It is easy to blame the Forex brokers for the lack of success by Forex traders, and you only need to look at the broker review forums to assume they are the bad guys.
The reason behind this broker bashing is that there are just so many losers in the Forex market compared to the winners, but are the brokers to blame for this? Perhaps not. Maybe the brokers have just become the best scapegoat and there are a few theories as to why that is:
Why we blame brokers
So, why do most traders find fault in their brokers if they are not fully responsible for the losses? What are some of the reasons for the broker bashing?
Backlash from anger
When anyone loses something, they try to find someone to blame. According to psychology, the blame game is part of a defence mechanism implemented to try and avoid facing our own faults. Although there are negative reviews on forex brokers, there are also equally positive ones, which makes one to wonder why there’s a discrepancy. The truth is that most of those who lose in the Forex market do so due to inexperience.
I will concede that forex brokers create hype around the forex market, showing all the potential benefits and downplaying the negative sides. In fact, while opening an account, you will only find one picture warning you of the risks involved in forex trading.
This is intended to pull people in, and although it is unfair, it’s just business. The actual fault lies on your part, for not being more serious about your trading career and taking time to learn everything you needed to. To become a profitable trader, you need years of experience, which most people overlook for the dream of making quick money. If you had taken your time to learn the ins and outs of the markets, perhaps you wouldn’t have suffered the losses you did.
Lack of understanding
Another fault in our psyche is to blame what we don’t understand for any wrong that happens to us. Take the 2007-2008 financial crisis which was caused by a collapsing housing market in the US. At the root of the problem were people taking mortgages, sometimes more than one, on an adjustable rate. Sure, the bankers built upon these mortgages other insecure financial instruments like the collateralized debt obligations (CDOs).
But at the root were individuals who bought houses without understanding the consequences and implications of a variable rate mortgage. When these individuals were unable to pay their mortgages, the entire house of cards came falling down. Now, only the bankers are blamed for the financial crisis, but some of the blame must go to those individuals who entered deals they didn’t understand.
My point is that the same lack of understanding happens even in the Forex market, with people blaming their brokers when they just don’t understand how the market actually works. One such concept is slippage, which refers to the difference between the price at which your order is filled and the price you wanted the order to be executed at. Slippage is common during times of high market volatility, and it affects spot transactions as well as pending orders.
Take, for example, black Thursday which happened on the 15th of January 2015 when the Swiss National Bank (SNB) de-pegged the franc from the euro. The result was a massive rally by the Swiss franc against other currencies in the market which occurred within hours. During the event, slippage was very high and many orders were either executed at different prices or not executed at all. Even for those with pending orders, their orders were still affected, and many of the orders were not executed at the pre-set price.
Naturally, many people blamed their brokers for the slippage, but slippage is a normal occurrence in the markets and not the doing of the broker. The problem was even more prevalent among the best Forex ECN brokers because they have to relay their trades to the market makers. The broker receives an order from their client at a certain price, but by the time the order is sent to the market maker, prices of the currency pair have already shifted. The broker tries to reactivate the order at the new market price, but again the prices will have changed.
This is what causes slippage, and why trades may be filled at a different price than that expected. Due to the lack of understanding by most traders, they will assume that the broker was out to get them, but slippage is just a reality of financial markets, and it happens with all other markets.
There are other factors also blamed on the brokers but they are just market realities that are not the fault of the brokers. Another example is the belief that the broker is trading against you, thus causing the markets to move against your favour. Say, you sell the EUR/USD at a total cost of $1,000, and your broker buys the same pair at a cost of $100,000. Laws of demand and supply would cause the value of the EUR/USD to rise due to the higher demand, and some traders believe their brokers do this.
However, dealing desk brokers will match your trades on the interbank market if you’re winning and make even more than you do. If you’re losing, they will take the opposite trade on the interbank market, but that is just business, they’ve seen a trading opportunity they can’t let to pass. As you can see, even those on the STP Forex brokers list don’t really have anything against you, it’s just business. They will side with you when you’re gaining and take the opposite trade when you’re losing, wouldn’t you do the same?
Why it’s wrong to blame
Whenever you experience a loss in life, in this case the loss of capital, the more civilized thing would be to take a moment and reflect on your actions and consequences. Instead, people turn to the Forex forums to bash their brokers even before considering their part in the loss. Therefore, before you start to trash your broker, here are some things to remember:
It’s partly your fault
When you want to buy a car or smartphone, do you just pick the one which you come across first, or do you do some research? I’m sure you first do a lot of research on the internet to see what other buyers have to say about the product. If it’s a car, you probably want to know how safe it is and its performance. Then why don’t you apply the same scrutiny when choosing a Forex broker?
