How To Avoid Forex Broker Scams

As you probably know, there are a lot of scams involving Forex brokers. These include problems withdrawing money, brokers trading against you, and even price manipulations and platforms freezing...

As you can see, it really pays to make a complete research about Forex brokers before you open a real account with them.

Here are 5 tips to avoid Forex broker scams:

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Minimize Your Risks In Forex

When Forex trading, you'll have winning trades and losing trades. The best thing you can do is to never lose your track. With this, I mean that you should always keep focused.

Losing money in Forex can be devastating. The first thing you should do is stop trading at once and use your trading diary to see what you're doing wrong.

But how should you minimize your risks in Forex? Here are 4 tips:

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Chart Patterns

Identifying chart patterns is simply a system for predicting market trends and turns!

Hundreds of years of price charts have shown that prices tend to move in trends. Well, a trend is merely an indicator of an imbalance in the supply and demand. These changes can usually be seen by market action through changes in price. These price changes often form meaningful chart patterns that can act as signals in trying to determine possible future trend developments.

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Trend Lines

Technical analysis is built on the assumption that prices trend. Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. Many of the principles applicable to support and resistance levels can be applied to trend lines as well. It is important that you understand all of the concepts presented in our Support and Resistance article before you continue.

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The Interest Rate (Rollover)

Forex traders make money either buying low then selling high, or selling high then buying low. Profits and losses are determined by the opening and closing prices and by the pip value as you have studied in the previous section. However, profits and losses will also be affected by the different interest rates of the currency pair - by when the trades actually settle and how long the position is held.

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Types of Forex Charts

Three most popular types of charts:

1. Line chart
2. Bar chart
3. Candlestick chart

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Support and Resistance

Market prices move in zig zag fashion. Peaks represent the price where more people sell than buy so market couldn't overcome this price. These prices are called resistance levels.

The troughs on the other hand represent the price where buying pressure was higher than selling. These troughs are called support levels.

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The PIP

In equities or futures, the smallest unit of measurement is called "tick" or "point". In Forex this unit is called a "pip" (for Percentage In Point). As shown in the most trading platforms a pip is the 4th decimal place after the comma or, which is the same, the ten-thousandths place in the quoted exchange rate (0.0001).

A well known exception is any currency pair that contains the Japanese Yen where a pip is the 2nd decimal after the comma (0.01). The same happens with the Thai baht.

The reason to establish a common incremental unit in Forex is due to the fact that differently to equities which are all quoted in the same currency, in Forex each currency can be quoted in any other currency. That makes sense, doesn't it?

If the exchange rate of a currency pair moves from 1.3000 to 1.3010, we say that the price moved up 10 pips. The pip incremental is what shows if a position is winning or losing. So you make money when the pips move in your favor in a trade.

An increment of a single pip has a certain value and in the case of direct-quote pairs (pairs quoted in US Dollars) that value is 10 US Dollar per standard lot, and 1 US Dollar per mini lot. Other currency pairs, like reverse quote pairs (with the USD being the base currency), and cross rates (pairs without the USD) will have different pip values.

1. Currency Pairs With Direct Quote (EURUSD, GBPUSD)

For currency pairs with direct quote the pip value is constant and doesn't depend on the current exchange rate of the pair being traded.
pip value = (lot size) X (pip size, with the corresponding decimal location / exchange rate)

where the exchange rate is always the ask price.

Here is an example with the EUR/USD with the quote being 1.2599/1.2600.

€ 100,000 X (0.0001 / 1.2600) = € 7.93 = 1 pip

However, to get the value of the trade in Dollars, then multiply € 12.6 by the current EURUSD quote:

€ 7.93 X 1.2600 = $ 9.99 ($ 10.00 rounded up)

This phenomenon is observed when the Dollar is the counterpart or quote member within the pair: the pip value is always the same.

In the above example, a EUR/USD standard lot represents 100,000 Euro which can buy 126,000 US Dollars at the exchange rate of 1.2600. Therefore, the EUR/USD currency pair could be expressed as 100,000 EUR / 126,000 USD.

If you buy the EUR/USD and it moved up by one pip to 1.2601 you have earned $10. You can see the difference by substracting the pair as 100,000 EUR/126,010 USD. The amount of USD has grown on the right side of that equation by $10- the value of the pip.

2. Reverse Quote Pairs (USDJPY, USDCHF)

For those pairs having the USD as the base currency the pip value measured in Dollars is calculated with the same formula as with direct quote pairs:

pip value = (lot size) X (pip size / exchange rate)

However, in reverse quote pairs the pip value in US Dollars changes depending on the current quote.

For example, exchanging a standard lot with the pair USD/JPY at the rate 107.00, the pip would be worth:

$ 100,000 X (0.01/107.00) = $ 9.346 = 1 pip

In these cases you don't need to exchange the pip value to US Dollars in order to get the face value of the trade, because the lot size is always in the base currency and so is the pip value.

3. Cross-Rates (GBPCHF, EURJPY etc.)

The pip value measured in Dollars in cross currency pairs is a little trickier.

