Forex Robots Revealed

You may be wondering about the title of this section. Why do you need to beware of Forex brokers? Well, there are some tricks that they play that are not in your best interests, as I shall explain. Please don’t think this applies to all Forex brokers, but there are certainly some dishonest ones, or at least ones that look first to their own best interests at the expense of their clients.

Spreads

Firstly, to set the scene, you must think about where brokers make their money. Typically when trading Forex you may not pay a commission but you do have a spread. A spread is a difference between the price that you can buy and the price that you can sell at.

For instance, at this moment of writing, I am looking at GBPUSD (British pounds and US dollars), and see 1.6476/1.6481 as the quoted prices. These prices are known as the bid and ask. The first currency named is traded for X quantity of the other currency. In this case 1 pound sterling will buy US$1.6476, but if I want to buy 1 pound sterling I would need US$1.6481. So the broker would make US$0.0005 each time they bought and sold 1 pound sterling.

It certainly doesn’t seem that the broker will get rich on that, but you must realize that the standard size traded is 100,000 units, so if the broker bought your lot of currency and sold it again they would make £50.

You should expect the spread to be lower on the major frequently traded currency pairs, but perhaps a little higher on exotics. Forex robots are usually designed to be traded on the majors.

If you use a scalping robot, whether you make a profit or loss may depend on how large the spread is, and you may be surprised to learn that this is not standard and can vary between the brokers and at different times of the day. The spread may range from a couple of pips up to ten pips, and if you’re scalping for gains of ten pips, this can make the difference between profiting and losing, particularly when you take the inevitable losing trades into account.

Even though Forex is traded around the world, and is a huge marketplace at nearly $4 trillion per day, there is not much uniformity when dealing with brokers. For instance, many brokers work their retail side from a dealing desk, so you may effectively be trading directly against the broker if he chooses to not put your order on the market. This means if you are winning the broker can be losing. This whole system is open to manipulation, but you may not realize there is anything untoward going on.

Electronic Communication Network (ECN)

Some brokers have an ECN set up, which means the trades go through to the market, rather than being manipulated in house, and this will take care of any suggestion of impropriety. One way you can check whether your broker uses a dealing desk is to ask about the spreads. If your broker uses fixed spreads, then you can be fairly sure that they have a dealing desk, as the market usually dictates that spreads will vary according to conditions.

ECN is short for Electronic Communication Network, and this system was authorized by the Securities and Exchange Commission in 1998. With this you will get the same price information as any other trader, and you will not be trading against the broker at any time. Some names of ECN brokers include MB Trading, Hotspot, Dukascopy, Currenex, and FXDD. Make sure that you request an ECN account, as some brokers also use dealing desks.

Dealing desks can be prone to all sorts of tricks. For instance, the broker can send a fake spike that closes out your position on a stop loss order, rather than allowing you to stay in the trade and make a profit. The dealer can even give you a false quote when you come to close out your winning position. With a dealing desk, it is really up to the dishonest broker what price he charges you, and how big a spread you see.

With the popularity of Forex robots, brokers found that they were losing money and started to widen the spreads. There was also some suggestion that slippage increased – slippage is the difference between what you think you’re placing a trade at and the amount it is actually executed at. Some brokers even refused to take accounts where robots were used, and closed accounts that were too successful.

For this reason, you may find some vendors of Forex robots recommend particular brokers, who they say are happy to take their customers. There may be an ulterior motive to this recommendation, as it is usual for the recommending party to get a commission for each new account referred. Given that you need an account to get anywhere with your trading, you may choose to take their recommendation anyway, but try to compare costs and services with others to make sure that you keep them honest and get the best deal.

Stop-Loss Hunting

While on the topic of market manipulation, there is another phenomenon that is found in the Forex market. You may have thought that the Forex market is so big that it cannot be manipulated by large investors making trades to affect the price, unlike the stock market. To a large extent, you would be right, but there is a technique called stop-loss hunting which provides the exception to this rule.

Stop-loss hunting happens when a price is manipulated artificially to hit the stop-loss price of a trader, and then goes back to its natural position decided by normal market forces. Stop-loss, as you probably know, is simply an order to sell the position if the price reaches a certain level, and it is used to get out of a trade if it looks like it is going against you. A stop-loss order placed with your broker will exit automatically if the price drops, even if you are not watching it.

Stop-loss hunting can be done by a wealthy institutional investor, and one of the ways that they manage to influence the market price is to wait for times when the trading volume is low. This happens in off-peak times, although these are difficult to find with a 24 hour worldwide market, and also before a big news announcement, when trading is likely to be light until the news is released. It is still difficult to do, so the main threat of price manipulation will come from a broker who runs a dealing desk.

Price manipulation catches out traders who place their stop-loss orders in the market, but with a Forex robot the robot may automatically generate a sell order at a certain price level, so the market may never know in advance what level it will sell at. However, the price shift designed to trap manual traders may still force your robot into selling action. Some robots may be programmed to get a second confirming signal before selling, but only if the developer has seen this as a serious threat. While you cannot do much about the price moving from a large institutional investor, as this is a genuine if temporary value change on the market, you can avoid problems with your broker by using ECN brokers which reflect the true markets.

Overseas Brokers

There is another disturbing development with foreign exchange brokers. You can find some reports of it on the Internet forums, and it is worse than merely manipulating numbers – it is downright fraud.

I’m referring to brokers that are based offshore or in Third World countries, and because of their location they are very difficult to pursue legally. It is very easy with the Internet to virtually copy a refined and elaborate site, and appear to be a large corporation even if operating from the kitchen table. Appearances are deceptive.

The foreign or offshore broker may be more concerned with taking your money than paying back your winnings, and there have been reports of brokers who literally have held onto successful accounts and not paid out anything to the winning traders.

You can fight this sort of scam by seeking recommendations from friends, and by taking great care with anyone who you do not know. Even if the broker has an American address, it has been known for this to be the residential address of an unconnected person—in one case it was a foreclosed house. If you can’t visit the broker’s office, then at least you should make calls to the telephone numbers given, and see if the phone is answered in a businesslike manner, or whether it might be a personal line. Most reputable brokers will be included in business listings, and perhaps registered with the Better Business Bureau.

In case you think that this is mere scaremongering, you should note that the Federal Trade Commission states that typical broker scams cheat clients out of an average of $15,000. In fact, the National American Securities Administrators Association has called Forex trading at best risky, and at worst outright fraud. You have reason to be very cautious when starting to trade Forex.

As so many people find Forex trading works for them, you should not let this put you off; but you should take it as a stern warning to do your due diligence thoroughly when selecting a broker, and not just take the cheapest one that comes along.

Summary – you should look for –

• Personal recommendation
• ECN, not dealing desk (see below remark)
• Low Spreads
• Well Established and Reputable
• Responsive

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PS. Not many Forex Robots in the marketplace can be traded using ECN. One of them is FAPTurbo Evolution that trades with Dukascopy and they also offer a convertor tool - FAPConvertor. This is a tool that allows users to automatically convert each and every MetaTrader robot (such as Forex Megadroid & etc.) trade into the Dukascopy brokerage platform. However, they are now sold out!