How to Spot a Forex Trading Scam

Author: Consultant Finmaxfx

Just like any other business, Forex has its share of scams. Their prevalence often makes the average person wonder whether Forex is legit at all. There are three major types of Forex scams that people fall for. By making an effort to understand how they work, you can see the pattern and hopefully be on the lookout for similar shenanigans.

Three Major Types of Forex Scams to Avoid

1 Forex Robot Scams

A robot is a computer program that uses algorithms to make decisions about when and where to enter or exit trades. The concept itself is entirely legitimate. Forex robots do exist and can work quite well. Expert Advisors (EAs) on the MetaTrader 4 and MetaTrader 5 platforms are examples of this. However, there are MetaTrader 4 scams that take advantage of this functionality and claim to provide performance that they simply cannot achieve. Here are some things to look out for when evaluating a Forex robot to see if it could be part of a scam.

  1. Overly emotional marketing. Is the developer of a Forex robot resorting to telling you how their robot can change your life or how big your garage will have to be to hold all the Ferraris you’ll own? It’s a good sign that they either don’t have the numbers to back up the performance they are claiming or that the numbers they have are not legitimate.
  2. Unrealistic performance metrics. Forex robots that claim to get insanely high returns can be totally bogus.
  3. Using an unregulated broker or being on a warning list. Some Forex robots show outstanding returns on brokers that are not regulated by any major authority. Such a situation should make you question whether they are using an account with the same spreads you would be getting if you opened an account. It seems unlikely that someone running a legitimate Forex robot would want to use it on an unregulated broker. Many Forex regulatory agencies, such as the FCA (Financial Conduct Agency), have warning lists with businesses or brokers that are suspicious or known to be perpetrators of scams.

2 Forex Signal Seller Scams

Unlike Forex robots, signal sellers send you buy or sell signals, and it is up to you to trade on them. Trading signals contain all the information you need to carry out a trade. They provide the currency pair, entry, exit, stop loss, and take profit levels. Like Forex robots, these signal providers can also be scams, and here are some things to look out for.

  1. No live or verified track record. Any signal provider should be happy to give you a link to their track record in real-time if they are, in fact, providing a legitimate product. If they are hesitant to do so or if the statistics they do give are for a demo account and not a live one, you should be wary of becoming involved.
  2. Subscription fees. Some signal providers will only give you verification of their trading results if you subscribe to their service. Furthermore, whether their signals are profitable or not, their business will always be beneficial because of the fees they are earning. However, a legitimate signal provider will want to keep you profitable so that they can continue to earn the subscription fee from you.
  3. Signals specific to one broker. Some Forex signal providers offer signals only if you sign up with a particular broker. There is no reason why Forex signals should be specific to a specific broker except that the signal provider gets a kickback for sending you there. This is not to say that this is a scam in and of itself; it is just a particular business model.

3 Phony Forex Investment Management Funds

Forex investment funds are usually presented to a potential investor as a chance to have an expert professional Forex trader manage your account. Many of these so-called professionals are pros alright, but they are far from experts. Their con often consists of exaggerated claims of performance or simply a referral to another trader from which the “fund manager” gets a kickback.

  1. Unrealistic performance claims. If a fund manager claims he can more than double your money over the course of a year, it should sound too good to be true. And we know if something is too good to be true, it probably is.
  2. Referral links to open an account. If a fund manager wants you to open and fund an account with particular referral links, this likely means that they are getting a commission from the broker you are signing up with. So, they get a fee for each position opened or closed, whether the trades are winners or losers. This creates a conflict of interest for the so-called fund manager, as they have no interest in whether your trades profit or lose.
  3. Hard to get ahold of. If your fund manager has reviews or word-of-mouth testimonials that suggest they are hard to get ahold of, that is a sign that they are not on the up and up. Legitimate financial professionals should be able to address any concerns you have about your investments, especially when they present themselves as taking on this responsibility when you open an account with them.

How to Identify Forex Scams in 5 Easy Steps

Given the vast size and scope of the Forex market, it shouldn’t be a surprise that it is crawling with scammers. Since most Forex traders fail, many who have an interest in Forex are receptive to anyone offering some kind of shortcut or advantage. Here are some tips that can help you distinguish scams from legitimate offerings.

Step 1: How Did You Find out about The Product?

Consider the source of the opportunity. If you found it on one of the many reputable and legitimate Forex trading sites or a magazine that is generally trusted, it is a good sign. However, if you learned about it through a spam e-mail or on a website or magazine that is known to contain shady offerings, you should be on the alert.

Beginners often don’t have the background or experience to know what a legitimate Forex product looks like or where you find out about them. Stick to websites and magazines with good reputations. This is not to say that you won’t find scams there, as legitimate websites and magazines aren’t in the business of spending hours and hours tracking down scams. But consider it the first layer of defense to avoid offers in spam e-mail or media that you don’t trust.