For example: with the EUR/NZD rate representing 1 / 2.5040, or expressed in a standard lot, 100,000 EUR / 250,400 NZD at the current exchange rate, if the pair moves up one pip to 2.5041 then the position would have incremented 5,03 US Dollars per pip.

Too abstract? Alright, this is the formula:

pip value = (lot size) X (pip size) X (base exchange rate / exchange rate)

where the base exchange rate is the current quote of the base currency against US Dollar, and the exchange rate is, like in the previous formulas, the current quote of the traded pair. Therefore:

€ 100,000 X 0.0001 X (1.2600 / 2.5040) = $ 5.03 = 1 pip

For cross-rates the pip value is changing depending on the current exchange of the traded pair AND the base currency exchange rate to the US Dollar. Got it? Great!

The formula seems complicated because we are converting it to US Dollars. But if your account is in EUR and the traded pair is the EUR/NZD, then you don't need to input the base exchange rate in the calculation. Supposing you buy a standard lot of EUR/NZD, the value of the pip is:

€ 100,000 X (0.0001/2.5040)= € 3.99 = 1 pip

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The Spread

As with other financial instruments, there is a price an investor can sell at which is called "bid" price, and a price the investor can buy at which is called "ask" price.

From the broker-dealers' perspective, the bid is the price at which the broker-dealer is prepared to buy, therefore to "bid" a specific currency pair from you as a trader. At this price, you can sell the base currency to the broker-dealer.

For example, in the quote EUR/USD 1.2872/73, the bid price is 1.2872. This means you sell one Euro for 1.2872 US Dollars.

In turn, the ask is the price at which the broker-dealer is prepared to sell (is "asking" for) you a specific currency pair. At this price, you can buy the base currency. It is shown at the right side of the quotation. Sometimes it's also called the "offer" price.

Using the same EUR/USD quote, the ask price is 1.2873. This means you can buy one EUR for 1.2873 US Dollars. The ask price is also called the offer price.

The difference between both prices is known as the "bid-offer spread" or "the spread", and it's expressed with a similar quote convention than the pair:

Bid / Ask

In our example, the spread value would be of 1 point, the difference between 1,2873 (the price the broker-dealer is ready to sell) and 1,2872 (the price the broker-dealer is ready to buy at).

So to summarize:

Example: EUR/USD 1.2872/73

Ask Price: 1.2873

Bid Price: 1.2872

Spread: 1 point

Another example illustrates that the bid price of the AUDUSD pair is 0,6520 USD and the offer price is 0.6528 USD:

AUD/USD = 0.6520/28

The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade.

The formula for calculating the transaction cost is:

Transaction cost = Ask Price – Bid Price

The spread in this case is made of 8 points, also called "pips".

The spread is usually lower in the majors, since a high turnover assures ample liquidity to meet the trading needs. That is why interbank and retail dealers charge less for the majors through the spread. For less traded pairs or cross currency pairs the spread will be bigger, since at an interbank level these trades may involve the use of synthetic pairing and dealers have to assume more risk in completing those transactions.

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Currency Pairs

The following is a list of the most frequently traded currencies, their trading symbols, their nicknames and major characteristics:

USD (US Dollar)

The US Dollar is by far the most transacted currency in the world. This is due to several factors as you have already learned in the last chapter. First, it's the world's primary reserve currency, which makes this currency highly susceptible to changes in interest rates. Second, the USD is a universal measure to evaluate any other currency as well as many commodities such as oil (hence the term "petrodollar") and gold.

70% of the U.S economy depends on domestic consumption, making its currency very susceptible to data on employment and consumption. Any contraction in the labor market has a negative effect on this currency.

All US Dollar denominated bank deposits held at foreign banks or foreign branches of American banks are known as "Eurodollars". Some economists maintain that the overseas demand for Dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate and the flow of trade to readjust. Other economists believe that at some stage in the future these pressures will precipitate a run against the US Dollar with serious global financial consequences.

Nickname: Buck or Greenback

EUR (Euro)

The European Monetary Union is the world's second largest economical power. The Euro is the currency shared by all the constituting countries which also share a single monetary policy dictated by the European Central Bank (ECB).

This currency is both a trade driven and a capital flow driven economy. Before the establishment of the Euro, central banks didn't accumulate large amounts of every single European national currency, but with the introduction of the Euro it is now reasonable to diversify the foreign reserves with the single currency. This increasing acceptance as a reserve currency makes the Euro very susceptible to changes in interest rates.

Nickname: Fiber or Single Currency

JPY (Japanese Yen)

The Japanese Yen, despite belonging to the third most important single economy, has a much smaller international presence than the Dollar or the Euro. The Yen is characterized by being a relatively liquid currency 24 hours.

Since much of the Eastern economy moves according to Japan, the Yen is quite sensitive to factors related to Asian stock exchanges. Because of the interest rate differential between this currency and other major currencies that preponderated for several years, it is also sensitive to any change affecting the so-called "Carry Trade".

