How to Spot Forex Scams

How to Spot Forex Scams
How to identify FX scams

Forex (Foreign Exchange) is essentially a financial market. As such, Forex trading is a legitimate endeavour where investors buy and sell different currency pairs. The Forex market is decentralised, which effectively means that there is no centralised physical location where investors can go and buy/sell their favourite currencies.

Decentralisation also means that the market is not controlled or supervised by any single entity or institution, but rather by regulators or authorities in different regions. In Forex trading, money is the commodity traded between participants. This is why currencies are traded in pairs. When you buy one currency, you are simultaneously selling another, and vice versa.

For instance, when you go long on EURUSD, you are buying the euro, while at the same time selling the US dollar, with the aim that the euro will strengthen relative to the US dollar. Forex as an investment opportunity, has long existed in the world, but it has only become widely available to the retail trading community in the last decade or so.

Retail investors mostly trade Forex as CFDs (contracts for difference), where there is no obligation to own the underlying currencies traded. When trading CFDs, investors are speculating on the price changes in financial assets, which means they can profit from both rising and falling prices.

A key attraction of trading CFDs is leverage. That is, traders only need to place a little margin with the broker to control a much larger position in the market. This effectively means that profits on successful trades are amplified. But herein lies the danger of leverage – losses on unsuccessful trades are also boosted. So essentially, Forex is a high risk, high reward activity.

So, why are there Forex scams?

Forex Scams

Forex is by far the largest financial market in the world, with over $6 trillion traded daily globally. That staggering figure, coupled with the magic of leverage, always means that there is immense opportunity to make profits in the Forex market, even though this comes with a lot of risks as well.

Technology has literally democratised the Forex market, and there are almost no barriers to entry in the retail scene. Forex trading requires a great deal of knowledge, skill and experience; but because anyone can start trading in an instant, vulnerable people are attracted to the opportunity without due consideration to the inherent risk. Because Forex is a massive goldmine, unethical businesses attempt to attract unsuspecting customers with promises of making big money round the clock.

They portray Forex trading and the ability to profit as something quick and easy. As long as the lucrative Forex market exists, Forex scams will always exist. It is therefore prudent for investors to be able to identify and avoid Forex scams in the various forms they come in.

Types of Forex Scams

Forex scams come in multiple forms, some common, and others are more subtle. They can come from brokers and other non-broker sources. One of the biggest challenges in identifying scams is that many services and features available today are in fact legitimate.

However, unscrupulous scam artists use trojan horse style tactics to exploit what are generally genuine offerings. Here some of the most common legitimate services that are often exploited by scammers:   

Forex Mutual Fund (PAMM) Scams

The Percentage Allocation Management Module (PAMM) takes its inspiration from the traditional hedge fund model, and as a legitimate product is a fantastic way for investors to take part in a managed fund. However, it is important to do proper due diligence first before investing. Here some key factors and red flags to look out for:

  • Qualified Fund Managers – Establish that the fund managers are qualified and experienced. Many scam funds will claim that their fund managers are qualified professionals but in fact, they are not.
  • Inflated Returns – Scammers often claim massive historical returns and will show numbers that way exceed market norms to lure investors in. Be sure to check these claims and not simply invest blindly.
  • Excessive Management Fees – It is quite normal for there to be fees, but before investing, check the ‘fine print’ and understand what the fees are, how you can exit the fund if you choose to, and possible penalties for making an early exit.

EA/Trading Robots Scam

EA (Expert Advisor) modules and Trading Robots can be powerful automated trading tools and are often value-add offerings with legitimate brokers. Investors should understand that trading software only automates a manual strategy. Automation has its inherent benefits, but generating unlimited profits is not one of them. Unfortunately, there are scammers that offer solutions which are not what they claim to be. Key factors to consider when it comes to evaluating automated trading solutions:

  • Promises of unlimited profits – Scammers will claim things like, “churn out endless profits from the markets round the clock” or “guaranteed profits”. This is simply not true and even the best and most reputable solutions cannot ensure 100% accuracy or even close to that.
  • World-class trading software with a few ‘recommended’ brokers – This is a popular scam where investors are sold or offered free software if they deposit with a ‘recommended’ broker. The scammer earns a commission by referring new clients to a broker, so their goal is to lure in naïve investors with unclaimed promises, simply to earn their commission.

Trading Signals Forex Scams

Trading signals provide trade ideas or suggestions to traders that will help them take advantage of opportunities in the market.

Signals can be generated manually or automatically by individuals or companies. They can use technical analysis or fundamental analysis, or both, to generate trading signals. There are many legitimate signals services, but once again, there are scam offers and key warning signs to look out for:

  • Inflated accuracy – Claims like “90%+ accuracy” are an immediate indication to be cautious. Even the best traders and technology cannot achieve this level of accuracy. With a little investigation, you can actually check their previous signals against historical market data.
  • Free Signals with ‘recommended’ brokers – Introducing brokers and affiliates who earn a commission by referring new clients to a broker will often purport to offer you Free Signals if you sign up and deposit with the broker they recommend.

