Is forex trading a scam?
Foreign exchange (Forex) investing is not a scam, plenty of scams have been associated with trading Forex. Regulators have put protections in place over the years and the market has improved significantly, making such scams increasingly rare.
Unfortunately, scams have been a big problem historically, faced by everyone in the Forex industry. As with any new industry, plenty of predators exist out there, looking to take advantage of newcomers.
Forex itself is a legitimate endeavor. You can engage in Forex trading as a real business and make real profits, but you must treat it as such. Don’t look at Forex trading as a get-rich-overnight business, no matter what you may read in hyped-up Forex trading guides.
With real work and time invested, you can have a profitable, legitimate Forex business. Like any other real business, though, there is no free lunch.
Defining the Situation
A scam or fraud means an intentional deception has taken place, with the intent to take money from an unsuspecting person. Scams take place in a variety of ways but have become increasingly rare because of increasing regulations.
A distinct difference exists between a poorly-run brokerage, which isn’t necessarily a scam, and a fraudulent one. Even a poorly-run brokerage can run for a long time before something takes them out of the game.
What Makes a Scam?
Forex trading first became available to retail traders in 1999. The first handful of years was wrought with overnight brokers that seemed to pop up and then close down shop without notice.
The common denominator was that these brokers were based in non-regulated countries. While some did take place the United States, the majority seemed to originate overseas where the only requirement to set up a brokerage was a few thousand dollars in fees.
Since 2007, the occurrence of shops vanishing with clients funds has become very rare. Over the last few years, many Forex brokers have been acquired by others, or the shops of the shutdown brokers have been futures brokers whose clients were also able to trade Forex futures but not spot Forex such as MF Global.
Spotting a forex scam
The spot forex market trades $1.65 trillion a day, according to the Bank of International Settlements’ Triennial Survey. Combine that with currency options and futures contracts, and the amount traded on any given day is more than $5 trillion.
With this volume of money floating around an unregulated spot market that trades instantly, over the counter, with no accountability, Forex scams offer the lure of earning fortunes in limited amounts of time. While many of the popular old scams have ceased, due to serious enforcement actions by the Commodity Futures Trading Commission (CFTC) and the 1982 formation of the self-regulatory National Futures Association (NFA), some old scams do still linger, and new ones keep popping up.
Back in the Day: The Point-Spread Scam
The old forex scam was based on computer manipulation of bid/ask spreads. The point spread between the bid and ask basically reflects the commission of a back-and-forth transaction processed through a broker. These spreads typically differ between currency pairs. The scam occurs when those point spreads differ widely among brokers. Brokers often do not offer the normal two- to three-point spread in the EUR/USD, for example, but spreads of seven pips or more. (A pip is the smallest price move that a given exchange rate makes based on market convention. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point.) Factor four or more pips on every $1 million trade, and any potential gains resulting from a good investment are eaten away by commissions.
This scam has quieted down over the last 10 years, but be careful of any offshore retail brokers that are not regulated by the CFTC, NFA or their nation of origin. These tendencies still exist, and it’s quite easy for firms to pack up and disappear with the money when confronted with actions. Many saw a jail cell for these computer manipulations. But the majority of violators have historically been United States–based companies, not the offshore ones.
The Signal-Seller Scam
A popular modern-day scam is the signal seller. Signal sellers are retail firms, pooled asset managers, managed account companies or individual traders that offer a system – for a daily, weekly or monthly fee – that claims to identify favorable times to buy or sell a currency pair,based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities, plus testimonials from people who vouch for how great a trader and friend the person is, and the vast wealth that this person has earned for them.
All the unsuspecting trader has to do is hand over X amount of dollars for the privilege of trade recommendations. Many of these scammers simply collect money from a certain number of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. This new scam is slowly becoming a wider problem. Although there are signal sellers who are honest and perform trade functions as intended, it pays to be skeptical.
“Robot” Scamming in Today’s Market
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These scammers tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot,” because of the ability to work automatically. Either way, many of these systems have not been submitted for formal review and tested by an independent source.
Examination factors must include the testing of a trading system’s parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should research any system they’re thinking of incorporating into their trading strategy.
Other Factors to Consider
Traditionally, many trading systems have been quite costly. Just a few short years ago, $5,000 was not much to pay for a system. This can be viewed as a scam in itself.No trader should pay more than a few hundred dollars for a proper system today. Be especially careful of system sellers who offer programs at exorbitant prices justified by a guarantee of phenomenal results. Look for one of the many legitimate sellers who is decent and whose systems have been properly tested to potentially earn substantial income.
Another persistent problem is the commingling of funds. Without a record of segregated accounts, individuals cannot track the exact performance of their investments. This makes it easier for retail firms to use an investor’s money to pay exorbitant salaries; buy houses, cars and planes; or just disappear with the funds. Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue of fund segregation; what occurs in other nations is a separate issue.
Other scams and warning signs exist when brokers won’t allow the withdrawal of monies from investor accounts, or when problems exist within the trading station. Can you enter or exit a trade during an economic announcement that is not in line with expectations? If you can’t withdraw money, warning signs should flash. If the trading station doesn’t operate to your liquidity expectations, warning signs should again flash. An important factor to always consider when choosing a broker or a trading system to satisfy your personal goals is to be skeptical of promises or promotional material that guarantees a high level of performance.
Of the 193 cases filed with the NFA in 2008 for rules and law violations, 166 were settled within nine months, but only 23% of the plaintiffs received lost funds. Therefore, as with many Ponzi schemes, even when those who deliberately engage in Forex scams are brought to justice, there’s no guarantee investors will be reimbursed.
How to Avoid Being Scammed?
The first step to take is to check the location of the brokerage’s headquarters. Regulations have increased greatly in the last five to 10 years, and it has, rightfully so, become increasingly expensive to do business in highly-regulated countries like the United States or the United Kingdom.
Outside of location, you can do diligence based on how willing the broker is to talk about execution and their books. In other words, you can ask the broker how long they’ve been in business and how many countries they are regulated in. The more the better.
What If You Feel You’re Being Scammed?
Depending on your location, you should speak to your governing authority. Most of the regulations that have passed stem from requests of clients at brokerages that have failed or clients that feel they have been cheated. If you’re being scammed and you report it, you can help play an active role in the continual cleaning-up of the Forex market.
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