Forex trading more often than not requires a broker for retail accounts. If you are a retail trader and want to open a live account in future, or you have already opened a live account, you should know how the brokers make money and how they can cheat you to make more money.
A brokerage company is regulated only when a governmental organization registers it and monitors the brokerage companies’ activities.
Once traders notice that a brokerage firm is regulated by a renowned organization, they feel safe and believe they cannot be cheated anymore, but this is fallacious. How?
- There are always some special cheating ways that cannot be tracked by the regulatory authorities.
- Brokers could simply bribe the regulatory authorities and ask them to be nicer to them and overlook some events.
- Many of the people who work in the regulatory authorities are the brokerage companies owners, and so they know how to bypass the rules
Evidence abounds that suggest that those regulations are done by the governors who directly/indirectly own brokerage companies and make millions through them.
Someone Who Has GOLD Makes the Rules!
The regulation doesn’t necessarily mean that the broker cannot cheat. What’s more? Not being regulated doesn’t mean that the broker cheats. Some cheating brokers, see the idea of regulation as merely a tool to draw more traders to open accounts. They registered because they have to, not because they are sincere. Don’t trust a broker just because it is registered.
There are dirty hands behind regulation. Once they discovered they could make plenty money through the traders’ losses, they took steps to stop the traders’ funds to leave the country, make it very difficult for the small brokerages to become registered. They created a funnel to drain the funds into their own pockets. On the other hand, people just see the surface and are not conscious of what is going on behind the scene.
Here are ways that brokers can cheat to make more money out of your trades:
- Stop Loss Hunting:
Stop loss hunting is a very efficient way that market maker brokers apply to make the traders lose money.
Markup is an extra pip the broker adds to the liquidity provider’s base spread and is used by these brokers to make more money through every position traders take.
Slippage causes a trader to lose the profit he could have made with his winning positions, and lose more with his losing positions because it worsens the trader’s entry/exit prices.
Slippage is hidden to the traders. You won’t know that the broker slips the price until you open and close a position.
Re-quoting is a new trick made by market maker brokers. When the price is rising sharply, and you decide to click on the buy button, the broker delays for few seconds, and then instead of taking the position for you, gives a new price which is higher than the price you want to enter (since the price is going up strongly).
Swap is the interest required of you when you hold your position overnight.
The swap is calculated using a special formula, and as every currency interest rate is plainly stated by the related central bank, the swap has to be an invariable amount with all of the brokers, liquidity providers and banks.
Leverage is an excellent facility that assists in trading large amounts of money with a smaller account and make bigger profits compared to when there was no leverage. However, it is a two-edged sword that can cut our own throat, if not used properly.
So now you see why your forex broker loves to offer you massive leverage?
They think about making more money in a shorter time. These are essentials your forex broker would never put in the picture for you as it’s bad for business.