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What do brokers prohibit: the causes of the most frequent restrictions


Tell me, when you chose a broker, do you take into account the trade restrictions of the broker? Yes? Well, then, after the article please leave comments with the indication, in which section of the site you found this information. Alas, as practice shows, the trade restrictions are carefully hidden by the broker and in the best case prescribed somewhere in the depths of the agreement. The account is already credited, work has already begun, but… Loss followed by loss… And all because the nuances were not taken into account. Brokers often ban something that can be beneficial for a trader.

  • Not so long ago on one of the leading financial blogs there was an information about how reputed broker simply blocked the profitable trader’s account. Trade was carried on the news, and quite successfully, but at the time of elimination of profit broker simply annulled the results of the transactions. Attempts to reach support brought to no avail — broker referred to the fact that there is a limit on the maximum profit per transaction. There seemed to be no violations of the rules, but profits can be corrected by the broker. In fact, trade was conducted through a simple expert Advisor Ilan with manual opening of positions, and that was the actual reason for blocking the account.

Most often brokers prohibit automatic trading, hedging (locking) and scalping. Partial bans are logical and due to objective factors, and in part this may be a sign of an unreliable broker.

  • Tip: carefully review the list of prohibitions of the broker. Try to understand why brokers ban a particular action (forums help) and only then take the decision on replenishment of the deposit.

Strategies that brokers prohibit

  1. Hedging

Hedging, locking are the synonyms, denoting the simultaneous opening of long and short positions on the same asset. For a trader this is the insurance. While it is not clear which way the trend will move, but there is an understanding that it is not flat, the position is opened to both sides. Once the trend will gain a clear direction, losing position is closed. It seems simple, why would prohibit locking? The reason is objective — NFA.

In 2009-2010, the regulator introduced a new rule 2-43(b) under which hedging is prohibited. Its essence is to ensure that the broker must follow the FIFO rule — the first open position closes also the first. In other words, if open long position on the asset, and by the time the second, the response of a short position (and in fact is closing), compensation is at the first position. And if the dimensions do not match, the broker prevents the opening of the hedge.

The motivation of the regulator:

  • traders do not always understand the risks associated with locking. Due to the difference of spreads and the slippage losses may not be strictly comparable with the classical stop-loss. Brokers can offer (impose) the customer service as a strategy, misleading him;

  • the client loses twice on the spread and bears double costs of the commission for opening positions due to the fact that one transaction is unprofitable. The regulator considers that traders are not able to assess the risks in most cases;

  • tactics can serve as a way of money laundering.

Initially, the experts and brokers met negatively this decision. In their opinion, there should be no  restrictions, the trader is free to choose the strategy and count the losses. However, the position of the controller remains unchanged – it is prohibited to open positions at the same time on the same asset on one account in different directions. First opens the position of “entrance” and then on “exit”.

In practice, the rule is ignored. First, domestic brokers are not licensed by NFA and European regulators react neutrally to this rule. Second, brokers technically bypass the ban of the regulator. The formation of “lock” is not performed directly in the platform, but in the back office where positions are opened at the same time, but in the different analytic accounts, forming differently directed orders on the system “-2+2=0”, “2-2=0”. And the overall total of orders is formed in the form of a ticket, the amount of orders per period. In other words, technically, the rule was bypassed.

Part of the brokers still prohibit locking, part of them don’t. Follow this moment and decide for yourself how important this strategy is for you.

  1. Scalping

Manual strategies, auto trade — the Internet is full of information on this subject. Scalping — instant opening and closing of trades which can bring a good income, in spite of the spreads of the broker. You can successfully work on the flat, putting the shortest timeframe, you can wait for the uncertainty and play on volatility. There is a strategy of morning scalping (when markets open with a gap). Scalping is a trading that has its admirers. But brokers don’t like scalping.

There are different limitations. Some brokers forbid more than 20 transactions per session (number is conditional), the other — the minimum duration of the transaction from 3-10 minutes, others restrict leverage. It would seem that the more transactions, the more the commission and the broker’s profit on the spread. But no, and there are few reasons:

  • the broker brings the client to the foreign market, i.e. trade conducted by the company. Because scalping can be profitable among professionals (beginners bypass it), their profit — the loss of the broker. It is more profitable to attract the newcomer and get his deposit;

  • the load on the server. Internet connection and the broker’s server can not withstand the speed and load. The result — failures, freezing, slowness;

  • weak liquidity providers who do not have time to implement the application.

In any case, if brokers prohibit scalping it is the evidence of “kitchen” or weak broker.

  1. Automatic trading

Yes, it also sometimes falls under the ban. By the way, another sign of the unreliability of the broker. All advisors can not be profitable, but what is the reason of the broker to ban them, if it brings the client directly on the stock markets? Or he doesn’t? That makes more sense.

Brokers forbid trailing stop order and advisors. There are debates on the forums about  how the broker can identify the signs of installed robot. Believe me, he can. First, in the settings of the robot there is  a function to automatically assign numbers to their open positions with the aim to distinguish their positions from others. Second, brokers remain the add-in (if you download the platform from his website). There are instances when the broker remotely interfered in the work of EA, but cases are rare.

Dealing centers do not love autotrading because they don’t want to share profits.  But what prevents from opening a terminal on the second computer with an Advisor and simply duplicate its signals in manual mode? Worse, if there is no direct prohibition on auto trading. But if the robot shoots down a server traffic or sends meaningless queries, it can be disabled remotely. But it’s easier to change the broker.

Summary. Brokers prohibit many trading techniques and this is written in the contracts. A few people grasp the meaning. The broker who brings the client to a real market, will not put any restrictions,  because his earnings — is a commission and spread. Draw your own conclusions!



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