Step 2: Are There Only Backtest Results?

If the results the offering gives you are only backtests, you should not consider this good enough. You should only trust results if they are MyFXBook-verified. Backtests can be manipulated to look like they would make serious profits when they would have bombed and completely wiped out an account in the real world.

Furthermore, backtesting is excellent for testing a strategy you’re developing. But in terms of tracking performance, you want to track how it does in the real world when it comes to actually trying to get someone to put down their hard-earned money for it. You want to see the strategy operate in real-time and in the recent past. Why? Conditions change, and the strategies of yesteryear may not work today.

You should also demand robustness tests. Any strategy can be made to look like a winner if you use one set of parameters. How does it perform in hundreds of simulations with different settings? If such results are not consistently favorable, the results for the strategy won’t be promising in live trading either.

Step 3: Are MyFXBook Results Public or Private?

So, they’re trying to sell you a robot or strategy, but their MyFXBook results are private? What legitimate reason is there for a product they are trying to sell to have hidden results?

The only one must be that those results would, if known, generate a negative opinion of the strategy involved. Maybe the gain and return are public and look impressive, but their balance chart and other information are hidden. If such details were revealed, you would see that they are obviously using strategies that most brokers don’t allow, such as a Martingale strategy.

Step 4: Did You Get an Investor Password With an IP Address?

A seller may invite you to connect to their MetaTrader server using their investor password so that you can look around and see their results. If they provide you with an IP address for the Server field instead of a name, this is another red flag. A legitimate professional broker is going to use names for their servers because this is user-friendly and a good professional presentation.

You can also verify from the name who the broker is and whether it is a demo or a live account server. It could be that the seller is trying to trick you by giving you an IP address where you can’t glean what the server is. Or it could be that they set up their own server with completely bogus results.

Step 5: Check Reviews on ForexPeaceArmy.com

It is good practice to check reviews for products on ForexPeaceArmy.com and similar sites. Many people neglect to do this as they don’t figure many people have reviewed a product they are looking at because it is “such a great opportunity.”

But in reality, many of these scams have been around for a long time. It is an excellent idea to at least give a glance to review sites by making sure that these products are not mentioned or have a lot of negative reviews. Forex reviews are good general reading to ensure that you are aware of current scams. Make sure you are reading real Forex reviews by only going to reputable websites. You can find a list of scam Forex brokers at sites like ForexFraud.com.

How to Avoid Forex Trading Scams

Forex is a hotbed for scams, just like any other activity where money is involved. The more money involved, the higher the likelihood of scammers becoming interested. As the most liquid, heavily-traded market in the world, it should come as no surprise that the Forex market is the subject of many scams.

Is Forex Trading Legit? Exploring Scams Involved with Forex Trading

Forex is definitely legitimate. The monetary systems of almost every country in the world are strongly tied to the Forex market.

The scams in the Forex market are the same old time-tested cons that have plagued every other business endeavor.

They can be found in all kinds of services and products, but these just happen to be Forex services and products. Bogus claims that you can make an unrealistic amount of money are common among them. Examples of this might include Forex training that doesn’t teach you the tools you truly need or a Forex robot that doesn’t trade as profitably as advertised, if at all.

Always make sure that the results that you get from a seller are legitimate. Having myFXBook-verified results are the best way to ensure that the results are legitimate. Make sure that the results clearly pertain to the product you are interested in. By googling “trade capital scam” you will see what an obvious scam looks like. Central Forex and Money Brokers Ltd. is a name that has been tied to shady Forex business activity.

is forex trading legit explorin -scams involved with forex trading

What is a Margin Call? How and Why Does it Happen?

A margin call occurs when the used margin in your account is not adequate to cover your trades. When this occurs, your broker forcibly closes your trades because you no longer have sufficient collateral to back the funds you borrowed to open your positions. You can think of the used margin as a good faith deposit that allows you to keep a position open using the leverage provided by the broker. Once you begin to lose so much that your good faith deposit begins to be lost, the broker steps in and protects themselves. Margin calls can be avoided by prudent usage of stop loss orders. When your account is adequately funded, there should be no reason to suffer losses so significant as to require a margin call.

Leverage is a tool and a powerful one. It can greatly multiply your profits, but can also greatly multiply your losses. Set your stop loss on every trade you open and have sufficient funds to give you the flexibility to set it where you need to.

The Ins and Outs of Forex Trading

Successful Forex trading requires a good grounding in fundamental analysis and technical analysis, as well as an understanding of the mechanics of trading itself on the particular platform provided by the broker with whom you have opened an account. You should understand the different order types provided by the platform: limit, stop, trailing stop and market. You should be able to make sense of the candlestick charts that are typically used in Forex and be familiar with at least the common indicators like the MACD (Moving Average Convergence/Divergence) and the Relative Strength Indicator (RSI).

