If you google the collocation “foreign exchange scams”, the number of results the search engine will come up with will truly dumbfound you. The foreign exchange industry is now better regulated than it was a couple of decades ago but there are still many dishonest trading companies, whose main purpose is to swindle unsuspecting traders out of their money.
It is important to be as informed as possible since this will help you differentiate between scam brokers and reliable ones. You must research your brokers and their background carefully before you sign up for a live account and make a large real-money deposit. Trading the foreign exchange market is hard enough as it is without having to deal with scammers who work against the best interests of their clientèle.
In the following article, we inform readers about the most common types of Forex scams and provide them with a quick checklist on how to spot them. We also tackle the subject of foreign exchange regulations and offer some tips on how to protect yourself against Forex scams.
Forex Scams to Keep Your Eyes Peeled for
One thing about scammers, in general, is they can be extremely resourceful when it comes to robbing people out of their hard-earned money. Retail traders are beginning to wise up in recent years, causing scammers to invent newer, “improved” schemes to swindle investors.
Traders must constantly keep their eyes peeled for frauds to protect themselves from the scammers’ ingenuity. Below we cover several major types of foreign exchange scams retail investors should be wary of.
Investment and Fund Management Scams
The popularity of the so-called fund management accounts has grown tremendously in recent years, especially among retail traders who are yet to learn to adequately manage their capital and positions. With this type of account, the investor allocates a certain percentage of their available balance to a skilled professional manager who executes trades on their behalf.
This potentially enables the account holder to realize better market returns since their account is managed by an experienced, highly competent person. The fund manager, on the other hand, is rewarded by charging a nominal commission for their services. At least, this is how it should work at reputable brokerage firms.
Given the proliferation of Forex scams we currently witness, it is not unheard of to come across fraudster managers who advertise excellent track records with a high ROI but have little to no real evidence to back their claims up.
The trading records of such people are often completely made-up. In reality, they have no idea how to properly manage investors’ capital causing them to incur massive losses while collecting commissions for the “service” at the same time.
If you want to have your Forex account managed by a professional, be sure to research them in-depth to ascertain they really are as successful as they claim to be. Check how they have performed in the long run, over a span of at least three to five years.
Their ROI, trading strategies, and risk level are also worth checking out. Above all, you should choose a properly regulated provider of managed Forex services before you open a live account.
Inaccurate Forex Signals
You will be amazed by the number of people selling educational materials and Forex signals over the Internet. The purpose of a Forex signal is to alert the trader when it is the best time to open a position for a given currency pair.
It contains all the important details you need before you place a concrete trade, including whether to open a long or short position for the respective pair, when to enter or exit the market and at what price.
The signal can also tell you how to adjust your Stop Loss and Take Profit. Signals are created either by human analysts who monitor the markets or by automated trading robots supplied by certain signal service providers.
In many cases, traders have to subscribe to signal providers and are charged high subscription fees to receive these notifications. Scam signal providers tend to advertise impressive results and signal accuracy without providing any evidence to verify their claims.
If the provider fails to back their claims up with an actual track record, this is most likely an indicator they are not trading the signals they offer themselves. Besides, why would anyone resort to selling signals for profit in the first place if their trading decisions are so accurate?
Inefficient Strategies and Robots for Algorithmic Trading
If you are keen on algorithmic trading, chances are you have already heard about trading robots, or Expert Advisors (EAs) as they are called in MetaTrader. These robots are often created by other traders with good programming skills.
By using algorithms, the robots monitor the markets around the clock to identify favorable trading opportunities based on a set of predefined conditions. They are commonly used in algorithmic trading and can be “taught” to automatically execute orders according to a given strategy.
The thing is some of the people who program these robots advertise them rather boldly, claiming they can generate huge profits without the trader lifting a finger. You just sit back and relax while the robot generates money for you, they say.
The whole situation is similar to the scenario with the poor trading signals. You pay hundreds of dollars for an algorithmic trading strategy so that it turns out it either has not been tested or is over-optimized, which renders it ineffective under real-life market conditions.
Another problem results from the fact these robots are often programmed to follow a scalping strategy, which is to say they trade with high frequency, generating nominal profits consistently. This increases the win rate of the advertised system but the robot again fails to deliver on the dynamic live markets.
Needless to say, not all trading strategies and bots are faulty. Some indeed can improve the success rates of traders. However, due diligence is required before you pay a hefty sum for a trading system. Beware of unrealistic marketing promises that assure of 4,000% return rates.
If it sounds too good to be true, then it probably is. Before purchasing a robot, you should carefully examine it by testing its parameters and codes. If these turn out to be invalid, the bot will simply spew buy/sell signals at random, causing you to gamble with your capital rather than trade intelligently.
