How do I spot a forex scam?

Forex scams come in many types and varieties, and while traders may first worry about broker forex scams, these are actually the easiest to spot. In general, if something seems too good to be true there is a good chance there is some scam behind it. Returns that are huge, trading conditions too good to be true, trading schemes that somehow purport to avoid regulations, all of these are different types of forex scams that need to be avoided. To most easily avoid broker forex scams, choose a regulated broker with a good reputation and a long history. For all other scams simply trust in yourself rather than trusting someone else to make your profits.

What are popular modern forex scams?

Many of the common forex scams in 2020 revolve around robot systems and signal sellers. If you think about it logically, you’ll realize that anyone with a robot that can return vast wealth in mere months doesn’t need your $99. The same is true for signal sellers. If their signals are so great, they should be able to trade their own account and retire within months to a Greek island. Why would they want to deal with all the potential problems that come with running what amounts to a retail business? While there are signal services that are legitimate, nothing beats improving your own trading skills and knowledge. That’s something you can take to the bank anytime you like.

Is the forex market a pyramid scheme scam?

The forex market is not a pyramid scheme. It is a zero-sum game, and it may seem unfair to new traders because those who make money consistently are the professional traders and institutional traders who are likely to prey on the ill-informed and untrained trading masses. The best way to avoid landing on the losing side of this zero-sum game where there is always a winner and a loser to any trade, is to become adept at trading yourself. In other words, become one of the traders who is more likely to end up on the winning side of any trade by improving your forex trading skills and knowledge.

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How to Spot Forex Scams

Forex scams come in multiple forms, some are 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.

Broker scams are 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 IIROC, 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 the 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.

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Here Are Some Examples To Avoid:

‘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 24/5. 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 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 are some key factors and red flags to look out for:

Qualified Fund Managers – Establish that the fund managers are licensed, regulated, qualified, and experienced. Many scam funds will claim that their fund managers are licensed, regulated, or qualified professionals but in fact, they are not.
Inflated Returns – Scammers often claim massive historical returns and will show numbers that way exceeds 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, some scammers offer solutions that 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.

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 trader. For instance, a buy order is filled at a much higher price, which limits the eventual profits that can be realized 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 3^rd party. When it comes to scam brokers, they may not take the necessary precautions, or worse, they may sell your information to a 3^rd party. These 3^rd parties may start sending you unsolicited emails or contacting you with offers you’ve never opted into. Identity theft and the selling of personal information can potentially result in losses for innocent investors.

So, why are there 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 democratized 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 around 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.

The Friedberg Direct 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 Friedberg Direct takes center stage. When you are trading with Friedberg Direct, you are trading with a reliable and trustworthy partner that is very much invested in your success as you are. Friedberg Direct is a reputable brokerage firm that has achieved regulation in Canada. There is a free demo account for investors who wish to ascertain the services of Friedberg Direct before committing their time, money, and resources. As your trading partner, Friedberg Direct offers attractive trading conditions as well as handy trading tools and resources to help you realize your investment goals.

* Friedberg Direct powered by AvaTrade technology does not provide any investment advice or recommendations. Any market recommendations, signals, algorithms, information, and/or opinions procured from or provided by and/or distributed by any third party do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell, or the recommendation to buy or sell, any transaction on behalf of Friedberg Direct powered by AvaTrade technology. Reliance on any such recommendations, signals, algorithms, information, and/or opinions procured from or provided by and/or distributed by any third party is solely at your own discretion and Friedberg Direct powered by AvaTrade technology does not take any responsibility for the outcome of any actions or trades based on such reliance. This includes but is not limited to, the MT4 and MT5 trading platforms and/or any other platforms utilized to trade on your Friedberg Direct powered by AvaTrade technology account(s). You should always seek independent advice from a professional financial advisor. Please be advised that you are solely responsible for assessing the merits and risks of any trade that you enter, and each trade entered into by you represents an independent decision. You are solely responsible for the trades you chose to enter into and their outcome.

** Margin requirements are dependent on the asset the trader wishes to trade and vary given the base currency of your account. All margin requirements and rates are subject to change at any time and without any warning. It is the client’s obligation to monitor their margin requirements and ensure that they have sufficient funds to maintain their positions. These margin requirements and rates are established by the Investment Industry Regulatory Organization of Canada (IIROC). These requirements and rates are periodically updated by IIROC and are subject to change at any time without notice and in line with market conditions. Clients should always endeavor to maintain sufficient excess funds in their accounts to avoid having positions liquidated due to sudden margin rate increases.

Stay Safe and only trade with Regulated Brokers!

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