How to Trade FOREX without Being Ripped Off by the Broker
U.S. FOREX regulators have periodically issued warnings of broker scams such as price manipulation and outright theft. A trader ought to perform due diligence before entrusting money with a broker. By taking a few simple precautions, traders can find trustworthy brokers who will facilitate their trading activity. A good broker is invested in a trader's success---a bankrupt trader cannot generate fees for a broker.
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Instructions
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Open an account with a non-dealing desk (NDD) broker. This kind of broker passes your orders directly into the interbank market without trying to fill your order internally, a practice that prevents price manipulation by the broker. An electronic communications network (ECN) NDD broker is the best choice, because it gives traders a window into to the current depth of market (DOM)---the current open bid and ask prices and volumes by all traders for each FOREX currency pair. This is the best pricing information available. ECN brokers earn revenue exclusively through trading commissions, as opposed to trading against their customers.
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Diversify your holdings among several different brokers. For instance, once you have an ECN NDD account, you can try one or more dealing desk (DD) brokers. These are brokers that net buy and sell orders internally, often taking the other side of your trade. Different DD brokers compete against each other and against NDD brokers on various bases, including advanced trading software, liberal availability of margin---financing for the non-collateralized portion of your trades---and/or small minimum account sizes. DD brokers earn revenue by marking up a bid/ask spread: they increase spreads relative to the spreads available in the interbank market and then pocket the difference. By comparing a DD broker's spreads with those listed by your ECN broker, you can quickly evaluate the DD broker's markup to guard against overcharge. A normal markup generally translates into an additional $5 to $30 additional cost per $100,000 trading lot.
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Monitor a DD broker's currency price quotes against those provided by your ECN broker. If a DD broker is dishonest, it will manipulate prices to your disadvantage. For instance, if the price of your currency pair is approaching your stop loss price---the price you specify to automatically close out a losing position---a dishonest broker might force your position to stop out by misquoting the current price as the stop price: it takes the other side of your losing transaction and collects its spread markup. There are other schemes, but by comparing a DD broker's quotes and spreads with those from your ECN broker, you can quickly separate the honest brokers from the crooks.
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Tips & Warnings
Reputable FOREX brokers are registered by a country's national regulator. In the United States, this duty is shared by the National Futures Association and the Commodity Futures Trading Commission. Deal only with registered brokers.
It is prudent to focus on brokers that have long track records: five years or longer. You can check with your country's regulatory body to verify how long a brokerage has operated. You can also check the many traders' forums on the Internet to discover any complaints against a particular broker.
The worst brokers, called "bucket shops," do not actually place trades with your money. They assume your trades will generally lose money and simply pocket your loss. Bucket shops are completely dishonest, illegal in the United States and are never registered. Obviously, you should do enough research to avoid these shops at all costs. Many less-reputable brokers put up phony websites that claim to "impartially" recommend themselves. These are Internet scams and with a little practice you can spot them quickly by their use of questionable testimonials and very low fees.
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