Foreign exchange trading is a legal way to make money, yes. But the growing popularity of trading led to a boom in forex scams. Checking your broker thoroughly and researching ample should be your first move before entering the forex trading arena. You should be well-versed enough in the field; more so, you should know how to identify a forex scam before engaging yourself in trading.
IN THIS ARTICLE
Forex trading scam is a category of the investment sector that deals with dishonest brokers, advisors, and more. What is forex trading, you may ask? It’s simple! Read on to know all about it. First, we will start with the basics
What is Forex?
Forex is also known as foreign exchange or FX trading; it entails the conversion of one currency to another. Forex trading is among the most actively traded markets in the world.
What is Forex Trading?
Forex trading allows traders to exchange one currency for another. The knowledge of exchanging money is an important one. As traders have to do international travels, conduct business with international clients, and trade in a foreign land. At the moment, a universal currency does not exist. So there should be an answer to exchange the equivalent value of one currency for other countries. So at this very moment, the foreign exchange comes into play.
There is approx volume trade of more than $5 trillion in the foreign exchange market or forex trading, including currency futures and options.
How does Forex Trading Works?
What the FX market essentially does is, determine the value of one currency relative to another. While trading, you take a position in any primary currency against another major currency. To give you a broader look, let’s take an example, For instance, you bet on the U.S. dollar versus the Mexican peso. Multinational corporations do most activity in forex markets to hedge natural positions. On the other hand, individual investors usually speculate on currency movements.
Investing is different from your usual investing in stocks, bonds, or real estate. That is because your investment in the stock market is a positive-sum game as the value of your stocks rises with time, while investing in currencies is a zero-sum game. Look at it this way, As the U.S. dollar strengthens versus the pesos, the ones holding U.S. dollar positions win, and those with pesos positions lose an equal and opposite amount.
If you are set to venture into the forex world, you will need a forex brokerage account and an honest forex broker at that. Forex trading is legal, so how do forex trading scams come into play?
Is Forex a scam?
The forex exchange is vast and cannot be regulated smoothly. As a result, it leaves gaps through which the scammers can do different forex scams.
Is Forex Trading Legit?
Yes, Forex is legit, but some brokers aren’t’; being ignorant of how things work in this arena and how to keep a vigilant eye out for scam brokers can lead you right to an attractive trading deal that leads you straight to doom.
Are Forex Brokers a Scam?
There are many potential foul plays in play; the forex market is also the ultimate atmosphere for spoofing, ghosting, and front-running. While the internet eased trading, it also exacerbated the risks, opening a grand door to more opportunities for fraud schemes, exaggerating returns, and the failure to pay for your wins. Some scammers also use manipulative software to rig the system. Lack of transparency and ambiguous regulatory structures with insufficient oversight impedes smooth forex trading. But worry not, there are forex products that have regulatory oversight.
There still are some legitimate brokers who do business in this market. But how does one tell them apart?
How do you identify a Forex Trading Scam?
Before venturing out in the forex world, know how to identify scams. Below are the most common forex trading scams,
Market prices depend on the supply and demand; the more the demand for a stock, the higher the stock’s price and vice versa. These determinants can be manipulated for profits. Also known as ghosting, spoofing is when a trader manipulates the market by placing a large order that he does not plan to execute to create the impression of interest in the position.
Bots or an algorithm can make higher traders and then cancel them before they go through. Spoofers manipulate security prices; they move it enough to increase the profitability of a trade. Spamming with orders creates an illusion of a fluctuated demand for security affecting the security’s price. Moving valuations require a boatload of hijacked orders, and hence spoofers rely on an algorithm to place and cancel orders for them. Spoofing is typically affiliated with high-frequency trading (HFT).
Front-running, also called tailgating, is essentially a trading stock by a broker with inside knowledge of a future transaction that is bound to affect its price. For example, in front-running, a broker, aware that the client is about to place a big order, places an order for the broker’s account ahead of the client’s.
A front-run can also be based on insights about the firm’s decision of issuing a buy or sell recommendation to clients that is most likely to affect the price of an asset. The exploitation of data that is not public is illegal and unethical in most cases.
Firms or traders who ensure to identify buy or sell signals that indicate that it is an appropriate time to make a trade for a fee. The scam works by a person or firm selling information that is claimed to be based on professional forecasts. They make money by trading on this information and guarantee to make money for innocent traders.
They charge a specific fee for their services and do not provide any data that helps the trader make money. Instead, they have a sham backup of testimonials that they claim are legit and gain the trust of traders.
