Is Forex a Scam : A Full Guide on How to Spot and Avoid Scams in Forex Trading
Foreign exchange market is now bigger than ever. For example, did you know that the daily currency volume that is being traded on the Forex is 5.3 trillion US dollars? To visualize that number imagine every single domestic product purchase (toothpaste, cleaning products ets.) around the world and then multiply this by four. Yes, Forex is just that big. And with the large amount of money comes a proportionally large number of scammers. This is our reality - some people prefer to make their profit the honest way and some take the path of cheating their way into the world of the wealthy. This makes the job of any trader twice as hard, because currency trading itself is already tricky and together with the constant need to stay away from scams it becomes nearly impossible. That’s why we put together this handy guide - to help you explore the tricks that are being used against honest traders and learn to effectively avoid them to protect your earnings. Today we will discuss the following:
What is Forex and how does it work
Types of Forex scams including how Forex brokers cheat traders
How to identify and avoid scams in Forex trading
Do Forex brokers trade against you
How to choose a reliable Forex broker checklist
What is Forex trading and how does it work
In order to better understand all the ways you can be scammed on Forex, it is important to start with getting familiar with the idea of foreign currency trading altogether. The idea of Forex market lays in the very name of it - foreign exchange. Whenever you exchange a certain amount of money into an equivalent amount of another currency you are technically performing a Forex transaction. Now, this does not mean that everyone who has ever visited a local Western Union to exchange the leftover euros from their trip to France is a foreign currency trader. Trading is actually a series of transactions that can happen one right after another or be stretched over the course of several weeks or even months. The point of trading is to grow the initial capital through manipulating with the various currency’s values. You probably know that currencies tend to fluctuate in their value based on the number of factors. And this fluctuations are the exact basis of what is Forex trading.
A few decades ago, currency trading was almost exclusively available to companies and individuals already involved in the world of finance. This included, banks, investment management and insurance companies. Back then all Forex scams were pretty much rolled out by ingenuine industry workers who built various schemes and tricked people into trusting them with their money. The idea was simple: they introduced themselves as official representatives and guaranteed that the invested amount will grow double and higher with their help. Their main assistant in tricking people was the global lack of information which is nearly non existent today. However, it is fair to say that some of these scam models survived until today in the underdeveloped countries.
With the globalization of the Internet, trading transitioned into the online world and the new Forex era begun. Now the amount of transactions every day is higher than the total amount of similar operations in a whole year of the last century. Online Forex trading is available everywhere to anyone and it is constantly growing through new traders and investors joining every day. But with the great help of new highly sophisticated tools and software we are also facing the peak of foreign exchange fraud. And because we now have access to all sorts of information at any point of time, the scammers are more inventive and vicious than ever. That is why we will dig into the tricky world of spotting and avoiding scams while trading Forex.
Types of Forex scams
Because the Forex market is so complex and multilayered the scammers have build approaches from every possible perspective. And although the used techniques can vary, the end result is all the same - to trick unaware traders into trusting their money to questionable people and companies. Let’s explore some of the most common Forex fraud categories to later on practice spotting and avoiding them. It is important to note that the following are just generalized branches of the spread out world of scamming, so the details may very here and there.
Interfering with the trader’s account. The number one way of how Forex brokers cheat traders is through the incorrectly managed accounts. This of course only concerns the ingenuine brokers who are not interested in assisting their clients achieve profit. Account management is rare to come across but nonetheless very real way for some brokers to assist their clients. In the ideal world, a new inexperienced trader will give partial or full access to their trading account to the account management company allowing them to interfere with the trading process and optimize the income gain. While in some very unique cases this is actually a real scenario, more often than not account management is improperly executed and causes significant setbacks to the trader’s account.
Faulty automated trading software. Automated Forex trading robots can be produced by brokers or by independent developers. The procedure behind automated trading involves market analysis, strategic planning, backtesting and trading itself performed by an especially designed software on behalf of its user. These days automated trading systems take up nearly 70% of the entire daily market volume, which means it is also a very attractive playground for all kinds of frauds. Luckily, in most cases it can be relatively easy to identify a scam when it comes to choosing the genuine automated trading software and we will discuss it later in the article.