Most of those traders who blame their brokers probably didn’t do this research because, if they had they would not have fallen for an unscrupulous broker. There are several real Forex broker reviews on the internet ran by reputable companies. These should make it easier than ever to spot a fraudulent broker.
Besides, are you a truly excellent trader? With so many traders in the market, the only way to succeed is to stand out by being an exceptional trader. Can you honestly say you’ve got what it takes to compete with other traders? Thus, if you find yourself at the hands of such a broker, it really is partly your fault. (See the 10 most common mistakes Forex traders make and also the best Forex traders of all time)
The brokers need your business
Would a salesman, real-estate agent or even an electronics company sell you something bad? Recall the incident with the Samsung Galaxy Note 7 which would explode while charging. Samsung was very apologetic and even refunded or replaced its customers’ handsets. This is because a company’s survival depends on their customers’ experience, and the happier the clients are, the more that company gains popularity.
Now, the same is true for forex companies for trading whose survival depends on acquiring more clients, which is why they are always launching lucrative deals and offers to new clients. A broker would not intentionally make you lose money because they want you to stay. The common misconception is that dealing desk brokers are more prone to stop hunting because you are trading against them.
This is partly true because such a broker loses whenever you gain, but the broker counts on the probability of you losing to profit. More than 80% of traders lose money, according to statistics, and these are excellent odds for the broker, they don’t need to hunt your stop loss. Besides, Forex brokerages are massive companies with plenty of capital, they would not gain from hunting stops on small accounts.
As for the true ECN brokers, they have absolutely no need to bet against you, and even have increased motivation for you to win. Such brokers connect you to the interbank market and profit from the spreads they offer you. As such they want you to stay in the game for as long as possible so that they can keep earning from the spreads.
(Find out more about a broker’s operations on how to create your own Forex brokerage firm)
Are all the brokers faultless?
By now, I may seem like a Forex broker lobbyist, but I’m not, I just believe in looking at the issues from all possible angles. As for the question, whether all the brokers are faultless, the answer is no, forex brokers are not all faultless. There are actually a number of brokers who perform some unfair operations. Even though Forex regulators are meant to curb these kinds of practices, it is impossible to completely eradicate unfair practices, and some traders have been unfortunate to find themselves on the wrong end of the stick.
How do you tell the good from the bad apples?
The easiest and way to identify good brokers is to look at what other traders are saying about them. Through these reviews, you can learn whether other traders have been screwed by certain broker. On the other hand, we have seen how brokers get unfair treatment simply because their clients lost money by their own doing, and blame their brokers. As such, broker reviews are not to be completely trusted; they can be taken into account, but not taken as the absolute truth. After all, we know people lie, and maybe they’re cyber-assassins hired by competitors to muddy their names.
To protect yourself, here are some lessons on self-defence: Forex scams
The only sure-fire way to tell whether a broker is good is to try using their services and judge for yourself. To minimize your risk of losing due to an unscrupulous broker, open a mini, micro or nano account with only a little leverage. These accounts allow you to trade with very little capital, and this allows you to evaluate the broker’s services with minimal risk. (See more about types of Forex trading accounts)
After you have traded on one of these low-capital accounts for some time, you will be more informed about the broker’s character. If they are a good broker, you can upgrade your account and deposit more money, otherwise, you can walk away with only a minimal loss and a valuable lesson.
How do unscrupulous brokers get away?
The first major hurdle is that the Forex market is decentralized, and there is no single location where all transactions go through. As such, the regulators cannot oversee every single trade that is performed, and there are millions of trades every day. It is very easy for a broker with ill intentions to hide their unfair practices from the regulators. Furthermore, the brokers can be very crafty so that their actions are not detectable, and suing a broker can be a very arduous process. (See more on how to complain against a broker)
If, for example, you find yourself in the hands of an unscrupulous broker who drains your $1,000 account, you might not have any recourse because the legal fees alone for such a complaint would far surpass the capital you lost. Such brokers know how to target clients who are not in a position to pursue a complaint, and that is how they get away with their actions. Therefore, prevention here is better than cure, it’s better to avoid falling victim rather than letting yourself fall for a scam.
If you still feel angry at your broker about losing your money, here’s a video showing some mistakes you may have made that led to the loss:
