Is Your Forex Broker a SCAM Broker?
If you are a regular poster or visitor to an online Forex trading forum, you will most certainly see this question asked three times out of 10: “is my broker a scam broker”?
Many of these online forums are littered with one tale of woe or another about Forex brokers. But are all bad experiences in Forex attributable to Forex brokers? When you consider that 96% of all individual Forex traders fail at Forex trading, surely this cannot all be attributed to some Forex broker scam activity. We, therefore, have to distinguish between activities due to scam brokers, and bad trading practices by traders.
The fact is that many retail Forex traders enter the market unprepared, without realizing that Forex trading is a bit like going to school and taking exams, with a reward of promotion to a higher grade and eventually a certificate or degree as the case may be. In Forex, the trader has to study the art of trading, and an actual Forex trade is the exam that measures the trader’s proficiency, with the reward of a profit pay-out from a successful trade. What we are generally seeing, especially in developing countries where the technology for Forex trading took a while to catch up with the rest of the world is that traders take only a few day’s training, or attend “one-day intensive” seminars on a Saturday (when the market is not running), then rush off on Monday with thousands of dollars to open Forex accounts to start trading. In such scenarios, high failure rates can only be the outcome. Many of these cases then go to online forums to report what they feel are the reasons behind their failures. You hear things like “it was as if the market was waiting for me to trade before going against me”. All this is bad trading in action and cannot be attributed to fraud activity by a Forex broker.
However, we need to say that scam brokers exist and their activities are very real. When you put money together with the greed mentality that is locked up in a secret reserve of the human soul, waiting to be tempted out of hiding, it is indeed impossible for brokerage scams not to occur. If you want to know whether your Forex broker is surreptitiously scamming you, then here are some warning signs.
A notable Forex broker in the US was recently punished by the regulatory authorities for activities similar to stop hunting, resulting in fines and penalties worth $14 millions. The broker in question has also asked to hire an independent monitor to watch its trade execution practices and policies as relating to price changes between the time the customer places orders and the time such orders are executed. The issues raised in the CFTC memo border on one thing: slippage. Slippage is a phenomenon where a trader’s entry order or stop loss is filled in at a worse price than his expected execution price. This increases the cost of the trade on the trader’s end.
One phenomenon which traders complain about is what is known as stop hunting. This is the practice where a broker triggers a trader’s stop loss even when the actual market price is still a few pips away. The brokers what are commonly implicated in this dubious practice are market makers. A good way to detect this is if the trader opens three different trading platforms, and sees that the actual market price has not reached the stop loss level on other platforms. If a trader notices this pattern of persistent stop hunting by his broker, it is an indication that his broker is a scam Forex broker.
Arbitrary Account Closures without Valid Reasons
Some brokers have been known to appropriate client’s funds without valid reasons. Online forums are awash with information about such brokers.
Non-Payment of Trading Profits
If there are persistent complaints about a broker not honoring payments of trading profits to traders, then such a broker is a scam broker.
Some brokers have also been known to alter trading conditions by “freezing” their trading platforms, thus preventing traders from either participating in profitable trading opportunities, or from closing out profitable trades. I know a case where a trader who opened a trading account with $50,000 had such problems with his broker, and was not allowed to close out a trade due to a platform freeze. Frustrated, the trader closed the platform and returned two months later, expecting to have been stopped out. To his amazement, the trade had become so profitable that his account size had swelled to $200,000. He was allowed to close the trade, but the broker has not made good on the withdrawal request. There is no better definition of scam if a broker is involved in such practices.
These are some of the notable ways that brokers scam clients. If you notice any of these red flags, then it may be time to start looking for another broker. In my next blog post, I will share with you some tips what you need to care about when choosing a Forex broker.
P.S.: Do you know another unethical practice scam brokers use? Let me know in the comment section.