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 oven 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.
This entry was posted on Friday, January 29th, 2010 at 5:29 pm and is filed under
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