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 fraud 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. Unlike CFD trading, which offers diverse trading options like indices, metals, energy etc, Forex trading only deals with currencies. The knowledge of exchanging money is an important one as people go on 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 with that of 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 in relevance 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 in currencies is different from your usual investment 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 a reliable forex broker for that. Forex trading is legal, so how do forex trading scams come into play?
Is Forex a scam?
The foreign exchange market is vast and cannot be regulated smoothly. As a result, it leaves gaps through which the scammers find their way in and execute 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, which then leads you straight to doom.
Are Forex Brokers a Scam?
There are many potential foul plays on this playground; 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 broker’s failure to pay for your wins.
Some scammers also use manipulative trading software to rig the system. Lack of transparency and ambiguous regulatory structures with insufficient oversight obstruct smooth forex trading. But don’t you worry, there still 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?
A forex broker can steal your money utilizing various methods. 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 rising 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 trading done by a broker with inside knowledge of a future transaction that is bound to affect the price of the asset. 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 given out by the broker, like the firm’s decision of issuing a buy or sell recommendation to clients that will most likely affect the price of an asset. The exploitation of data that isn’t made public is illegal and unethical in most cases.
Signal sellers are firms or traders who ensure to identify buy or sell trading signals, which indicate that it is an appropriate time to make a trade, for a fee. The scam works through 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 innocent traders of high profits.
They charge a specific fee for their services and do not provide any data that would genuinely help the trader make any 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 that they have a technology 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” since the systems usually work for a while; but 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, the scammer may start using 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 to identify when something is a scam. Following are warning signs you need to look out for;
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-mentioned list of Forex scams 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 from a small investment, at the start of the Forex fund. But there is a big catch: no one invests the money handed to 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 funds. So when the flow starts halting, the scammer shuts the program and flees away with the remaining money.
Manipulated bid/ask spreads.
Although they are not so popular now, these scams have damaged many pockets. Hence, 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 sorts of 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 ground, they would rather have used it exclusively instead of selling it.
Managed accounts can be a Forex fraud; they often involve a broker/ account manager taking your money and using it to buy luxury items for themselves instead of investing it. Eventually when the victim asks for their money back, there is no money left to repay them.
Ponzi and Pyramid schemes
These are common affinity frauds. Ponzi schemes promise high returns from a small initial investment upfront. The early investors gain some sort of returns 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 returns are being funded by money brought in by new members of the scheme. As soon as the investors start dropping out, the scammers close the plan and do away with 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 techniques like “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 for representation purposes. 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/mentors in Forex; you must know whether the broker has made the money they claim they have.
Forex trading is a massive and active 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. If you cannot afford to lose = don’t trade with actual money as a beginner.
Do your analysis
Do not be gullible. Take the time out to draw your analysis. Be critical in your approach. Analyze statistics and rely on functions through which you have tested and achieved success on a demo account first. Check the authenticity of the company making the claims or selling their expertise/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 any decisions with your money. You can also hire a financial advisor to educate you on trading and to help develop a financial plan. Always ask questions.
Scammed by a Forex Broker? Get Help, Here!
There are many security concerns for people trading in forex and many instances where a trader could lose their funds to scammers. However, if you get scammed by a fictitious forex broker, you can reach out to us and report the scam. The highly experienced attorneys at Financial Fund Recovery help 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.
How safe is forex trading?
Forex trading involves risks as the market of foreign exchange is extremely volatile.
Is forex a gamble?
No. Though forex trading upholds high risks, it cannot be considered as gambling.
What are some fake forex trading websites that we need to avoid?
Forex brokers who have no license or have an offshore license can be potential scammers. Tradefx24, By Trading, Capionvest, and Fusion Markets are some of the suspicious brokers that possess offshore or no license at all.
Where do I report forex scams in Australia?
Australian Competition and Consumer Commission, an Australian regulator, developed a website named Scamwatch, which is dedicated to dealing with such scams. You can resort to them or contact Financial Fund Recovery which extends fund recovery services.