What Will a Broker Do If I Start Earning Consistently?

Many people who are potentially interested in trading and investing in the financial markets are trapped by the misconception that it is impossible to earn a steady income on Forex, that brokers simply do not let their traders make money and profit from gullible clients themselves. This stereotype is constantly reinforced by the cries of “deceived financial tycoons” who, barely entering the market, started trading immediately on a real account, without any kind of system, and safely lost all their money. Naturally, 99% of such “traders” blame the broker for everything, and Forex seems like one giant scam. In practice, however, things are not that simple.

In reality, everything depends on the broker. If you look at the market in simplified terms, then all brokers can be divided into two categories: ECN (STP) brokers, which route client trades to the interbank market, and “bucket shops,” where trading is conducted inside the company, and the trader at best makes deals with other clients, and at worst trades against the dealing center itself.

With ECN brokers, everything is clear: it is beneficial for them that the trader place as many trades as possible so they can earn commissions, and a trader who blows the deposit will not be able to place trades. Therefore, it is beneficial for them that the client trade at least without losses.

With “bucket shops,” in fact, things are also far from being so bad: there are quite a few such brokers that have been operating in the market for 10-20 years and have not been noticed for outright deception or draining clients. When a novice trader constantly makes mistakes himself, there is no need even to drain him, he will lose money on his own by making losing trades. And on Forex, the majority, as a rule, does make mistakes.

A somewhat more complicated matter is the attitude of “bucket shops” toward traders who trade at a profit. Large companies may well turn a blind eye to one or another client’s stable but small earnings and allow him to withdraw his money, after all, reputation is more important. All the more so because this can be turned into good PR and attract hundreds of newcomers who will ultimately lose much more money.

But if the company understands that one of its clients is not merely trading steadily at a profit, but is also constantly increasing volumes, taking more and more out of the broker’s pocket, measures begin to be applied to him. Moreover, in most cases the broker deprives the client of all his funds and cuts off access to the feeding trough, while formally not breaking the law. We will return a little later to the question of how the broker manages to do this, but for now it is worth paying attention to the most popular ways of earning stable income on Forex.

Traders who earn money from forex trading can be divided into two categories. The first is experienced exchange traders who, of course, have a strategy (or, more precisely, a set of specific rules), but who also make decisions based on their own experience, and sometimes even on intuition. Such specialists do not finish every month in profit, and may endure failures for a long time, but experience and professionalism allow them to climb out of the hole again and again, make up for all losses, and once again end up on horseback.

Such traders, as a rule, trade in large volumes, which is why they immediately go to ECN brokers, without risking any involvement with bucket shops. As a result, the broker steadily receives its commission, and the trader gains confidence that he will not be deprived of his honestly earned profit.

The second category of earning traders is algo traders, bot operators, and all those who have a profitable trading system and know how to follow its rules clearly. In this case, the trader does not necessarily need to be a hardened exchange veteran, it is enough just to understand the basics of the market and know how to control his emotions. Some of the people who earn from algo trading have no exchange experience, but they do understand programming and probability calculations. Based on market analysis, such specialists can write a robot that will bring stable profit under certain conditions until the market evolves and the former input data lose relevance.

But even before the market changes, most automated trading systems have one problem: they require instant execution of orders. An ECN broker cannot provide such conditions, it allows the trader to enter a deal only when it finds a counterparty for him. And in force majeure situations (for example, when trading the news, for which most such systems are designed), serious execution delays occur, as well as slippage, when a trade is opened at a price a couple dozen points above or below the planned one.

Read more about this in the article How orders are executed on Forex.

That is why most algo traders have to turn to “bucket shops” for services, since only they can ensure instant order execution. And once a broker notices such an inconvenient client, it starts looking for ways to “drain” him with minimal risk to its reputation.

It should be understood that a bucket-shop broker, especially one that has not been in the market for its first year, calculates in advance the probability that traders will appear who can achieve a constant income in one way or another and takes measures. The simplest way to protect itself from excessively lucky clients is to insert several small and outwardly harmless clauses into the client agreement. This may be a time limit on a trade (which is critical for scalpers), a cap on maximum profit per trade, or a cap on the maximum withdrawal amount. If the trader even accidentally locks in a larger profit than is provided for in the agreement, he can formally be recognized as a violator and refused further service, with his accounts frozen (that is, the money remaining on the deposit is taken away).

There are decisions that are even simpler: to add to the offer a clause that gives the broker the right to refuse the client any further services at any moment without explaining the reasons. Funny as it may sound, a trader who accepts such conditions thereby gives the broker the right simply to take his deposit, without letting him make a single trade.

Of course, there is also the reputation factor, and in most cases it is even more serious than the legality of the broker’s actions (most of them still have offshore registration anyway). A large company will not brazenly steal clients’ money, because this threatens much greater losses due to the fact that newcomers will prefer competitors with a better reputation.

That is why, before choosing a broker, it is necessary not only to read the client agreement carefully (point by point) with all addenda, but also to study reviews of this company on the internet. Moreover, it is often not easy to see the real picture because, on the one hand, there is a large number of paid planted reviews from the dealing center itself, and on the other, black PR from competitors and simply offended losers who will easily smear even an honest company, just so they do not have to admit their own mistakes.

In addition to bucket shops and ECN companies, there are brokers that operate on a hybrid principle. This means that they route large trades to the interbank market, while orders placed in fractional lots are traded inside the company. Brokers do this so as not to refuse services to small clients, who may later become serious investors. However, it is impractical to route trades of 0.01 lot to the interbank market, so the broker executes them independently.

In practice, this is fraught with the following situations: a client’s trades are executed instantly and at the quoted price as long as he trades with a small lot. If the trader conducts systematic trading and his deposit grows, he begins increasing volumes. As soon as the trade volume reaches 1 lot, the orders are routed to the interbank market, delays in execution and slippage appear. The trader begins to think that the broker is intentionally putting spokes in his wheels, while in fact it is merely bringing him to the real interbank market.

We wrote about this in more detail in the article How the Forex market works.

However, regardless of the company’s motivation, such a scenario is unacceptable for a systematic trader. Therefore, before beginning cooperation with a broker, it is necessary to clarify all execution nuances. If the trader decides to cooperate with such a company, it is necessary to limit trade volumes.

Now, as Forex gains more and more popularity every year, various organizations come to the market that commit direct or indirect fraud against clients. This may include persuading someone to open an account for a large amount, to take out a loan to fund the deposit, or simply refusing to return funds.

In order not to fall into such a trap, it is necessary to show elementary caution and not cooperate with unverified companies. Your choice of broker should be made on the basis of your own research and conclusions. If a representative of an unfamiliar company calls you and offers to open an account, promising mountains of gold, it is better to refrain from such cooperation, solid brokers do not attract clients with banal cold calls.

If it so happens that you have already become a client of a dubious organization (from the category of “they offer a job,” and then persuade you to take out a loan to open an account), and you have problems withdrawing funds, you need to move to decisive action immediately. The simplest option is to write a statement to the prosecutor’s office. In 99% of cases the money will be returned within a few hours. The statement can then be withdrawn as unnecessary.

In order to avoid such unpleasant situations in relations with your broker in principle, it is recommended simply to cooperate with trusted ECN companies, with which the client is guaranteed not to have a conflict of interest. If all of the trader’s success depends on instant order execution down to the point, it will be necessary to do research in search of the most loyal “bucket shop,” and then to protect profits from your broker constantly by regular withdrawals. And just in case, it is better to have a couple or three backup options.

Respectfully, Alexey Vergunov TradeLikeaPro.ru