The supporting services scams. This type of foreign exchange fraud does not directly connect to the trading process, however affects it dramatically. Many websites and social media channels advertise themselves as sources of Forex market analysis or trading signals providers. In this case, navigating between genuine services and scams is a little trickier since both analysis providers and signals sellers exist in the actual trading scene. Now with that said, the amount of false sources is also very high. Some websites will claim to provide you with daily, monthly or yearly subscriptions that will include vital information for your trades. Of course, these subscriptions are going to be associated with some sort of a fee. In some cases, the scamming service will simply take the money and run without giving nothing in return. But more often they will continue an ongoing series of reports, newsletters and signals. The trick here is that there will be no actual information in these reports, and although sometimes they might add some of the real data for the realistic effect the rest is simply going to be nonsense. Experienced Forex traders will have no problem identifying the false report once they see it, but for the newbies this is a high risk scenario of getting into a trap.
Good old Ponzi schemes. This is a type of fraud we have discussed earlier in reference to the past times, but in some countries and communities this schemes take place up to this day and therefore they are worth a mention. Ponzi game is a scam with a century old history which can also be referred to as a financial pyramid. The idea behind those is that earlier investors benefit from the deposits of the newly brought participants and the more people involved the richer are the ones at the top. Needless to say that at the crown of each of these pyramids are the masterminds who tend to leave everyone below high and dry as soon as the target amount is achieved. It is crucial to note that this is not the same as the referral programs. Many genuine companies and businesses roll out the referral system as a way of expressing gratitude for the loyalty of their customers. The main difference is in a real referral broker program you will be rewarded for bringing a friend but this will not make a giant portion of your income, whereas in the Ponzi scheme the entire profit will largely depend on the number of people brought into the system.
False advertising. Last but not least, some Forex related companies and services will do pretty much anything to get new clients and this can bring them onto a slippery path of false advertising. Unfortunately, there are not many ways to tell the truth from lies at the first glance, however as long as you pay attention to details and do the research before jumping head first, it is very possible to avoid being tricked into paying for something that is never going to happen.
Now we are more familiar with the ways of how Forex brokers cheat traders, of course we mean the ingenuine brokers and other Forex related companies, we can dig into some tricks and tips on how to spot and avoid the foreign currency exchange scams.
Identifying and avoiding scams in Forex trading
As previously mentioned, there are tons of ways for scammers to cheat the traders and sometimes it can get tricky to fully avoid being lied to or full on scammed. Here we have gathered a number of general guidelines to follow when you are intending on having a fraud free Forex market experience. The major disclaimer here as always is there is no one size fits all recipe for having an honest and straightforward trading journey. Sometimes one or two of the following are going to fit the situation perfectly and sometimes you will simply need to use your own judgement when identifying a scam. So, here are some tips on how do you identify and avoid Forex scams:
Watch out for false advertising, unverified information and fishy promises. Disregarding of you overall Forex experience and goals, knowledge is always a key to a successful trading experience. There is really no limit to learning and you should get as much information as possible on various aspects of trading in order to achieve the set target. For example, as you learn about the tricky nature of currency trading you will very soon understand why there cannot be words like “foolproof”, “guaranteed” or “100% success”. Forex market is a complex and ever changing environment that can absolutely not be an all wins no loss experience. Every professional trader will always share that before they got to any sort of positive outcome there were always series of setbacks and failures. This is simply due to the fact that productive trading comes from experience and gaining experience obviously takes time.
Notice confusing messages. If a statement requires you to read it twice - there is something wrong with it. There will be times when you will come across brokers and services that are downright difficult to read into. That is something usually referred to as fine print because you need to look very closely and read very carefully in order to avoid being cheated.
Charging for things that should be free. Some scammers are trying to bite off more than they can chew. This is clearly shown when the company is overcomplicated and has a variety of paid services. For example, if you are already trading with a chosen broker you will pay certain fees on the transactions that are being processed for you. Now, this means that if the broker is trying to additionally charge you for downloading trading instruments or getting helpful information for your trades - they are too greedy to be true. A good broker is interested in the success of their traders which means they will provide as much as needed to ensure the positive results including free education, fundamental analysis updates, an ability to practice tardes through a demo account etc.
Automated trading that sounds like magic. Yes, automated Forex trading robots can be highly effective and bring a decent amount of income to their users. But this still means that they are not perfect. Whenever the trading robot is being advertised as a never losing profit machine with an over 5000% margin - you are looking at a scam. Another red flag for a fraud in automated trading is trading many currency pairs at once. Each robot runs according to its own pre-set algorithm that can only be effective on not more than 2-3 pairs. Of course, with the advance of technology this will most likely improve overtime but as of now the more focused the robot is - the better.
