Are Forex Brokers The Antichrist or is Broker-Bashing
one Gigantic Witch Hunt?
Market
Dynamics and History Articles - Choosing The Right Forex Broker
In this article we would like to
address the flip side to the argument we put forward in our piece ‘Choosing
the Right Forex Broker’. That article focussed on broker
malpractices, but do we have the right to place the blame on these
firms or are our expectations of them unrealistic?
Is It Fashionable To Blame The Broker?
There are a few sites scattered throughout the Internet (ours included)
that offer you the opportunity to review
your broker and it seems
that there is a growing trend towards the negative. What I mean
is that there are a far larger number of negative reviews than
positive ones. There are several reasons for this: There is a
tendency to jump on the bandwagon of bad reviews if you have
lost money to the market and you have negative feelings associated
with this. It may also be prudent to consider the fact that human
nature seems to be drawn toward the negative; when you turn on
the news how many negative stories are reported compared to positive
ones? Is this because more bad things happen or because we find
these stories more ‘entertaining’? I believe that
a lot of this ‘broker bashing’ is due to the fact
that there are currently a larger number of ‘bad’ brokers
than ‘good’ ones but I also believe that some of
these reviews are not entirely fair because our expectations
are not realistic in the first place. Let us take a look at and
evaluate some of our common complaints.
Slippage
Slippage is the difference between the price at which you set your
order for execution (in the case of a stop order) or the price
you attempt to have an order executed (in the case of a market
order) and the price at which you are actually filled. It should
be noted that stop-loss or stop
entry orders actually become
market orders once active i.e. once the specified price is hit,
so they do not guard you against slippage. This is one of the
most common complaints made against brokers by furious traders
who see potential winners turn into losers and small losers turn
into large ones.
A loss is an unpleasant experience at the best of times and if
you feel that your broker is the reason for it, or the size of
it, you are bound to direct your anger towards them (N.B. Trading
Psychology and management of emotions comes into play here). This
is where we need to check our expectations and put any complaints
into context.
Slippage is generally associated with periods of either extremely
high volatility or extremely low volatility. As an added ingredient
the size of your order can also contribute. The most common times
of high volatility in the forex market are at major
news releases and it is no coincidence that this is also the time that traders
experience the greatest amount of slippage. This is because economic
announcements generate a large amount of interest and everyone
is jostling for position at the same time.
Those traders that are active around these times will understand
that a few pips here and a few pips there can make all the difference
between closing the day with either a profit or a loss. A bad fill
can be enough to make the difference and when you experience one
it is natural to blame it on your broker for being too slow or
for being dishonest and banking your money for themselves. However,
the reality is that slippage at news times is very common and in
some cases almost inevitable but rather than just blaming the broker
there are steps that we can take to minimise or eliminate the bad
fills, such as:
Be mindful of the times you trade: If you are
not a news trader then you may wish to avoid the most highly anticipated
news releases altogether. By doing so you will not be trading during
times of massive volatility and your chances of experiencing slippage
are greatly reduced. If you are a news trader then there are some
precautionary steps that you can take (see below).
Enter with limit orders: A limit
order will
only be executed at the specified price or better thus eliminating
slippage. However, traditional limit orders can only be placed
above or below
the market which requires you to enter on a retracement.
This is an advanced trading technique and requires a good deal
of experience. A limit order will only solve the problem of slippage
on your entries and does not remove the threat of slippage on
your exits if you want to cut your losses or take profit without
the use of a fixed target.
Enter after the initial spike: The first move
after a data release is often extremely explosive creating what
is known as a ‘spike’ in prices. If you wait for
this move to play out then you are giving the market time to
digest the news and you are avoiding the main body of volatility.
This gives you time to plan your own trade based on the data
released, possibly catching a retrace using a limit
entry.
Choose your broker accordingly: If you use a
broker with a dealing desk then you are more likely (in theory)
to experience slippage than if you use an ECN style broker. It
is likely that a human will actually be matching and filling
orders on a dealing desk which leaves you open to an added delay,
especially at busy times. An ECN broker doesn’t have this
limitation and that fraction of a second saved can make a huge
difference. In conclusion, if you are actively trading at busy
times then an ECN broker is probably most suited to your needs.
On the other hand if you trade infrequently or you have a small
account and cannot afford the commission
fees that ECN brokers
charge then a broker with a dealing desk may be adequate.
My Broker is Trading Against Me
This is an extremely common complaint that has lead to the conspiracy
theory that most brokers actually want you to lose your money
because they are on the other side of your trades. Let us step
away from this theory for the moment and consider the fact that
there is ALWAYS someone on the other side of your trades. For
you to go short someone else must go long and vice versa so someone
somewhere always wants you to lose! Now, some brokers claim that
they match client orders at the dealing desk while others use
their dealing desk to offset their clients’ trades with
their own overall position in the market, which is known as hedging.
If a broker is perfectly hedged then they simply collect the
spread that you pay them (which is greater than the spread they
pay in the interbank market) and that is their profit. The conspiracy
theory has come from the notion that most traders lose and so
it would be more beneficial for brokers to trade in the opposite
direction to their clients rather than go in the same direction
and hedge themselves. Experiences of delayed orders, slippage
and stop hunting have added fuel to this fire because they can
be easily explained as brokers stealing your money rather than
potentially legitimate problems incurred at busy trading times.
Conclusion
In this article we have attempted to point out to you alternatives
to broker malpractice theories and a few ways in which you can
minimise their effects. If you are a firm believer that your
broker is trading against you and wants you to lose then you
are developing a potentially self-destructive frame of mind.
This belief may prevent you from identifying problems closer
to home such as trading psychology and strategy inadequacies.
But the fact remains that if you are unhappy with your broker
or you are experiencing excessive slippage, multiple re-quotes,
poor customer service, possible stop hunting, platform freezing
and held orders then you should change brokers. At the end of
the day the reasons for poor service are of secondary importance
behind the effect it has on your trading. It may be that your
broker is honest but technologically inept or it may be that
you are the victim of a bucket shop but try to keep your complaints
within the context of market dynamics. If none of the coping
strategies listed above make any positive difference then it
is definitely time to find a new broker.
Market
Dynamics and History Articles - Choosing
The Right Forex Broker
