How to Identify And Avoid Forex Scams
Reading time: 14 minutes
Did you know the Forex market is the largest financial market in the world, with over $5 trillion traded every single day? Not only does it allow central banks and corporations to trade with each other, or holidaymakers visit new destinations, it also allows speculators to take advantage of a market that trades 24 hours a day, 5 days a week.
There has never been an easier time to access the world's forex market either. At the click of a button you could be trading on the direction of the Euro, British pound, Japanese yen, US dollar or even the Russian Ruble! There are hundreds of currency pairings to trade, so there is plenty of choice to find the ones that interest you most.
However, while the financial gains of trading the Forex market seem lucrative, it cannot considered easy. Having a sound trading education, a properly funded trading account and an understanding of risk management techniques are essential. Unfortunately, there are many unscrupulous people who will try to scam individuals through Forex trading scams. Forex scams will be around for as long as the Forex market exists. As schemes are evolving, scammers are always somewhere nearby, trying to steal your money. But could there be a solution to this problem?
Investment scams take many different forms. Some of the scams are even named after their creators - such as a Ponzi scheme, named after the infamous Charles Ponzi. Forex scammers tend to target beginners or uneducated traders. The best way to avoid being a victim, and avoid getting scammed, is by getting a good Forex trading education, before you enter the markets.
Forex scams often pitch "too-good-to-be-true investment opportunities" as a way of convincing you to part with your money. When you lack trading experience, swindlers will try to exploit your optimism, your fears and your lack of knowledge. Learning the markets means you are no longer an easy target.
How To Spot A Scam
The most important giveaway of a Forex scammer is a guarantee of unusually large profits with little or no financial risk. First of all: there is no such thing as a 100% guarantee. If there was, there is no way traders would share it with other market players. Some of these offers may sound very attractive, especially to beginner traders. But as the saying goes, the only free cheese is in the mouse trap. The bottom line is this: if something sounds too good to be true, it probably is.
For some more insight into the trading 'dream' that a lot of scammers sell, and the trading reality that most traders experience day-to-day, check out this video from professional trader Paul Wallace.
Here are a few simple rules to follow in order to avoid scammers:
- Remain safe and do not run after empty promises
- Be especially wary of software that claims to have found a 'secret formula'
- Do not install any programs until you are certain they won't damage your computer
Another giveaway is that scammers never register with any regulatory authority. Remember - true brokers always provide proof of their legitimacy. If you suspect that a Forex broker is lying about their regulatory status, you can contact a regulatory authority who may be able to provide a list of regulated companies, and a list of cases opened against regulated companies. This will help you understand which Forex brokers to avoid.
Three Major Types of Forex Scams to Avoid
Those involved in forex scams, money scams and general trading scams are always trying to find new and innovative ways to take advantage of new traders. However, there are three major types of forex scams that people commonly fall victim to. Below we will explain how these work, as understanding them is the first step in avoiding them.
1) Robot Scams
A Forex robot is a trading program which uses algorithms, or lines of computer code, as technical signals to open and close trades. Not all Forex robots are scams. For example, Forex robots can be built using Expert Advisors (EAs) within the popular MetaTrader suite of trading platforms.
Searching online for a Forex robot scam list may help you to avoid some of the known scammers. There are a few other things to watch out for to avoid Forex robot scams you may come across:
- Marketing messages that are unrealistic. If the author of a Forex robot has to 'sell' you on the dream of what it could do for you, then it's unlikely they will have the results to back it up. After all, numbers don't lie, or do they?
- Very high percentage growth returns. There are some Forex robots that are advertising systems that yield over 4,000% return in just a few years. This may seem fantastic, but it's important to look at the statistics. The return could just be closed trades, the system may have open trades that if the stop losses were hit could wipe out any gains.
- Undiversified scalping strategies. Many Forex robots employ a scalping system which means they trade for very small profits. This then shows a high win rate and can inflate the results in a supportive market condition. Yet, market conditions change, and if the system loses more per trade than it wins, it will only take a few losing trades to wipe out any accrued profit.
- Using unregulated brokers. There are some Forex robots that show extremely good results using unregulated brokers no one has ever heard of. In this instance, the results might be good on their own interbank spreads but if you open an account with them your spreads and commissions will be wider, thereby eating into much of the profit.
At the end of the day, if you are considering using a Forex robot, then treat it like a business rather than an emotional decision. Start with an online search for a list of forex robot scams and then do your own due diligence.
2) Signal Seller Scams
Forex signal sellers are individuals who send out trade ideas which usually include a currency pair, direction, entry price, stop loss and target levels. There are multiple things to look out for so you don't fall victim to these kinds of forex trading scams:
- Subscription fees: Individuals may market you amazing results without any verification. To get access to the trades, you often need to pay high subscription fees, or they start out low and use credit or banking details for other kinds of money scams. If their trade signals are so good, why sell them at all?
- Broker-tied signals: Some signal sellers offer you trading signals, but only if you sign up with a specific broker. This means they may be getting a kickback from the broker, so are motivated to send you any trades for you to take regardless if they win or lose. Having said this, there are some that will want to keep you profitable so they can continue to receive their kickbacks from the broker, which acts as their payment for the service.
- Unverified results: It's all well saying your forex signals have made a high percentage return but if they can't show a verified track record it means they're not trading the signals themselves - which is clearly a red flag in itself.