Expert Advisor scam, more commonly known as robot scam, is a trading algorithm designed to buy or sell on the forex market automatically. Thanks to their subtlety, despite the abundance of legit automated systems out there, EA scams are pretty famous.The scams primarily are based on the assurance to make automated forex trades using a trading program also called a robot. With an EA, it is hard to verify the results as backtesting is not reliable while forward testing is. Sellers promise high, exaggerated returns while the systems usually work for a time; if it is not self-optimizing, it will fail due to changing market conditions. To pull a perfect scam, the EA seller will direct one to open an account with a market maker broker or a shady offshore broker for a fee. When the EA eventually fails, one will use the trading account as well.
Most common forex scams include:
- The quick rich scam.
- Secret trading formulas.
- Algorithm-based trading methodologies.
- The latest is forex bots that do trading on your behalf.
Scammers are good at concealing their illegal practices. But there are still a few things that you can use as clues that something is a scam. Following are warning signs you need to look out for to identify a scam,
Guaranteed success or grand profits
If they promise success, they are most likely bluffing. Nothing in the forex market can be guaranteed. Many factors influence the market, and these factors are pretty prone to fluctuations.
Lack of background information
Scammers are savvy. They will show you profits and not losses. They might even show charts from demo trading accounts that by no means reflect actual trading. Do not base your decisions on limited information. Go through their background information thoroughly.
Unsolicited/ persistent marketing
This kind of marketing indicates fraud. It is a scam if you are being pushed to purchase a product or service with little to no information and time.
An example of Forex trading Scam
The below Forex scams list documents the scam types that have been involved in forex frauds.
High yield investment programs
High yield investment programs (HYIP) are prevalent Ponzi schemes in which the broker promises a very high return of a small investment at the start of the Forex fund. But there is a big catch no one invests the money in the exchange.
In reality, they pay the initial investors via the money invested by the current investors. However, there is a catch the scammers need the flow of new investors to maintain the liquidity of the funds. So when the flow starts halting, the scammer shuts the program and flees away with the remaining money.
Manipulated bid/ask spreads.
Not so popular now, these scams damaged many pockets. You need to settle with a Forex broker who is registered with a regulatory agency. These scams involve having spreads of 7-8 pips instead of the legit 2-3 pips.
Scams through robots
Forex robot scammers promise significant gains without doing much. They even use fake or misleading figures to convince the customers to buy from them. They lure novices with flawed promises as no robot is armed to thrive in all environments and markets.
Software is used to analyze past performances and to identify trends. All software has to be tested independently and formally, and one should be wary of reviews as they can be paid for. If their claims hold any genuine round, they will use it exclusively instead of selling it.
Managed accounts can be a Forex scam; they often involve a trader taking your money and using it to buy luxury items for themselves instead of investing it. When the victim asks for their money back eventually, the exists no money that can be repaid.
Ponzi and Pyramid schemes
The common affinity frauds, Ponzi schemes promise high returns from a small initial investment upfront. The early investors gain some sort of return on their money, which motivates them to engage their friends and families in the scheme. The truth is that it is not an investment opportunity but instead that their initial return is being funded by money paid by other members of the scheme. As soon as the investors start dropping out, the scammers close the plan and take the money.
Boiler room scams
The scammers get people to buy shares in a worthless private company by claiming that their shares will shoot up substantially when the company goes public. They use “urgency,” which forces people to act quickly, preventing the target from researching the said opportunity properly. Usually, the company is non-existent and may have taken a fake telephone number, office, and website. As soon as the scammers make all the money they possibly can, they vanish with everyone’s investments.
How to avoid a Forex Scam?
Scammers won’t take advantage of you if you have enough knowledge. Research and learn about the foreign exchange market and the legit resources that assist you with trading. You can also set up a demo trading account with a trusted broker to practice before putting actual money at stake.
Learn how to trade on the forex trade.
Pretty basic, right? But that’s what is essential here. If you want to avoid being scammed, learn forex trading thoroughly. Find trustworthy brokers/teachers of Forex; you must know that the broker has made the money they said they have. Forex trading is a very serious market trading trillions of currencies daily. Start with demo accounts and learn to make long-term profits before the actual game. Avoid “the quick money” sham at all costs. Mastering forex trading will take time. Don’t trade with money = you cannot afford to lose.
Do your analysis
Do not be gullible. Take the time out to make your analysis. Be critical in your approach, analyze statistics and make your functions that you have tested and achieved success with on a demo account first. Check the authenticity of the company making the claims or selling you the expertise or course by checking the location or jurisdiction where the business is registered. Most Forex scammers trade from a location where they believe the local law will make it hard for them to be prosecuted internationally.
Take time before making decisions with your money. You can also hire a financial advisor to educate you on trading and develop a financial plan. Ask questions.
Scammed by a Forex Broker? Get Help, Here!
There are many problems in forex trading and many instances where a trader can lose their funds to scammers. However, the highly experienced attorneys at Financial Fund Recovery help the traders recover their lost funds from forex scams within 120 working days. Don’t hesitate to contact us if you want to talk to our team of professional Forex Scam recovery experts. Know more about Forex Withdrawal Problems here.