Unverified payment methods. This is probably the easiest way to identify a Forex scam. Find out the channels through which a broker or a service accepts payments and make sure that the channels are secured. By going with trusted money transferring services like WebMoney, Skrill, Neteller or a simple bank transfer you are doing yourself a favor by ensuring that your money will get to the right destination properly. And with most of the verified services you can claim fraud and be partially or fully refunded in the circumstance where you were mistreated by scammers.
In all cases always ask as many questions as you need to. Professional well-established brokers do not have a problem with explaining the procedures of their operation to traders because they simply have nothing to hide. Do not hesitate to dig in, after all it is your own money at stake here and it is appropriate to handle it wisely. As promised, we will look into the checklist of how to choose a Forex broker that isn’t looking to cheat you. But first let’s answer that most commonly asked question when it comes to the Forex scam discussion: do Forex brokers trade against you?
Do Forex brokers trade against you
We have already briefly covered the topic of managed accounts before as the main way of how ingenuine brokers cheat traders. But as we have already established, account management is pretty rare amongst respected brokers because they choose to work with traders capable of managing their own accounts. In other cases it is simply impossible for Forex brokers to trade against you, their client. To fully understand this just consider the fact that brokers are simply executors of the orders placed by their traders. This means that you are the one responsible for all the planning and decision making that comes prior to placing an order, just as you are responsible for each trade’s outcome.
It is, however, also true that it can take a certain amount of time for a broker to fill your order. The orders come to the broker on a first come first serve basis, unless some of them were placed by VIP account holders. VIP account is usually a way to get priority when it comes to filling the trade orders. But no matter what type of account you have, your order will most likely be filled in a time period between a few seconds up to a couple of minutes, and most of the time this will be effective enough to achieve the necessary result. So the correct answer to the question do Forex brokers trade against you is no, because they are not really capable of doing it and they mostly wouldn’t if they could. Because we already know that a good broker is interested in their traders’ success just as much as traders themselves. Now that we have this sorted out, let’s go over some of the things to look for when choosing the best Forex broker.
How to choose a Forex broker checklist
A broker is your guide and partner when it comes to successful trading. So it is very obvious that choosing the right broker to trade through is the first step towards fruitful trading journey. You can use this how to choose a Forex broker checklist to find a new broker to use or to assess your current broker and see if you might need to switch. In order to do either of these consider the following:
Length of service. Brokers become good over time. This is simply explained by the fact that the longer one company stays in business the more trust and loyalty it gets from its clients. Additionally, the oldies of the broker community tend to offer more professional services to their traders such as consulting, advanced tools and easy to access education materials.
Simplicity. We have already covered this one as we were discussing the ways to avoid being scammed. As you read through the broker’s website or talk to one of the representatives, keep your head in the game and notice if something just does not sound right. In case of a live conversation over the phone or chat, feel free to ask twice to ensure you are getting the same answer. Simple and confident statements from a broker is a good sign of having nothing to hide.
Professional toolset. Online Forex trading is highly technical and involves a number of software tools. A good broker will both have the most advanced trading platform available for a free download and promptly post its recent updates. It is also a great plus if the broker is offering your help in getting to know the platform or any of its parts. This can be either a talk through from a customer care rep or a PDF written step by step user manual - both work just fine as long as you can get them for free.
Regulations. More specifically, the minimal amount of governmental regulations applied to the broker’s activity. Forex is being thoroughly controlled and regulated by many governments which can dramatically limit the opportunity for broth brokers and traders. For example, in some countries the amount of trades process on a daily basis can be limited while in others it is the total amount of traded funds that is under close surveillance. So the rule of thumb for international traders is - a good broker is a global broker. Global brokers are usually not subjected to major limitations by the governments and can work effectively with traders from all over the world.
Truthfulness. The respected broker is not going to tell you that they are going to guarantee your success, because the only person truly responsible for it is you. Broker companies consist of traders who make mistakes from time to time. Do Forex brokers lose money when they trade on their own accounts? Yes, they do just like any other trader and you can tell that they are being honest about it when the broker emphasizes that the way to become profitable via trading is through education yourself and practicing. But do Forex brokers lose money of their traders on purpose? Genuine brokers - don’t.
Financial clarity. All of the financial transactions processed by a well-established Forex broker need to be transferred through verified serviced in a timely manner. There should be no complications with both depositing and withdrawing money. Always make sure your money is being handled properly before starting to trade.
The most important thing when you are choosing the right broker is not to rush and check for everything you feel needs to be checked. And once again, the more you know about Forex in general and all of the specific technicalities in particular the higher is the chance of you spotting the scams and avoiding being mistreated.