The key to avoiding any type of currency exchange scams, money scams or trading scams is to, again, think like a business and do your due diligence, rather than act on an emotional decision of inflated promises and dreams.
3) Phony Trading Investment Scams
There are many adverts nowadays promoting phony forex trading investment scams and fake forex investment funds. In essence, a slick marketing message or salesperson will sell you on the phantom, or unverified results, of their forex fund. All you need to do is send them your investment and you can sit back and enjoy the returns.
Of course, many people who send their money never see it again. The company says they have never heard of you and have not received any funds from you. What started as a forex trading investment scam now turns into one of those money scams.
Another outcome, is that they open an account for you, usually with an unregulated shady broker. However, after one or two trades, they wipe out your account. While they blame it on the market, it's all gone to their brokerage company. Furthermore, because it is unregulated, it is very difficult to get your money back.
Why You Should Educate Yourself To Avoid Trading Scams
As Forex trading carries risk, losses are inevitable. Retail speculators are almost always trading undercapitalised, and can be subject to the problems of gambling addiction and improper use of leverage. Any speculator who trades without skill is essentially gambling.
In all fairness, a large number of the reports of money being stolen by brokers is a result of weak trading, and not scam brokers. If unskilled traders spent time developing a proper trading methodology they would become better traders much quicker, and would likely avoid Forex scammers altogether, as they would be better informed about potential risks and what to avoid.
Three Signs of Trading Investment Scams
1) Trading Systems and Education Without Any Proof
There are a lot of scammers selling trading systems and education. When you ask them to provide any proof of their trading history, they evade the question. There are also many traders who would offer their systems without a trading room or any services. These types of scammers are sometimes referred to as "snake oil merchants". "Snake oil" is the term traders use for false traders and trading systems that have no valid proof of their trading history.
2) Email Spam Asking for Personal Info
Scammers may also ask you for personal information, such as:
- Your full name
- Your phone number
- Your home address
Don't give away your personal details to someone you don't fully trust. Be suspicious of brokers who don't provide you with a written risk disclosure statement. Even if they do, read the statements thoroughly, because the devil is in the details.
3) No Background
Never work with someone who refuses to provide you with their background information. Be it a broker, a trader, an educator, or a money manager. Always do a quick check online to see if the person or company is legitimate.
According to New York Magazine, a kid from Queens, New York City in the USA made tens of millions of dollars by trading stocks on his lunch breaks at Stuyvesant High School. What happened in reality, is that it turned out he never made any money, and all his profits were made in a paper trading account.
How to Avoid Scams
The best way to avoid investment scams is to take your time. Don't rush your decisions - and make sure to assess all the pros and cons first. Finding a reliable Forex broker is not an easy task, but you will benefit in the long run from investing your time. The first step you should take when you come across a Forex broker or agency is to google their business name.
Look for customer reviews on reputable websites. If there are none or they are sound fake, you should stay away from that service provider. Additionally, you can browse through scam reviews and see if a Forex broker is as reliable as claimed. Also, make sure to find out if there are any outstanding legal actions against the broker.
For example, you can:
- Visit Forex forums and see whether there are any complaints about fund withdrawals, and if so:
- Contact the user who posted the complaint and ask for more details.
Perhaps the user was mistaken or confused, but it never hurts to ask. A proper background check will minimise your risks.
Keep Away From Opportunities That Seem Too Good to Be True
Easy money? No way! Don't believe anyone who tells you it's easy to make money with something like ''20% gain per month''. It's pure nonsense, because Forex & CFD (contract for difference) trading requires a lot of screening time, education, patience, and quick wits to become profitable. There is no easy money here. But if you dedicate your time and learn how to trade properly, you might achieve an additional source of income.
Further Steps You Can Take To Protect Yourself
Make sure to compare the regulations of the regulatory authority with the terms on the broker's website to find inconsistencies and anomalies in their terms. If you don't trust your own judgement, or you simply don't have time, ask the advice of a licensed financial advisor. Additionally, you can ask for business registration proof before registering with a broker. Make sure to read through all the fine print when opening an account. Sometimes scammers use account incentives against the trader when it comes to withdrawing funds.
- If you receive bonus funds and wish to withdraw them, a Forex scammer may deny you that right due its terms and conditions.
Don't forget that when you start live trading - always trade a small volume for a short period initially, and then attempt a withdrawal. If everything goes smoothly, it's safe to deposit more funds. The availability of a Demo account is another indicator of a good or bad broker. If you don't get offered this option, or are discouraged from demo trading, this is a strong indication of a Forex scammer.
Questions To Ask To Avoid Trading Investment Scams
Remember that you have every right to ask questions. A few proper questions, can determine whether you are dealing with a trustworthy broker or a Forex scam artist. Make sure you know your rights, research the contacts, and check the company's registration and business background. Keep in mind that all the information you receive from a potential new broker must be in written form. Never rely on promises made on phone conversations or oral statements.
Ask yourself these questions:
- What can you do when you realise a broker's offer is not for you?
- How binding is the contract?
- How easy is it to reach customer service?
- Can you contact the broker by phone, Skype or email?
- Do they list a physical address?
- Do they use actual names?
- Are they a registered company?
- Can they provide performance history?
To ensure you're not a victim of a scam, always use a regulated broker that is well established, has favourable online reviews, and is 100% transparent in their fees and compliance policies. The allure of quick money and easy cash will always be present, which is why you should make sure that you fully understand what it truly takes to become successful at currency trading, without using quick-fix schemes that put you at risk.
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.