Sunday, August 1, 2010

Broker Conspiracy Theories : Are they True ?

If people new to forex trading have anything in common it is the overwhelming belief in the broker conspiracy theories. Ask ten people on their road to become successful traders about what they think regarding forex brokers and they will tell you that the main reason (or one of the main reasons) why they cannot profit as much as they want is because their brokers "play with them" in such a way that trading profitably becomes impossible (or much harder at least). The reasons why there is such a widespread belief in the broker conspiracy are many but the real question to ask is, is this conspiracy real ? Do brokers willingly play with their customers and mess with their execution and accounts in such a way that profitability is removed ? On today's post I will talk about these issues, giving you my opinion about the broker conspiracy theory and the consequence this has on your trading.

You have just bought your first extremely profitable scalping system, simulations show great results (although they are unreliable for this type of systems), your demo account shows great results and you are ready to jump into a live account with your first forex broker. You open up the account, fund it, get your VPS and start to trade your EA only to notice that your demo and live accounts almost never agree and your demo account is taking almost twice as many positions as your live trading account. Upon checking your live account you see a lot of spread widening, re-quotes and slippage that makes you think : the rumors were true, my broker is messing up my execution.

To tell you the truth, I do not believe in broker conspiracy theories because it is not in the main interest of a broker to harm their customer's performance due to the fact that they make money from the spreads and this means that the longer it takes for a customer to lose their account, the more money they make. Generally what people perceive as their broker "messing with them" is nothing but the harsh reality of trading in the real market. Sometimes if the broker is a "market maker" this may become a little bit shady since the broker may make some decisions to protect itself from quick positioning or scalping, which they do not like due to the fact that they cannot properly hedge their exposure when such small and fast positions are opened. Such decisions may include spread widening, re-quotes, etc.

I have had my fair deal of experience with people in the broker industry (well known brokers at least) reason why I can tell you that most of the things you hear about are nothing but myths. Brokers are not "evil market makers" making money when you lose money, that to me seems like a childish way of putting things such as the brokers are "the bad guys" and you become the poor good guy/gal who could only make it if he or she wasn't screwed as much by the big guys. The first thing you need to do here is to take responsibility for your profits and your losses. Forex brokers are not responsible for your opening and closing of positions and therefore the fact that you attempt to use systems that simply don't work under real market conditions is not their fault.

However I always believe that you should always work with the worst possible case available such that your trading and decisions are as robust as possible. If there is a broker conspiracy and brokers will relentlessly prosecute and make certain systems (like scalpers) totally nonviable then you should focus on trading a system that is shielded from the power your broker has over your trading. Certainly it would not be very intelligent to trade a given system that you know depends greatly on execution variables your broker controls. If brokers do seek to make traders lose, then why in the world would you want to make it easier for them ?

In the end, if you profit or if you don't depends entirely on the decisions you make. If you trade systems that are very vulnerable to your brokers bidding then you will fall prey to the problems of real market execution and - if existent - to your broker's endless hunger for new trader's flesh. As I said before the key here is to take responsibility for your trading and find systems that will allow you to trade with the smallest degree of dependency on live execution variables. Systems that trade in the medium or long term which do not have small take profit and stop loss targets will make you "immune" to any conspiracy since your broker will not be able to control your trading through the manipulation of execution variables.

However it is interesting here to note that I have never heard a profitable trader complain about execution related problems as a "broker conspiracy" since experienced traders know that this is a characteristic of the real market and that being successful despite their existence is one of the jobs YOU have as a profitable trader. It is irrelevant if these problems are or aren't caused by your broker, if they are there and you want to be profitable then make your trading style such that these problems will have a small effect on your account balance. If you are suffering because of execution issues you should know that your trading style is what gives them the room to harm your wallet.

If you would like to know more about automated trading system development and how you too can design likely profitable trading systems please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !


Winter said...

Hi Daniel,

Could you recommend some reputable forex brokers ? At the moment, I only trust IBFX and Alpari.

Daniel said...

Hi Winter,

Thank you for your comment :o) I also like Alpari and IBFX but I would also trust FXDD. Regarding safety of deposits I would also trust but I do not like the fact that they have Sunday candles. Definitely for me FXDD Malta and Alpari UK are the best and most trusted. Thanks again for your comment,

Best Regards,


Rodolfo Maria said...

Hi Daniel,

this of MM forex brokers is a big issue for everyone.

I completely agree with you when you say that is up to us as traders to make things in such a way that can't be exploited by brokers.

But it's also indisputable true that operating with MM brokers, most of the times our orders don't reach the *real* market, being instead electronic entries in the broker's book. This way when you lose they win and vice versa. It is as simple as that.

So, a regulated broker is the bare minimum to start from and everybody should follow the rule to immediately close the account the very first time the broker clearly cheats you.


Daniel said...

Hello Rodolfo,

Thank you for your comment :o). I do agree with what you say, however bear in mind that the definition of being "cheated" is different depending on the person.

For example a person using a scalping trading tactic may feel cheated due to re-quotes and slippage which are normal and not unlawful in that context.

I also have to disagree with you in that brokers profit from your losses and give you their money when you win. Even though your positions are not executed in the real market on most brokers, they do NOT like to keep themselves exposed and they usually hedge the positions between their users and take real interbank positions for the remainder. The idea is that they profit from the spread and hedge their exposure to their customers as much as they can. I know several people on reputable brokers and this is the way in which they operate. Otherwise it would be a very risky business model for them, something which they avoid as much as possible.

Of course, if you see that your broker has some behavior outside of what they are supposed to do and you have clear and substantial evidence that points to their cheating you should of course email your broker first and then the corresponding regulatory body.

However, even though I have no real evidence to believe that this "conspiracy theories" are true, the best thing you can do - as I mentioned - is to make your trading method much more robust against anything that may potentially affect your profitability.

Thank you very much again for your comment Rodolfo :o)

Best Regards,


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