Forex trading is not gambling. You should trade a demo account until you feel completely comfortable trading with real money. There is also skill involved in executing a trade properly. Prudent traders will set stop loss and take profit levels when they open a trade. It’s not just picking a winner and a loser; you must also determine the best time to buy and the best time to sell.

How to Become a Forex Currency Trader

To be successful at Forex trading, you will need a sufficiently-funded account. Some experts claim that as much as $10,000 to $20,000 is required to adequately fund a Forex account. Having more funds is better because this means that you will have enough cushion in case of losing trades. If you go on a losing streak, you will be able to recover. If you had a small, underfunded account, your account could be wiped out quickly and you would not have the flexibility you need to set reasonable stop losses before your margin call is triggered and your trade is automatically closed.

You will need to pick a Forex broker. You should only choose legitimate Forex brokers, who are reputable and regulated. Brokers without verification processes are dead giveaways as unregulated brokers because regulators require brokers to perform KYC and other identify verification processes to prevent money laundering. Brokers who are regulated are subject to financial requirements that protect clients from conflicts of interest and financial insolvency on the part of the broker. Client funds are also protected up to a certain amount if the broker goes out of business.

How to Spot a Forex Trading Scam

Once you have chosen a broker, you will want to get acquainted with their platform by getting a demo account. These are offered by almost all brokers these days. You can use this demo account to learn and practice Forex trading. Learning how to trade spot Forex (spot Forex is the term that distinguishes Forex trading from the Forex futures market) is a skill that takes a little time to get used to. Only when you are comfortable trading your demo account should you move to the next step and open a real money or live account.

Forex Trading is Not a Scam

Is FX Trading legit? Forex trading is a legitimate profession. But just as some businessmen and salesmen are crooks, this doesn’t mean that all businesses and marketing messages are scams. Scammers follow the money and as the most heavily-traded market in the world, Forex serves as fertile ground for these hucksters. Looking on the Internet for Forex trading reviews can help you avoid scams that others have discovered. You can find legit online Forex trading if you look at reputable sites that review brokers.

forex trading is not a scam

Avoid These Forex Trading Risks

There are four major types of risk when trading in Forex. These are systemic risk, liquidity risk, leverage risk, and counterparty risk. Systemic risk, also known as market risk, are those risks that are inherent to the market itself. It is good that there is a certain level of risk in the market, for without it there would be no movement in price, known as volatility, and there would be no potential for profit.

Market risks include central bank interventions like interest rate changes and quantitative easing; economic news like inflation, growth, employment; and consumer sentiment figures, wars and diplomatic conflicts, regulatory changes, and tax policy changes.

Liquidity risk is the risk that comes with whether a market is liquid or not. When a market is liquid, it is easy to buy and sell something. When you place a buy or a sell order in your Forex platform, the broker has to find a seller for your buy order or a buyer for your sell order. If there is little interest in buying what you’re selling or selling what you’re buying, it can be a significant task to find someone to match your order to. How do trading brokers make money? On accounts with no commission, the spread is their commission. That’s why on accounts with variable spreads, you will often find that your broker increases the size of the spread in times of low liquidity. This adds to the cost of the transaction and affects your bottom line. The reason why the spread on USD/CNH is so high is due to the liquidity of that market. Add that to your list of China trading tips.

Leverage risk is the risk associated with using the leverage provided by your broker. There is a reason why regulators are always seeking to lower the leverage allowed by brokers to clients. That’s because the higher the leverage, the higher the risk. You can mitigate this risk by adequately funding your account and setting a stop loss reasonable for your trade setup. This way, margin calls will not even be an issue. As long as your stop loss is set at a spot that corresponds to the maximum loss you are willing to take, this risk is practically eliminated, barring some fluke in the broker’s execution of your stop loss order.

Counterparty risk is the risk that comes with those brokers who act as the counterparty to your trade.

In other words, they are the buyer of your sell orders and the seller of your buy orders.

The primary risk here is that the broker goes out of business and you encounter Forex withdrawal problems. This risk can be mitigated by only using brokers that are regulated by established regulatory bodies like the Financial Conduct Authority (FCA) in the UK. Forex trading is legal in the USA, but it is heavily regulated by the National Futures Association (NFA) to ensure that they are keeping client funds separate from the funds of their business and operating under other guidelines that help keep the company in good financial condition much like the FCA in the UK.

If you like this article, you might also be interested in this An Ultimate Guide, how to Become a Successful Forex Trader

Conclusion

Forex scams are so prevalent that you can just google “Forex trading” and come across them. It’s enough to make the general public wonder if Forex is real or fake. But Forex is indeed not only a real market but a very important one. By using the tips and guidelines above, you can learn how to sense a Forex scam when you see it and hopefully steer clear of anyone trying to steal your money.

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