The broker claims high drawdown breach of terms scam is a deceptive practice used by some brokers, where they accuse traders of violating the broker’s terms due to high drawdown levels in their accounts, even though the trader’s actions may be entirely within their rights. This tactic is often employed when a trader has incurred substantial losses or when the broker has no other way to prevent a withdrawal. By accusing the trader of breaching terms, the broker attempts to avoid paying out profits or restrict access to funds, often citing a high-risk account breach that was not actually a violation.

This isn’t a breach of terms—it’s a ploy to withhold funds or profits from the trader.

How the Scam Works

1. Trader Reaches a High Drawdown on Their Account
A trader may face a drawdown in their account due to market volatility or poor trading decisions. The trader might have:

• Open positions with a high drawdown
• Applied stop-losses and take-profits appropriately but still encounter losses due to market movements

While the drawdown might be high, it’s a common part of trading and within the trader’s risk management strategy.

2. Broker Claims the Drawdown Violates Their Terms of Service
After the trader experiences a significant drawdown, they are suddenly informed by the broker that:

“Your account has breached our risk management rules due to high drawdown.”
“The drawdown level on your account exceeds our permitted limits for this account type.”
“We reserve the right to close your positions or restrict withdrawals due to excessive risk exposure.”

The broker cites the high drawdown as a breach of the terms, despite there being no actual violation of those terms as originally agreed upon during the onboarding process.

3. Broker Uses the Breach to Withhold Withdrawals or Close Positions
Once the broker claims a breach due to high drawdown, they may:

• Freeze the account, preventing the trader from withdrawing any funds
• Forcefully close positions, often at a loss, or implement stop-outs
• Deny profit withdrawals, claiming the trader has violated their risk parameters
• Invalidate open trades by invoking the high drawdown clause, even though the trader hasn’t done anything outside their contractual rights

The trader’s profits are either locked or reduced, and the broker may argue that the trader violated internal risk management conditions.

4. Broker Refuses to Provide Clarity on the Violation
When the trader contacts support, the broker provides vague responses such as:

“Our system flagged your account due to risk breaches.”
“The high drawdown is outside our agreed-upon terms and we are unable to release funds.”
“Your account is being reviewed due to an excessive risk profile.”

However, these responses are rarely backed up with specific evidence from the broker’s terms and conditions, leaving the trader unable to dispute the claim effectively.

Real Case: Broker Closes Trades After High Drawdown, Denies Profit Withdrawal

A trader is using a high-leverage account and incurs a 50% drawdown after a series of adverse market movements. They attempt to withdraw their profits but receive the following message:

“Your account has been flagged for excessive risk exposure, and your withdrawal request is on hold. According to our risk management system, the drawdown exceeded acceptable limits.”

The trader has never been informed about a specific drawdown limit for their account. They are unable to withdraw their funds or close their positions, with no clear explanation from the broker as to why.

Why This Scam Is So Dangerous

The broker claims high drawdown breach of terms scam is harmful because:

• It misleads traders into believing they have violated terms, when the terms of service may not even mention specific drawdown limits
• It blocks access to profits and funds the trader has earned through legitimate trading activity
• It prevents the trader from closing positions or managing their risk, leading to further losses or forced liquidations
• It creates confusion about the broker’s internal policies, leaving the trader unable to contest the decision effectively
• It erodes trust in the broker, as traders may begin to question whether the broker is simply looking for excuses to withhold funds after a losing streak or profit-making session

This tactic plays on the trader’s uncertainty and lack of understanding about the broker’s true intentions.

How to Detect the Scam

1. Broker Claims a Breach Without Clear Terms or Limits
Check the broker’s terms and conditions to verify if there are any drawdown limits explicitly mentioned. Legitimate brokers should provide:

• Clear risk management parameters
• Drawdown limits clearly outlined for different account types
• A clear process for risk breaches and how they are handled

If there are no clear limits mentioned, or if the terms are vague, the broker may be exploiting this to block access to funds.

2. Broker’s Response Is Vague and Unsubstantiated
If the broker’s support team:

• Gives unclear answers when you ask about the exact reason for the breach
• Cannot provide specific evidence or explanations tied to your account or trading activity
• Consistently refers to general terms like ‘excessive risk exposure’ without backing it up

…it’s likely that the broker is using this tactic to retain funds.

3. Repeated Cases of High Drawdown Breaches for Multiple Traders
If multiple traders report similar issues with their accounts being blocked or funds being withheld due to high drawdowns, it’s a clear indication of a systematic issue with the broker’s tactics.

How to Protect Yourself

1. Thoroughly Read the Broker’s Terms Before Trading
Make sure to:

• Understand the drawdown limits, if they exist
• Review the broker’s risk management policies and conditions for withdrawals
• Pay attention to any clauses related to forced closures or margin requirements

This will help you stay informed and aware of any potential issues related to high drawdowns.

2. Choose Brokers with Transparent Risk Management Practices
Only work with brokers who provide clear, fair, and reasonable terms for account management and risk control. Look for:

• Regulated brokers with a track record of transparent practices
• Brokers who provide clear guidance on drawdown policies and risk exposure limits
• Brokers who are upfront about account conditions and trading limits

3. Always Monitor Your Account and Risk Exposure

• Keep track of open positions and drawdown levels regularly.
• Use stop-loss orders to mitigate risk and prevent excessive drawdowns.
• Set up alerts for your account balance to ensure you don’t unknowingly violate risk parameters.

4. Escalate Issues to a Regulator If Necessary
If the broker refuses to provide a clear explanation for the high drawdown violation or blocks your withdrawal without proper justification, escalate the issue to the relevant regulatory authority.

• File a complaint with the FCA, ASIC, or CySEC if you believe the broker is violating your rights
• Provide evidence, including account statements, communication logs, and screenshots of any unclear responses from the broker

Regulatory Expectations

Under MiFID II, FCA, ASIC, and CySEC regulations, brokers must:

• Clearly disclose the terms of account management and risk exposure for all clients
• Provide clear and accurate explanations if a trader’s account or withdrawal is flagged for breach
• Honor the terms of the account agreement, and not withhold funds without legitimate grounds
• Ensure transparency in their risk management processes, including any thresholds related to drawdown and margin calls

Failure to comply with these regulations can result in serious penalties for the broker, including fines and loss of regulatory licenses.

Conclusion: If They Use Drawdown as an Excuse to Withhold Funds, Be Wary

The broker claims high drawdown breach of terms scam is a manipulative tactic used by brokers to lock trader funds and prevent withdrawals by claiming that high drawdown levels are a violation of terms.

To protect yourself, understand the broker’s terms, track your trading activity, and always ensure that you are aware of your risk management conditions. If the broker fails to provide clear reasons for restricting your account or funds, escalate the issue and consider reporting them to a regulatory body.

To learn more about how to safeguard your funds and understand broker tactics, enrol in our Trading Courses. We’ll teach you how to manage your trades responsibly and avoid common scams.