Forex is the largest trading market in the world, defeating the Stock Exchange with almost $5 trillion US dollars in trades. The market is open 24/7; when a trade closes in New York, it opens in Hong Kong. In addition, currencies are traded in pairs in Forex; US dollar with Euro or US dollar with British Pounds.
With continuous fluctuations in price, the forex market can make a lot of money for individuals, companies, and institutions. Forex markets traders invest trillions of dollars every day. Traders constantly look for the best broker to trade forex, stocks, cryptocurrencies, binary options, etc. Most traders want to gain as much profit as possible from each trade and reduce potential loss.
With many dealers in the market every time, forex trading scams have become common. As a result, it is vital to ensure their legitimacy, causing a real challenge. A trader must research a company before depositing money to trade. Trading and gambling have prompted a wide range of responses from the public. Many forex traders are gamblers pretending to be authentic traders.
According to Investopedia, due to tighter regulations, scams in forex exchange are no longer as prevalent as before. However, there are still some fraud cases; hence you need to be aware of these trading scams to avoid falling victim.
Is Forex Trading A Scam?
The forex market is not a scam; the world’s currencies are traded on this platform daily. Forex trading has caught much attention over the years. The high-leverage position in forex trading has the potential to generate significant money for traders because there is no regulated or centralized exchange.
However, with high-leverage positions, scammers can use the lack of regulation to defraud inexperienced traders who desire to enter the market.
For a trader to profit, another must lose, making it a “zero-sum” market. The platform is, therefore, directed by banks and large, well-financed corporate institutions with a broad understanding of the financial markets, increasing the chances of an undercapitalized trader making a loss in the market.
It takes considerable experience to make a significant profit in the market, and it is also a steep learning curve.
Fraudsters exploit the market complexity by withholding crucial information about market realities from unsuspecting victims. They claim their information, scheme, or software robot to achieve financial success.
Types of Forex Trading Scams
1. Fake Signal Scam
Some self-acclaimed experts in the study of market trends sell robots configured and trading signals to unsuspecting traders, telling them to place a trade or close a position. Novices do not know these robots are better used in technical analysis and shouldn’t be relied on for market prediction.
Some sellers tell their victims their signals can give up to 98% success rates and request a fee in exchange. After collecting the payment, these scammers only drop a few signal notifications and cut off communication with their victims. Most times, these signals are incorrect.
However, some authentic traders understand the market pattern and can successfully predict market movement. As a new trader, ensure whoever you are paying is honest!
2. Unlicensed Forex Brokers
Regulatory authorities regulate retail trading in some parts of the world. For instance, Australia has The Australia Securities and Investment Commission (ASIC), The UK has the Financial Conduct Authority (FCA), Cyprus has the Cyprus Securities and Exchange Commission (CYSEC), etc.
Unfortunately, retail forex trading is not regulated in many countries. So, most forex traders operating in unregulated regions have a foreign license from offshore regulators. Unlicensed brokers run brokerage firms and offer trading platforms to their victims so that people cannot withdraw their money when they deposit.
To avoid falling victim, visit the relevant regulatory website and check the list of licensed forex brokers in your country before patronizing any forex dealer. If trading forex in your country is illegal, you should avoid dealing with foreign brokers.
To trade in a country where it is illegal and there are no regulations, avoid any dealer that is not multi-regulated so you won’t fall victim to forex trading scams.
3. Price Manipulation
The Standard Accounts at forex brokers are mainly spread with zero commissions, but they also make up for it in the spread. The spread is the difference between the offer price and a currency pair’s bid. While emerging market currency pairs have larger spreads, significant currencies like USD/EUR have tighter spreads because people trade them in high volumes.
Consequently, there are large spreads when there’s price manipulation. Fake brokers could say their spread is higher than offers from other brokers because of their backend bank or for different reasons. Smart traders must check with other brokers to know the spread of the currency pair.
A journal published by California Business stated that although retrieving your money from forex scams is possible, the process is stressful, and there is no guarantee.
4. Fake Promises of Rewards and Bonuses
There is high volatility in the forex market and a high risk of losses with margin trading. That is why significant regulators require brokers to include risk statements on their websites to warn potential traders about the dangers of forex trading.
It is a red flag if a broker promises bonuses such as risk-free trading, extra dollars on account opening, or high returns on purchasing trading signals. These promises distract traders from doing necessary due diligence and entice them to trade on their platform. Major regulators do not allow dealers and brokers to offer rewards and bonuses.
5. Ponzi and Pyramid Schemes
High Yield Investment Programs (HYIPs) gather resources from the public to invest in forex trading, with promises of a high return on investment that will be shared amongst all contributors. These scammers usually pay returns on investment to the initial contributors to attract more victims and pretend they are legit.
Most victims fall trap because Ponzi schemes recycle the money from early contributors and pay new members to give the illusion of their legitimacy. Thus, investors are convinced to invest more in the scheme when they see their investment grow.
After accumulating vast amounts from their victims, they stop paying and disappear with their money. Ponzi schemes are typical in African countries. On the other hand, Forex pyramid schemes involve a company with a trading platform.
Since scammers need to attract traders to their platform, they use pyramid techniques to incentivize traders. It entails the top person recruiting two people below him, and the two recruit three people, so the chart grows.
For every recruitment, the top person will be paid a commission, and so forth, meaning the higher you are on the pyramid, the higher your commission. A scammer can use this scheme to sell forex videos, signals, and materials to people and lure them into patronizing his company. Afterward, they disappear with the money gathered.
Conclusion On Forex Trading Scams You Should Know
There have been several forex trading scams, and many continue to fall victim. As a beginner, do your due diligence to avoid these scammers. Always use an established regulated broker that is transparent in its fees and has favorable online reviews.
Don’t be gullible to make quick money so you can understand what it truly takes to become a successful trader without using quick-fix schemes.