Here some examples of pure scams that should be avoided at all costs:

‘Holy Grail’ Forex Scams

Scammers understand that the hardest part of the entire trading activity is identifying and taking advantage of the best trading opportunities in the market. Naïve investors believe they will be on the path to unlimited cash when they can get their hands on a ‘holy grail’ trading system that will suck profits from the market 24/7/365.

Any promotion of a software or trading company that claims to have a ‘holy grail’ trading system that will insulate you from losses in the market is a scam and should be avoided entirely.

Guaranteed Returns Scams

This is probably the most not-so-subtle scam, but it still manages to net customers. In this scam, investors are encouraged to join a service or company that trades the Forex market, and they will earn fixed periodic profits. This is a pure scam because the Forex market is fast and dynamic.

Profits and losses are part of Forex trading and cannot be forecasted. It is virtually impossible to generate guaranteed profits out of the market. There is no foolproof strategy that doesn’t generate some losing trades, and anyone promising guaranteed profits out of the Forex market is simply out to separate you from your money.

Forex Broker Scams

The scary thing about Forex scams is that they can also be perpetrated by some Forex brokers. Here are some of the most popular scams around:

Price Manipulation

This is the most common scam performed by scam brokers. Some brokers manipulate their trading platforms to always be at the disadvantage of traders.

This can come in the form of negative slippage, where entry and exit orders are filled at prices undesirable to the trade. For instance, a buy order is filled at a much higher price, which limits the eventual profits that can be realised on the trade, if any at all.

There is also ‘stop hunting’, where the broker will seek to take out the stop loss applied by the investor before continuing to stream the correct prices. Essentially, price manipulation will result in the generation of losing trades for investors.

Unusually High Leverage

Leverage is a great innovation in CFD trading. But leverage is always a double-edged sword. You can earn big profits on successful trades, but losses are also magnified on unsuccessful trades.

Some brokers offer unusually high leverage levels of up to 2000:1 that lures investors to promises of big profits, but the natural market risks can wipe out the bulk of a Forex trader’s margin with a single losing trade.

Unsegregated Client Bank Accounts

Scam brokers will often operate a single bank account for both their clients’ funds as well as their own operational money. This means that when funds are dwindling on their accounts, they will be more likely to seek ways to boost operations using client money.

This is an extremely bad business practice, and in the event that the broker cannot meet their financial obligations, your funds will be tied up with theirs and could even be claimed by their creditors. 

Fake Bonuses and Promotions

Bonuses and promotions are quite common offerings by brokers, including legitimate ones. Licensed and regulated brokers have to ensure that their bonuses and promotions meet regulatory guidelines and do not “lock” the trader in.

However, some shady brokers lure in investors with promotions that are misleading and have terms and conditions that are so stringent or outrightly unattainable. This means that their investors will almost always end up losing their trading capital before getting a chance to withdraw any profits. If it sounds too good to be true, it probably is.

Personal Data Scams

When signing up with a brokerage firm, you will be required to submit some of your private and confidential information and possibly even payment info like credit card details. A legitimate and regulated broker is required to take necessary security measures to ensure that your data remains private and is never shared or sold to a 3rd party.

When it comes to scam brokers, they may not take the necessary precautions, or worse, they may sell your information to a 3rd party. These 3rd parties may start sending you unsolicited emails or contacting you with offers you’ve never opted into.  Identity theft and selling of personal information can potentially result in losses for innocent investors.

Avoiding Broker Scams

Broker scams are subtler and more devastating than other scams. A company that should serve as your trading partner may end up being your worst enemy. It is therefore vital to be able to identify them and avoid them completely. The first step to identifying a trustworthy broker is regulation with reputable agencies such as ASIC, FSCA, FSA, FFAJ and various others.

Regulated brokers are mandated to operate segregated bank accounts for client funds, separate from their working capital accounts. They are also subject to random platform checks that ensure they always offer transparent trading services to clients.

Regulators also check that brokers are not making unfounded claims or using dubious marketing tactics. Furthermore, in the case of a conflict, investors have a level of recourse with a third-party body whose express obligation is to protect investors.

Beyond regulation, investors should also check reviews from trustworthy sites online where they can read about experiences of other real traders. Many review sites also thoroughly investigate complaints, as well as safety and security issues, such as KYC policies and website encryption standards.

The AvaTrade Advantage

If you want to trade online, it is vital to avoid scams by only trading via regulated brokers, with a long track record, impressive reputation, industry awards and high client satisfaction.

This is where AvaTrade takes centre stage. When you are trading with AvaTrade, you are trading with a reliable and trustworthy partner that is very much invested in your success as you are.

AvaTrade is a globally reputable brokerage firm that has achieved regulation in many jurisdictions around the world. There is a free demo account for investors who wish to ascertain the services of AvaTrade before committing their time, money and resources.

As your trading partner, AvaTrade offers attractive trading conditions as well as handy trading tools and resources to help you realise your investment goals.

Stay Safe and only trade with Regulated Brokers!