Japan is one of the world's largest exporters, which has resulted in a consistent trade surplus. A surplus occurs when a country's exports exceed its imports, therefore an inherent demand for Japanese Yen derives from that surplus situation. Japan is also a large importer and consumer of raw materials such as oil. Despite the Bank of Japan avoided raising interest rates to prevent capital flows from increasing for a prolonged period, the Yen had a tendency to appreciate. This happened because of trade flows. Remember, a positive balance of trade indicates that capital is entering the economy at a more rapid rate than it is leaving, hence the value of the nation's currency should rise.

GBP (Pound Sterling)

This was the reference currency until the beginning of World War II, as most transactions took place in London. This is still the largest and most developed financial market in the world and as a result banking and finance have become strong contributors to the national economical growth. The United Kingdom is known to have one of the most effective central banks in the world, the Bank of England (BOE).
Sterling

While 60% of the volume of foreign exchange are made via London, the Sterling is not the most traded currency. But the good reputation of the monetary policy of Great Britain and a high interest rate for a long time contributed to the popularity of this currency in the financial world.

Nickname: Cable or Sterling

CHF (Swiss franc)

The Swiss franc moves primarily on external events rather then domestic economic conditions, and is therefore sensitive to capital flows as risk-averse investors pile into Franc-denominated assets, during global risk aversion times. Also much of the debt from Eastern European economies is denominated in Swiss Francs.

Nickname: Swissy

CAD (Canadian Dollar)

Canada is commonly known as a resource based economy being a large producer and supplier of oil. The leading export market for Canada is by far the United States making its currency particularly sensitive to US consumption data and economical health.

Being a highly commodity dependent economy, the CAD is very correlated to oil - meaning that when oil trends higher, USD/CAD tends to trend lower and vice versa.

Nickname: Loonie

AUD (Australian Dollar)

Australia is a big exporter to China and its economy and currency reflect any change in the situation in that country. The prevailing view is that the Australian Dollar offers diversification benefits in a portfolio containing the major world currencies because of its greater exposure to Asian economies. This correlation with the Shanghai stock exchange is to be added to the correlation it has with gold. The pair AUD/USD often rises and falls along with the price of gold. In the financial world, gold is viewed as a safe haven against inflation and it is one of the most traded commodities. Together with the New Zealand Dollar, the AUD is called a commodity currency. Australia's dependency on commodity (mineral and farm) exports has seen the Australian Dollar rally during global expansion periods and fall when mineral prices slumped, as commodities now account for most of its total exports.

Nickname: Aussie

NZD (New Zealand Dollar)

This currency behaves similar to the AUD because New Zealand's economy is also trade oriented with much of its exports made up of commodities. The NZD also moves in tandem with commodity prices.

Along with the Australian Dollar, the NZD has been for many years a traditional vehicle for carry traders, which has made this currency also very sensitive to changes in interest rates. In 2007 the NZD was mainly used to conduct carry trades against the Japanese Yen accounting for a higher volume than the Australian Dollar against the Yen.

Nickname: Kiwi


Although there are many currencies worldwide, the vast majority of all daily transactions involve the exchange of the so called "major" currency pairs:

* US Dollar / Japanese Yen (USD / JPY)
* Euro / US Dollar (EUR / USD)
* Pound Sterling / US Dollar (GBP / USD)
* US Dollar / Swiss Franc (USD / CHF)
* US Dollar / Canadian Dollar (USD / CAD)
* Australian Dollar / US Dollar (AUD / USD)

The pair is always expressed with the convention: Base currency / Quote currency set by the Society for Worldwide Interbank Financial Telecommunication cooperative (SWIFT).

Other currency pairs are referred to as "minors" or "exotic" pairs. These are some of the lesser-traded pairs that contain the USD and a currency from a smaller and/or emerging economy:

* USD/SEK (US Dollar / Swedish Krone)
* USD/NOK (US Dollar / Norwegian Krone)
* USD/DKK (US Dollar / Danish Krone)
* USD/HKD (US Dollar / Hong Kong Dollar)
* USD/ZAR (US Dollar / South African Rand)
* USD/THB (US Dollar / Thai Baht)
* USD/SGD (US Dollar / Singapore Dollar)
* USD/MXN (US Dollar / Mexican Peso)

Other pairs where the US Dollar is not a member currency are called "crosses". Basically, a cross is any currency pair in which the US Dollar is neither the base nor the counter currency. For example, GBPJPY, EURJPY, EURCAD, and AUDNZD are all considered currency crosses.

When you think about buying or selling a cross currency pair, don't forget that the US Dollar, despite not being a member within the pair, is still influencing the price behavior of the cross. Buying EUR/JPY is equivalent to buying the EUR/USD currency pair and simultaneously buying the USD/JPY. Knowing from the previous chapter how interbank platforms work, you also understand why cross currency pairs frequently carry a higher transaction cost. To build a cross, interbank dealers have to combine two orders on different platforms.

By knowing how currencies are related and transacted you will be given a basic understanding on how to analyze trading opportunities on majors as well as on crosses. The principles guiding you to profit from a trade with a cross should be technically the same as with the majors: basically you want to analyze which is the strong and which is the weak currency within the pair.

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