The question is, are bad reviews really unbiased or they are written by either competition or bitter traders who emptied their account because of the lousy experience? After all, only when things go bad we tend to complain! On the other hand, are good reviews really unbiased or are they written by the representative of a particular forex broker?
Forex brokers, in some cases, act as market makers and “trade against clients” or, better say, bet on clients’ loss. That doesn’t mean that if clients earn a million dollars that they will not pay you earnings. Regulated brokers will always pay earnings to clients, so clients do not need to worry. Traders do not need to think about that; it is the broker’s risk. Of course, if traders trade with a large amount of money, brokers never act as market makers in practice.
If a client deposits $100, brokers know that there is a high probability that the client loses $100 in trading.
Two Types of Online Brokers
As mentioned, brokers do trade against their clients, which is not exactly a secret — nor is it actual cheating — but it is something that a lot of people may not even be aware of.
Another thing to note is that not all brokers do everything in the same way. In other words, details on how they operate differently from one broker to another, but most can be classified in one of two groups — A Book brokers and B book brokers.
When trading CFDs and Forex the contract is always between you and the broker. So technically the broker is always trading against you. It is how they manage this risk themselves that makes the difference.
The retail brokers do want to see you fail, since they make money when you lose money. Basically, this kind of broker takes the other side of your trade. In this case the retail forex broker is the market maker. It can change prices, widen spreads and, of course trade against you. To every dark side, there is a plus. In our case retail broker have an advantage – you can open an account with very little investment, get very high leverage and the demo platform is available for practice longer than 30 days! Retail forex brokers offer micro and mini lots which allow you to trade very small sizes. . Not all of these brokers will be “hush-hush” about their technique, but some sure will.
Ways through which brokers trade against you
When a new trader finds out that a broker’s service is regulated with well-known and powerful authorities, they think they are at a safe place and are not going to cheat or traded against anymore, but sadly, this is not true. There are some ways through which a broker trade against you:
Stop loss hunting is one of the effective ways for a broker to cheat or trade against you. Market makers make money when you take the position, they charge you some pips when you buy a currency pair.
Slippage is the trick made by Dealing Desk brokers or Market Maker brokers. As we all know, market makers are trading against you, their profit is in your loss, they will try not to make a profit.
Re-quoting is another trick used by market maker brokers to trade against you. When the price in the market is going up strongly, and you chose to buy and when you click on the buy button, it delays for a few seconds, and instead of taking the position selected by you, gives you a new price that is higher than the price you want to enter.
Leverage is a good facility that helps traders in trading large amounts with smaller accounts. Market makers are aware that most of the new traders, they are inexperienced, are going to misuse the leverage.
On a bright side, market makers can offer an excellent opportunity with their high leverage and various trading instruments. Trading in such conditions can be profitable if you're an experienced trader with great control over your actions. That is why trading with a DD broker is not always a bad choice, because it depends on your trading skills, goals, and needs. However, whatever your choice is, make sure to seek a genuine broker that you can trust and would help you achieve your goals!
No Dealing Desk Brokers
Forex broker without dealing desk (ECN type) is more likely to be honest about the trades since it passes your trading orders off and doesn’t care if you are winning or losing. Their agenda is to get you to trade more and therefore earn more via spreads or commissions. These forex brokers are more like interbank brokers. They don’t trade against you and therefore there is no need to manipulate neither price nor spreads. Spreads are in most cases tighter, but you are probably have to pay commissions. Every trade you make passes through interbank. With ECN forex broker the leverage is generally lower and the minimum account deposits are higher.
Picking the right broker
If you are new and you don't want to lose all of your money in a few months, at best, you will need to keep in mind some things about your brokers, especially when it comes to how to choose the right one to work with.
Whether a broker trades against the client is not the key question as long as they provide you with fair and clean execution of orders. There are numerous things to look for, but we will now list some of the most important ones. Always remember to check them out, as the success of your trades may very well depend on this.
Distinguish Scam and Fraud
- If your broker does not respond to you, it may be a red flag that they are not looking out for your best interests.
- To make sure you're not being duped by a shady broker, do your research, make sure there are no complaints, and read through all the fine print on documents.
- Try opening a mini account with a small balance first, and make trades for a month before attempting a withdrawal.
- If you see buy and sell trades for securities that don't fit your objectives, your broker may be churning.
- If you are stuck with a bad broker, review all your documents and discuss your course of action before taking more drastic measures.
Stuck With a Bad Broker?
Unfortunately, options are very limited at this stage. However, there are a few things you can do. First, read through all documents to make sure your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have to assume the blame.
Next, discuss the course of action you will take if the broker does not adequately answer your questions or provide a withdrawal. Steps may include posting comments online or reporting the broker to FINRA or the appropriate regulatory body in your country.