If you do an internet search on forex broker scams, the number of results returned is staggering. While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business. Fortunately, they eventually get weaned out.
However, when you're looking to trade forex, it's important to know which brokers are reliable and viable, and to avoid the ones that aren't. In order to sort out the strong brokers from the weak, and the reputable ones from those with shady dealings, we must go through a series of steps before depositing a large amount of capital with a broker. Trading is hard enough in itself, but when a broker is implementing practices that work against the trader, making a profit can be nearly impossible. (For forex trading tips, check out Top 4 Things Successful Forex Traders Do.)
Separating Fact from Fiction
When faced with all sorts of forums posts, articles and disgruntled comments about a broker, we must remember that many traders fail and never make a profit. Many of these disgruntled traders then post content online that blames the broker (or some other outside influence) for their own failed trading strategies. Thus, when researching a potential forex broker, traders must learn to separate fact from fiction.
In many cases, it may seem to a trader that a broker was intentionally trying to cause a loss. Complaints such as: "As soon as I placed the trade, the direction of the market reversed;" "The broker stop hunted my positions;" or "I always had slippage on my orders, and never in my favor" are not uncommon. These types of experiences are common to all traders, and it is quite possible that the broker is not at fault.
New forex traders often fail to trade with a tested strategy or trading plan. Instead, they make trades when psychology dictates they should. If a trader feels the market has to move in one direction or the other, there is a 50% chance he or she will be correct. When the rookie trader enters a position, often he or she is entering right at a time when their emotions are waning; experienced traders are aware of these junior tendencies and step in, taking the trade the other way. This befuddles new traders and leaves them feeling that the market - or their brokers - are out to get them and take their individual profits. Most of the time this is not the case, it is simply a failure by the trader to understand market dynamics.
On occasion, losses are the broker's fault. This can occur when a broker attempts to rack up trading commissions at the client's expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers' rates have not gone to that price. Luckily for traders, this is not likely to occur. One must remember that trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. Overall, it is in the best interest of brokers to have long-term clients who trade regularly and thus sustain capital or make a profit.
The slippage issue can often be attributed to a psychological phenomenon. It is common practice for inexperienced traders to panic; they fear missing a move, so they hit their buy key; or they fear losing more and so they hit the sell key. In volatile exchange rate environments, the broker cannot ensure that an order will be executed at the desired price. This results in sharp movements and often slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not. Even in more transparent markets, slippage occurs, markets move and we don't always get the price we want. (Learn about different forex trading strategies in Place Forex Orders Properly.)
Therefore, often what is perceived as a scam is just the trader not understanding the market he or she is trading.
The Real Problem
Real problems can begin to develop when communication between a trader and his or her broker begins to break down. If a trader does not get email responses from his or her broker, the broker fails to answer the phone, or provides vague answers to a trader's questions, these are red flags that a broker may not be looking out for the client's best interest.
Any arising issues should be resolved and explained to the trader and the broker should also be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader in this case is the trader's inability to withdraw money from a trading account.
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:
- Do an online search for reviews of the broker. Take what is said and filter it based on what was said in the first section; could this be just a disgruntled trader? In the same search, find if there are outstanding legal actions against the broker.
- Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.
- Read through all the fine print of the documents when opening an account. Incentives to open account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say he or she cannot withdraw because the bonus cannot be withdrawn. Read the fine print and make sure to understand all contingencies in regards to withdrawals and whether incentives impact withdrawals.
- If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more and then attempt a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.
Note: It should be pointed out that a broker's size cannot be used to determine the level of risk involved. While big brokers get big by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn't always safe. (If this seems a little over your head, check out our Forex Walkthrough Charts, Economics, Trading, or you could start at Beginner.)
What If You're Already Stuck With a Bad Broker?
Unfortunately, options are very limited at this stage, however, there are a few things you can do:
- Read through all documents to make sure that your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have only yourself to blame.
- Be stern with your broker, but not rude. Point out the course of action you will take if he or she does not adequately answer your questions or provide a withdrawal. Steps may include posting comments online, reporting the broker to the regulatory authority or marking them as a scam on forex "policing" sites such as http://www.forexpeacearmy.com/
Supposed scams are often nothing more than traders not understanding the markets they are trading, and then blaming the broker for their losses. But there are times when brokers are at fault. A trader needs to be thorough and do research on a broker before opening an account. If the research looks good, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then another deposit can be made. If you are already in a problematic situation, you should verify that the broker is doing something illegal, attempt to have our questions answered and if all else fails, report the person to the regulatory body.
For further reading, take a look at our Forex Walkthrough.