Based on our research, and hundreds of extensive tests of forex retail brokers around the world, we have discovered that approximately 98% of retail brokers don’t have any interest in profitable clients. And this is the main reason why so many traders lose money over the long-term. At best, they break/even or end up decreasing a trader’s profits. In this article you can see the most common dirty practices of poor quality brokers and how to recognize and avoid them.
Based on our research, there are three types of forex brokers:
1) Brokers with a high conflict of interest between their business and their clients - traders are not able to make any profits with these brokers.
2) Brokers which look like as ECN / STP, but they only have one liquidity provider, meaning that there is still a major conflict of interest between their business and their clients.
3) Brokers that provide true and direct interbank market access where they execute all orders of their clients.
In the forex industry there are as many as 98% forex retail brokers around the world that fall under the first two categories. And if you trade with similar poor companies, it is very likely that they will not allow you to make long-term profits in trading. Or if you are making some short term profits it is likely that with brokers which fall under the third category, you would achieve much higher profits with lower drawdowns.
Below you can see the most common dirty practices of brokers, and signs that there is a conflict of interest between the broker and a trader. In such situations, the trader should consider changing broker to protect his trading deposit and to achieve better trading results than he is currently doing.
1) Trading recommendations from a broker
This looks like help and advice with good faith, but it could easily end like a nightmare for a trader. Broker’s advice could often end with high losses, because there is a good chance that the broker does not have a long term interest in your profits.
2) If your withdrawals last more than two business days
The second point is short and clear. If you provide your broker all necessary information, and if they are correct, then within two business days your withdrawal should arrive in your bank account.
3) Fixed spreads
This is one of the advertisements that brokers often use. If your broker offers trading accounts with fixed spreads it is not a good idea to trade with him any longer. Fixed spreads in the real interbank market do not exist. So, if you have an account with fixed spreads you are not trading on the real interbank market without conflicts of interests.
4) Excessive low cost spreads and commissions
Is another advertisement that is unfair and not transparent, but that brokers often use. If a broker executes all orders on the real interbank market with a true interbank spread, it is simply not possible that he would be able to provide you interbank trading with extremely low costs. Every broker that executes client’s orders on the interbank market has to pay a spread of the interbank market, liquidity providers, technologies - access to interbank market platforms, servers, and so on.
If a broker offers trading accounts with extremely low costs, you will give back all their lost profits for sure because of artificial slippage (see point number 7 below). How can you recognize brokers like this? Very easily - just take a look at the broker’s marketing campaign - if they are promoting low costs aggressively, then something is not right.
5) Guaranteed stop-losses
This is another dirty practice that looks like a good idea and seems like you are getting help from a broker. But in reality it does not say anything good about the broker. The fact is that there is not anything guaranteed on the real interbank market and that all orders are always executed for the best currently available prices (they obviously can not be guaranteed). If a broker guarantees you stop-losses (or even gives you some losses back) it is pretty sure that you are trading against only one market maker and you will not be able to be profitable in the long-term. Eventually if you make any profits on these accounts thanks to the stop-losses guarantee, a broker will suddenly cancel any stop-loss guarantees.
6) Stop-loss hunting and spread widening
If a price on market is close to your stop-loss, a vast majority of retail brokers increase a spread for a couple of points, and that will cause the stop-loss activation. This is the reason that the vast majority of brokers are directly or indirectly profiting from your losses. Brokers also often widen a spread right in the market entry or exit. This will cause an increase in a trader’s costs and his losses or lower his profits. The only thing that will increase is the broker’s profits.
7) Artificial slippages
Slippage is the difference between the expected price of a trade (the price at which you send the order), and the price at which the trade actually executes. The slippage is a normal cost that influences your market entries and exits - especially during a period of extreme volatility (heavy amounts of orders coming to the market) or if you would like to execute a high volume of trades (tens or hundreds of lots).
However, poor quality brokers often do artificial slippages which do not correspond to an execution of the interbank market. The slippage is often much higher cost than a spread or commission together which you pay and which you can see at first sight. A brokerage with modern technologies and real order execution of the interbank market is the basic rule for choosing the right broker.
8) Fines from regulators
If dirty practices go so far, that a broker gets a fine from his regulator, it is wise to run away from the broker as soon as possible. Fines from regulators are often the latest reaction on dirty practices of brokers and the vast majority of brokers’ dirty practices are never fined.
9) Deposit bonuses
This point is about an advertisement that brokers often use to attract beginners. You simply have to remember that there is nothing for free in this world. The main goal of bonuses is very simple - to wipeout the deposit of a client. The trader who gets a bonus will have a feeling that he is holding much higher trading capital than he actually holds in reality, and that is the reason why he will open trades with higher volumes and lose his deposit much faster.
Eventually if the trader makes any profit on an account with the deposit bonus he will have big problems with withdrawals. The reason is that brokers offering deposit bonuses often consider your trading capital right at the time of deposit as their profit, and they are pretty sure that you will lose your deposit.
10) Aggressive sales and approaches of a broker
If the broker is trying to hard sell you on their services, keeps calling you, or presenting himself with some nonsense sponsorships that have no connection with financial markets, pay attention to such brokers. Fair and solid brokers should have a friendly approach to their clients without any aggressive pressure. Also they should keep upgrading their technologies, provide you some education, or have people with extensive experience from real trading who will be prepared for your questions. They should create a trading interface for you which will improve your results.
To make a long story short, in the context of our project FX Trading Revolution, we have tested hundreds of retail brokers around the world on real accounts. Every point described above more or less influences your overall results which a trader will achieve on his real account.
At the website FXTradingRevolution.com you can find a comparison of the most interesting trading results of the same automated trading strategy traded with different brokers. Experienced traders will probably not be surprised that the difference in results is even more than 350%.
Team FX Trading Revolution
1. FX Trading Basics that you must Know
2. Know Your Enemy - Participants of Markets
3. Insider Information about Interbank Trading
4. What Brokers Never Want You to Know!
5. Dirty Practices of Brokers that Cost You Profits
6. How to Choose the Best Broker
7. The Most Profitable Trading Strategies
8. The Four Steps to Begin Trading Profitably