The foreign exchange market is risky and prone to volatility. Retirement funds, for example, should not be invested there because you could lose the majority or all of it very rapidly. There has been a substantial increase in forex trading scams in recent years primarily due to the increasing popularity, lack of regulation and social media. However, there are ways in which you can spot possible forex fraud and protect yourself from harm. Even then, there are still risks involved if you are using an intermediary (forex broker) to buy and sell currency pairs.
What is forex trading?
Foreign exchange, or forex, can be defined as a network of buyers and sellers who exchange currencies at a set rate. If you have ever been abroad, it’s probable that you have engaged in some type of forex transaction. It is the process through which people, businesses, and central banks convert one currency into another.
While a lot of currency conversion is done for practical reasons, the great majority is done with the intention of making a profit. Some currencies’ price swings might be particularly erratic due to the volume of currency that is converted each day. This volatility, which increases both the danger and the potential for huge returns, is what can make forex trading so alluring to traders.
Is forex a scam?
The world’s currencies are traded on the Forex market, a reputable exchange. It is not fraud on its own. Without the Forex market, it would be challenging to exchange the currencies required to purchase imports, sell exports, travel, or conduct international business. However, because there is no centralized or regulated exchange and because high leverage positions theoretically have the potential to make significant money for traders, scammers take advantage of the absence of regulation to target novice traders who want to enter the market.
Because the forex market is a zero-sum game, in order for one trader to profit, another dealer must lose money. As a result, the forex market does not by itself increase market value. The undercapitalized trader is always likely to lose because the majority of currency movements are controlled by huge, well-financed corporate institutions and banks that have a thorough understanding of the financial markets. to such Institutions and substantial banks that engage in daily foreign exchange trading Making a sizable profit in the market requires extensive experience and has a high learning curve.
Types of forex scam
Despite the fact that trading on the forex market is legal, not all online forex brokers, automated trading systems, or account managers are. It makes sense to learn how to prevent forex trading scams as they are still a thing.
Scams involving forex trading can take many different shapes, including the use of signal services and trading robots that are virtually worthless. Since they operate in a dubious jurisdiction where you have no legal redress, some dishonest and unregulated forex brokers may try to persuade you to trade via them with the intention of stealing the funds from your trading account.
Since there are occasionally trading scams on the forex market, keep reading to learn how to avoid them and identify the most reputable forex brokers so you can begin trading the forex market in a safe manner.
Some of the different forms of scams used in forex frauds in the past and present are described in the sections that follow.
The signal seller scam is a fraud in which a person or business sells advice on which trades to undertake while stating that this advice is based on expert forecasts and will ensure profits for novice traders. For this service, they typically charge a daily, weekly, or monthly fee, but they do not provide any information that enables the trader to profit. In order to win the trader’s trust, they typically have a ton of testimonials from purportedly reliable sources, but in practice they do nothing to predict profitable trades.
Programs for high-yield investments
High yield investment programs (HYIPs) are typically just a type of Ponzi scheme where a high rate of return is guaranteed for a little initial investment into what is actually a Forex fund. When there are no more participants in the scheme, the proprietors often close it down and seize all of the remaining funds. In actuality, the initial investors are being paid back from the money created by the current investors, and a steady flow of new investors is required to keep the funds flowing.
Bid/Ask spreads manipulation
The prevalence of these frauds has lessened with time, but they are still present. For this reason, selecting a Forex broker who is registered with a regulatory body is crucial. In order to pull off these frauds, spreads would typically be closer to 5-7 pips than the typical 1-4 pip spread. However, things such as volatility and liquidity can also have an impact on the spread.
Forex software scams
Scammers that use forex robots entice beginners by promising large gains with little work or expertise. To sway clients into purchasing their goods, they could use fictitious or deceptive data. No robot can adapt to all surroundings and markets; hence their claims might be false. Professionals typically just utilize software to analyse historical performance and spot trends. All software should be professionally and independently evaluated, but because reviews can be bought, care must be taken when relying on them. They wouldn’t be selling their product if it delivered on what they had promised; instead, they would be utilizing it entirely themselves. Read my guide on how to avoid forex robot scams for more information of what to look out for.
