There are many scams related to forex targeting the public & retail traders. These scams continue to surge. These days, forex adverts on social media are synonymous with pictures of luxury cars or houses and some fraudsters even go for celebrity endorsements with the aim of turning social media followers into customers.
People who don’t have the patience required to make money from forex trading may resort to perpetuating forex scams. Some do this because they already have some technical knowledge of forex trading.
The UK’s FCA had reported that over £27 million were lost by UK citizens to online forex and crypto scams in 2018-2019.
While most of the retail traders are now educated enough to figure out such scams & only deal with reputed brokers; but still many people, especially in Asia, Africa & even in developed countries fall for scams that are easy to spot if you are aware.
Forex traders should not get carried away by bogus promises; in this article, we will discuss some forex scams and how to detect them.
Retail forex & CFD trading is regulated in some parts of the world by regulatory authorities. The United Kingdom has the Financial Conduct Authority (FCA), Australia has the Australia Securities and Investment Commission (ASIC), Cyprus has the Cyprus Securities and Exchange Commission (CYSEC), FSCA in South Africa, CMA in Kenya, etc.
However, retail forex trading is not regulated in many countries and so any forex broker operating in unregulated regions is doing so with a foreign license from mostly offshore regulators.
A study by Safe Forex Brokers UK found that in most of Africa & Asia, forex trading is unregulated, but many foreign CFD brokers still accept clients from this region. These brokers don’t just accept, but actively promote forex without restrictions.
While there are some reputed forex brokers with a track record of being well regulated in multiple regions, most of the brokers in these regions are not regulated by any regulatory body.
Unlicensed brokers operate brokerage firms and offer trading platforms to the public and when a trader pays money into the account, he is not able to withdraw it.
As a rule of thumb, before patronizing any forex broker anywhere in the world, you should go to the relevant regulator's website and check for a list of licensed forex brokers in your country.
If forex & CFD trading is illegal in your country, then you should avoid trading via foreign brokers. In case it is a grey area, as in, there is a lack of regulation, but it is not illegal, and you still want to trade, in that case, avoid any brokers that are not multi-regulated.
Always verify the broker on the Regulator’s website to ensure that they are authorized & legal.
Some scammers sell trading signals and robots configured to tell a trader when to place a trade or close a position. These forex robots are better used in technical analysis to assist you but should not be relied on to predict the market.
The sellers may say their signals offer 98% success rates and request a fee from the trader. After paying the fee, the trader begins to receive email notifications each time a new signal comes out and the trader places a trade using this signal information.
The problem is most times after parting with cash a few email signal notifications are sent and then the scammer cuts off communication with the trader. Also, there is no guarantee that these signals work.
These scams target more inexperienced traders who are in a hurry to make profits and are looking for a passive technique that guarantees success.
Most of the Standard Accounts at forex brokers are spread only with zero commissions but they make up for it in the spread. The spread is the difference between the bid and asks the price of a currency pair.
Major currency pairs like EUR/USD have tighter spreads because they are traded in high volumes while emerging market currency pairs have larger spreads.
When the price is manipulated, you will see major currency pairs like the EUR/USD having very large spreads.
The broker could say that their spread is higher than what other brokers offer because of the Bank they are dealing with on the backend and even make up other reasons. Traders should check with other brokers and see what spread they are offering for the currency pair in question.
Also, in between the time a trade is opened and when it is executed, the bid & ask rates of a currency pair can change. This is referred to as slippage.
It could occur due to a network glitch that slows down trade execution speed and sometimes it’s just currency risk that a trader is exposed to in a volatile forex market.
A scam forex broker could capitalize on this and refuse to execute orders on time till the exchange rate of a currency pair falls thereby triggering the traders stop-loss order which now becomes a market order, and the trader is forced to cut his losses and sell off the currency pair at the next available price which the broker buys at a discount.
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To avoid this some brokers like CMC markets, offer guaranteed stop-loss orders (GSLOs) that a trader can buy at a refundable premium to hedge against the risk of slippage.
Traders should always visit online App stores and read user reviews about their broker's App to see if any user is complaining about manipulation of prices or any illegal activity. This visit should be done regularly.
High Yield Investment Programs (HYIPs) such as Ponzi schemes pool together resources from the unsuspecting public to invest in forex trading or other markers with a promise that the profit will be shared amongst all the contributors. They operate like funds where the capital is gathered to invest on behalf of clients.
They also promise very high returns and begin to pay returns on investment to the initial contributors.
Their victims get lured in because Ponzi schemes recycle the money gotten from initial contributors and use it to pay new contributors and so give the illusion that it is legitimate. When investors see their investment grow, they are convinced to put more of their money into the scheme.
After accumulating huge funds from their victims, the payments stop, and the Ponzi scheme managers close shop and run away.
Such forex scams are very common in African countries. For example, there was a recent scam related to MBA Forex which mostly targeted investors in Nigeria.
Forex pyramid schemes and multi-level marketing usually involve a forex company that has a trading platform. They need to attract more traders to their platform so the pyramid technique is used to incentivize traders.
In this technique, the person on top recruits two people who will be below him on the pyramid. Those two people below him also recruit three people and so the pyramid continues to grow.
For every recruitment, the person at the top gets a paid commission and so forth. The higher you are on the pyramid the more commission you get paid.
A scammer could use a scheme like this to lure victims to patronize his company, sell forex videos, signals, and materials to them and then disappear with their money after a while.
Initial benefactors of HYIPs may still have their earnings clawed back from them when investigations start so it’s better not to try to get lucky and avoid these HYIPs entirely.
Investors should always ask, check and confirm if the company that you are dealing with is licensed to operate in your country & offer investment advice. Are they regulated by relevant regulatory authorities to accept funds from the public for investments?
Forex markets can be very volatile and there is a high risk of losses with margin trading. That is why brokers are required by major regulators to put up risk statements on their websites to warn potential traders about the dangers they face trading forex & CFDs.
It is therefore a red flag if a broker is seen promising bonuses such as a $50 bonus on account opening, risk-free trading, or 80% returns on purchasing trading signals.
These promises of rewards are red herrings meant to distract the trader from carrying out necessary due diligence. Most of the major regulators don’t allow brokers to offer any offers.
A forex trader who is either inexperienced or too busy to trade may open a trading account and hand it over to a professional account manager to trade on his behalf. These professionals charge fees for their services.
Scammers have also capitalized on this to offer to manage accounts for traders and end up cheating them. They could place trades that are not in the client’s best interest or outright run away with the clients’ money.
Traders should investigate the account manager’s history to find out his success rate in the past, and look at their risk management strategy, past drawdowns to check how efficient the fund manager is.
The account manager also must be licensed to operate by the relevant authorities.
Most motivational forex videos and adverts trending online usually show luxury Yachts, Cars, etc. and the intention is to make the viewer feel the speaker/guru acquired all those items from forex trading gains.
These so-called gurus don’t talk about the downsides of trading and focus only on the benefits. Some of them operate or work together with unlicensed brokerages and end up defrauding investors.
Market regulators around the world have mandated forex brokers to put up risk statements on their websites. This statement highlights the risks a trader faces when trading and some regulators even went a step further to mandate brokers to state the percentage of people who lose money trading with them. This is usually found at the bottom of the broker’s website page.
The regulators have even put restrictions on leverage that CFD brokers can offer to retail traders.
Social media gurus do not conform to this regulatory requirement as they claim their programs are almost risk-free, which is simply not possible. If it were true, they wouldn’t be out sharing the so-called winning formula.
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Don’t blindly trust any advice on social media. Forex trading risks are very hard to manage & using margin to trade is extremely risky. Source: Financemagnet;