How to Detect Unreliable Brokers
With the popularity of retail foreign exchange trading constantly on the rise, new Forex brokerages are springing up like mushrooms after a rainfall. It is often difficult for less experienced retail traders to sift out the trusted from the unreliable brokers. Here are four red flags to watch out for when choosing your Forex broker.
Unreliable brokers who do not care about their customers frequently resort to an unethical technique called “churning”. This usually happens with disreputable firms that receive commissions for executing customers’ trades. In a nutshell, churning is the practice of effecting transactions merely for the purposes of earning commissions.
It is irrelevant to the churning broker whether or not such overtrading is detrimental to the customers or facilitates their trading objectives. Speaking of detriments, churning can often result in significant losses for the affected trader or make them liable for taxation if profitable.
From the perspective of major regulatory entities like the US Securities and Exchange Commission, churning is not only manipulative and unethical but also illegal.Brokers who are found guilty of churning usually face punishments such as monetary fines, license suspension, and even heavier criminal sanctions like incarceration.
One way to protect yourself against churning is to always remain in full control of your trading account. Effecting this technique is only possible if the brokerage company can exercise control over the trading activities in a customer’s account.
The customer must sign a discretionary agreement with the broker for this to happen, however. Another preventive measure against churning is to sign up with a fee-based live trading account.
No Regulatory Background and Information
Traders should never sign up with a brokerage firm that refuses to provide any background information about who regulates them. The first thing a trader should do is check the broker’s website for regulatory information. If such details are entirely absent from the website, you better take your trading activities and capital elsewhere. Trading with an unregulated broker is the surest path to an investor’s demise.
Regulations exist for a reason. Supervisory authorities like the FCA, CySEK, and ASIC are there to ensure brokers comply with certain requirements that guarantee a fair, transparent, and secure trading environment for all customers. Otherwise, you will have no one to turn to if a scam broker swindles you out of your money.
Unprofessional Emails Prompting You to Give Away Sensitive Information
Scammers frequently resort to email span as a means of luring unsuspecting traders to join their websites. They would require you to provide sensitive personal information, such as your full name, your residential address, or telephone number. Under no circumstances should you give away any of this information to anyone who approaches you in this suspicious manner.
Before you join the ranks of a brokerage, you should insist that the company gives you a written risk disclosure. The purpose of this statement is to inform traders of all the risks associated with trading in the foreign exchange markets.
Also, it is important to remember in today’s world, one’s personal information could be just as valuable as the assets they are trading. Confirm the firm’s track record and regulator before you proceed to register and dish out any of your details.
Promises of Easy and Large Returns
Another technique scammers frequently resort to is making bold promises of quick and massive returns. They would advertise low levels of risk and huge return percentages over short periods to whet the appetites of unsuspecting retail traders and cause them to make an investment.
However, there is no such thing as easy money in the world of Forex. Becoming a successful trader requires commitment, discipline, time, and patience. This is the only path to success on the Forex markets. If an opportunity seems too good to be true, it probably is not true in the first place.
Who Regulates Reliable Forex Brokers?
It is important to understand every aspect of a broker’s regulations before you open a live trading account there. The task of financial regulators is to ensure brokerages follow certain rules of conduct, providing an ethical, transparent, and safe trading environment for their customers.
Regulators observe closely for unethical practices like the previously mentioned churning. Upon suspicion, they would examine the positions opened in the affected trader’s account along with their relationship with the broker.
They will look into the ratio of solicited and unsolicited trades and evaluate the commissions the broker has generated in relation to the respective customer’s profits and losses that resulted from the trades. If the broker is indeed proven guilty of manipulative conduct, the trader will be able to seek recourse for the incurred losses. This would be impossible if you are trading with an unregulated firm.
The Forex Market Lacks Uniform Regulations but Why?
In essence, regulations seek to limit unscrupulous brokers’ capacity to defraud traders, regardless of what deceptive tactic is used. Now, the foreign exchange market, similarly to the cryptocurrency one, is decentralized, meaning there is no particular physical location where currencies are bought and sold.
Forex traders rely on digital technologies to get access to real-time bid/ask quotes, compare prices, and carry out over-the-counter (OTC) transactions with retail brokers. It is because of its decentralized nature that the foreign exchange market lacks a uniform regulatory framework.
Financial regulations vary wildly across different countries, with each jurisdiction having a unique regulatory watchdog and set of rules for brokerages to follow. What is legal in one place can be frowned upon by the regulators in another.
Such is the case with notoriously volatile financial instruments like the Contracts for Difference (CFDs) and the binary options. For example, CFDs have been outlawed for retail investors in countries like Belgium, the United States, and Brazil but can be legally traded with certain restrictions in many EU member states, Australia, New Zealand, Japan, South Africa, Canada, and Chile.
