Saturday, August 2, 2014

Questionable Forex Broker Practices Explained

A number of questionable forex broker practices can cause problems for a forex trader. As a result, you will probably want to do your best to ascertain in advance whether a forex broker has developed a reputation for engaging in these practices.
Some of the more problematic questionable forex broker practices are explained in the following sections.

Requotes

Requoting is the situation where your trading platform shows a trader a certain price and then when the trader goes to deal on it, the platform makes them wait.
The platform then shows a different price for the trader's approval that is usually worse than the original price the trader had selected to deal on.
While this might be a reasonable practice to protect the broker in a fast market, if requotes are common in relatively orderly markets, this issue can cost an active trader a substantial amount. Some brokers use this ploy constantly against their clients to line their pockets at their client's expense.
Accordingly, active traders should look for brokers that have a no requote policy on transactions done through their supported platforms.

Front Running

Front running involves a forex broker or dealer selling or buying ahead of a significant order or group of orders for their firm's account. For example, they might sell ahead of a sell order or buy ahead of a buy order.
While this may well result in a profit for the broker who can use the order(s) as an effective stop loss by filling the client(s), such a questionable broker practice might result in the order not being filled at all.
This is because the broker or dealer's front running trading activity puts pressure on the market that acts contrary to their client's best interest in having their order filled. Read more about front running forex orders.

Stop Hunting

Stop hunting entails the broker deliberately moving the forex market either in fact or just on their trading platform quotes.
A dishonorable forex broker might do this in order to be able to execute stop loss orders and thereby make a profit off of their clients' misfortune.

Excessive Slippage

Slippage occurs when an order, usually a stop loss, is not executed by a forex broker at the rate at which it was placed. Instead, the order is filled at a rate that is usually worse than originally intended by the trader.
Some order slippage might be acceptable in fast markets when exchange rates change rapidly, but in an orderly market they might represent yet another way for a forex broker to make extra money off of its clients.

Forbidden Strategy Clauses

Some forex brokers specifically forbid using their services for certain trading strategies in their terms and conditions. Beware of forex brokers with arcane trading rules, such as giving you a minimum time to hold a position or denying you to engage in scalping or to "pip hunt". "Pip hunting" describes any quick profit short-term trading strategy such as scalping.

If the trader then uses the broker's services for such forbidden purposes, perhaps because they did not read the fine print, the broker then seems to feel justified in confiscating any profits derived from the prohibited trading activity. Imagine that you deposit your money and you put them at risk and then such a broker might allow you to make a substantial profit before it confiscates the whole profit on the basis of the violation of their "pip hunting" rule.

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