Managed forex accounts
There are numerous examples of managed accounts, and these accounts might be a particular kind of forex fraud. These schemes frequently entail a trader taking your money and using it to purchase a variety of opulent products for themselves rather than investing it. There isn’t enough money to pay the victim back when they eventually ask for their money.
Pyramid and Ponzi schemes
These affinity fraud schemes are fairly typical. They guarantee substantial profits for a modest upfront commitment. Due to their apparent success, the early investors typically do receive some type of return on their investment, which motivates them to bring in friends and family. The ‘investment opportunity’ does not, in fact, exist, and their first return is being financed by contributions made by other participants in the plan. The con artists close the operation and grab the money when the number of investors begins to decline.
Bogus boiler rooms
This kind of con usually involves the con artists persuading customers to acquire stock in a worthless private firm on the promise that their shares will grow significantly after the company goes public. They rely on the use of “urgency” which implies that if they do not move soon, an opportunity would be missed, which stops the target from having able to adequately research the opportunity. However, frequently the business is a fraud with a phony address, location, and website. Once the con artists have taken as much money as they can, they will vanish with all of the investors’ money.
How can I recognize forex fraud?
Learning how to correctly trade on the Forex market is the single most crucial thing a person can do to prevent getting conned. Finding reliable Forex brokers and instructors, on the other hand, is a challenge. Due diligence is crucial in this situation because the novice must be sure that the broker has actually made the money they claim to have. The Forex market, where trillions of currency units are transacted every day, is a highly serious market, not a casino. Before trading with real money, practice making long-term profits on demo accounts. Be aware that it can take years to thoroughly learn the Forex trade, just like it does with any professional ability. Avoid any claim that suggests “you can make money quickly” and never risk more than you can afford to lose.
Don’t accept the assertions made at face value; instead, take the time to conduct your own investigation. An unskilled trader should adopt a critical mindset, analyse statistics, and create their own custom functions that they have first tried and successfully used on a sample account. While it will take some time to do, it will be better for the novice trader than putting their reliance in an automatic computer program. Don’t hurry into an investment that seems “too good to be true”
The legitimacy of the business making the claims or offering the course or expertise is something else a person might wish to investigate. Check the location/jurisdiction where the business is registered to accomplish this because many Forex scammers operate from places where they feel local laws will make it difficult for them to face international prosecution.
How to spot a forex broker scam?
Here are a few steps that you can take before opening an account with a forex broker to try and help avoid fraudulant forex brokers.
- Is the broker licensed to provide the relevant services?
- How reliable is the regulatory body if there is one?
- Is there a profit or reward for opening an account with the broker?
- Is there a cash bonus available from the broker for opening an account?
- Does the broker provide indications or automatic trades that ensure profits?
- Is there any reliable information about the business on its website, such as its history, financials, address, or something similar?
- Can I confirm the legitimacy of any prizes that are mentioned?
- Am I carrying out my due diligence to make sure the corporation can be trusted before accepting a large corporate sponsorship (such as a sponsorship)?
Is forex trading safe?
A lot of individuals believe that forex is a con. This is not true. The forex market, where currency trading takes place, is the largest financial marketplace in the world, with a daily turnover of $6.6 trillion, making it an entirely legitimate type of investment. However, it makes sense to be extra cautious because the forex trading world is full of forex frauds and forex pyramid schemes.
Trading in foreign currencies (FX) is a completely acceptable investing strategy. Individual investors can become forex traders by opening an account with an online forex broker, in addition to governments, banks, and major enterprises. However, given the disturbingly high prevalence of forex scams and forex pyramid schemes, extra caution is needed on the side of individual investors. Be careful of forex offers that promise enormous gains quickly, especially for beginners. It’s usually true if something sounds too wonderful to be true.
Final thoughts: how safe is forex trading?
It depends. If you use a regulated forex broker and avoid any obvious scams, then you can reduce the risks of falling victim to a forex fraud. However, there is always going to be risks involved with trading online. For instance, if you don’t use a stop loss or trade during volatile market conditions, that might not be considered safe. We cannot completely eliminate the risks from forex trading, but we can try to make it as safe as possible by following some of the tips outlined within this article.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.