Said restrictions typically pertain to margin and leverage ratios. In the context of the trading industry, leverage is borrowed capital that enables brokers’ clients to trade with significantly larger volumes than what they have in their balance.
A trader can thus yield considerably higher gains with small personal capital. Unfortunately, the same is true of the losses from unsuccessful trades which are also magnified. For this reason, trading with leverage is a very volatile enterprise, especially for uneducated retail investors.
To protect such customers, the regulators in different countries impose caps on the maximum leverage retail traders can take advantage of. The cap is 30:1 for major currency pairs throughout most of the European Union (bar Poland which allows for 50:1 ratios) but is lower at 25:1 on the other side of the ocean in Japan.
Furthermore, EU-regulated brokers are expected to follow strict negative balance protection policies to prevent their clients’ balance from going in the negative. Meanwhile, unregulated brokers are known to offer leverage ratios as high as 1000:1 or even 3000:1 to unsuspecting retail customers and without negative balance protection at that.
In worse cases, unregulated companies do not segregate their own funds from those of customers. Should one such broker file for insolvency, there is no guarantee traders will get their money back.
Having said all this, below is a short list containing the regulatory agencies of the countries with the most well-developed Forex trading markets. If your broker has the seal of approval of one or more of these watchdogs, it is extremely unlikely for you to get defrauded. Regulated brokers would usually post a risk disclosure toward the bottom of their homepage along with their license number and the name of their regulator.
- United States – the National Futures Association (NFA), the Commodity Futures Trading Commission (CFTC)
- Australia – the Australian Securities and Investment Commission (ASIC)
- Canada – the Investment Industry Regulatory Organization of Canada (IIROC), the Ontario Securities Commission (OSC), the British Columbia Securities Commission (BCSC),the Autorité des Marchés Financiers (AMF)
- The United Kingdom – the Financial Conduct Authority (FCA)
- Cyprus – the Cyprus Securities and Exchange Commission (CySEK)
- South Africa – the Financial Sector Conduct Authority (FSCA)
- New Zealand – the Financial Markets Authority (FMA)
- Japan – the Financial Services Agency (FSA)
- Russia – the Central Bank of the Russian Federation (CBRF), the Financial Market Relations Regulation Center (FMRRC)
- Switzerland – the Financial Market Supervisory Authority (FINMA)
- France -the Autorité des Marchés Financiers (AMF)
- Germany – the Federal Financial Supervisory Authority (abbreviated from German as BaFin)
Research Your Brokers to Protect Yourself Against Forex Scams
Education and research are the best precautions a trader can take to protect themselves against Forex scams, along with choosing strictly regulated brokers, of course. If a certain brokerage has attracted your attention but you are unsure whether or not the firm is regulated, you can check where it is based and then visit the website of the corresponding jurisdiction’s regulator. Many financial watchdogs have databases of the companies they oversee traders can look into.
Benjamin Franking, a wise man that he was, once said, “An investment in knowledge pays the best interest” and this certainly rings true today when it comes to Forex trading. Fraudsters normally target beginner traders because novices often lack enough understanding to identify what profits they can realistically expect to generate on the Forex markets.
Some brokers would incentivize new customers to join by offering them sign-up bonuses. Be very careful before you register and opt in for such offers. Unreliable brokers often incorporate ambiguous and confusing clauses in their bonus terms to prevent customers from fully understanding the conditions for participation. The customer then proceeds to request a withdrawal but is denied the money due to violations of the bonus terms.
The best way to protect yourself against Forex scams is to stay as informed as possible. Compare different brokerages, check their spreads, and read feedback from other traders. Pay attention to the small print to acquaint yourself with all the terms in advance.
What to Do If You Have Been Scammed by a Broker
It is a good idea to be diligent and keep a comprehensive record of all your trades and transactions. This ensures you have clear and compelling evidence in case you do end up getting scammed by an unscrupulous broker.
You will not be taken as seriously if you have nothing to back up your claims with. Taking screenshots of your orders is among the simplest ways to keep a record of your trades. If you have sufficient evidence, you can proceed to file a complaint with the regulatory agency that oversees the conduct of the faulty broker.
Contact the broker first and try to settle the issue in a civilized, yet firm manner. Should this fail, you can file legal action and ask the regulator to intervene. When enough evidence is at hand, most of these disputes are settled in favor of the defrauded customers.
If you hail from the UK, you can use the special form for scam reporting available at the FCA website. This one is for unregulated brokers. For FCA-licensed companies, you can get in touch with the agency via its regular contact details.
Be as precise as possible when reporting your case. Also, it would be a good idea to share your poor experience with other members of the foreign exchange trading community. This would prevent them from becoming victims of the same scammers.