How to identify and protect yourself against forex scams

Author: Forex Live | Category: Education

Some pointers on how to not fall prey to scams in the forex industry

The retail forex industry has boomed in recent years and is now a multi-billion-dollar industry - with hundreds of regulated brokers and daily trading volumes of almost $200 billion dollars. 

The volume of trading in forex has grown even more during the prevailing coronavirus pandemic as reported by industry analysts & leading brokerages in their Q1 2020 earnings.

Retail traders are attracted more to markets during higher volatility & falling stock, commodity prices during Coronavirus.

While Forex is a legitimate instrument, but some industry malpractice participants and con artists are taking advantage of its complexity & lack of knowledge among general public & new investors to scam & fool them.

Though, many common scams related to forex have been reduced by efforts from regulators around the world but still there are some scams that still find victims. Sometimes from lack of proper information on scams & sometimes due to lack of local regulations. 

While many of the scams in the forex market are no longer as pervasive as they used to be - mostly due to more regulated environment, but some problems still exist.

South African broker comparison website Forex Brokers SA looked at some of the common types of forex scams that you need to know about and how you can protect yourself against them.

4 Common Forex Industry Scams


1) Unregulated and Dishonest Brokers

An unregulated broker is a broker that is not regulated under any recognized jurisdiction or with country's financial market regulator, so it can't be held accountable by a governing government authority in your country.

These brokers are often offshore brokers and most of these brokers are registered in a jurisdiction like some island nation that is leaner to their business models. While some brokers may not even be regulated anywhere & just provide fake license.

While there are also cases of some regulated brokers that may sign up some of their clients in offshore jurisdictions to offer high leverage or to evade their regulatory responsibilities.

If an unregulated broker commits fraud or scams you or indulges in malpractices in any manner, you have little or no recourse against them. This is because there is an absence of laws that protect you from such malpractices. 

There are several ways in which such brokers can scam you. They can take your money using software "glitches" or "bugs" as an excuse, or they can fail to process your withdrawal which means your money might get stuck with them, or they can fail to process your trades in the market.

Here are some of the malpractices that you must look out for in your broker:

B1

Malpractices are not limited to those listed above only. So, you must be very careful while choosing a broker.

B2

2) Fake Forex Signal Seller Scams

A forex signal seller is an institution or an individual that offers advice on when to buy or sell particular currency pairs.

A signal seller typically claims to rely on market analysis and news to judge the right time to trade in currency pairs. They may offer trading advice through automatic messages or may manually send you messages.

Signal sellers are known to be often wrong and they may give advice that could lead to large losses for you.

Do not trust signal sellers who promise advice that can regularly outperform the market. Only listen to signal sellers that are approved financial advisors & that suit your own analysis.

3) Forex Robot & Trading System Scams

In these scams, you may be approached by someone asking you to buy a robot or an automatic trader that can trade for you. They will say that this robot allows you to earn money while you sleep.

The robot is supposed to be able to conduct trade in your stead that generate a profitable yield.

However, most of these robots never actually deliver as promised and you may end up with significant losses. These trading systems are never reviewed or tested by independent agencies.

4) Untrustworthy Investment Schemes & Funds

There are several entities & individuals that promise to offer get-rich-quick investment schemes through forex and cryptocurrency - that are not credible.

You should be wary of any investment schemes that promise guaranteed returns or outsize profits.

Returns or profits in the forex market can never be guaranteed and you should always remember that your investments are subject to market risk. Never trust any company or individual that claims otherwise.

For example, you may be told about a 'forex management fund' that promises 50% annual returns. You just have to send them your money and it will be managed by an investment expert with a stellar record.

These offers are always scam and you should never trust them. The "stellar record" of the investment expert is usually fake and unverifiable and you will likely lose all your money.

Spot these early signs of scams


1. Promises of guaranteed returns

There are several scammers who claim to offer trading systems or investment education & advice with guaranteed results - some even offer services to invest for you. You need to be wary of all of them.

You should never invest in what you don't know - only based on an advice or through others.

Regardless of what you are being sold in the forex industry (investment scheme or course or system) or whatever success rate, backing the seller claims - always ask for proof of the credibility of the seller.

When you ask them, most won't answer or show you proof.

These sellers or scammers are known as "snake oil" merchants because there is no proof of the usefulness of what they sell or their trading background.

2. Asking for Personal Information

Only give your personal information to vendors who you completely trust and who are established in the market. Your personal information is valuable and can be misused.

Before providing your personal information, you should ask for risk disclosure document. Always read the entire document before ascertaining whether to provide your personal information or not.

3. Advise out of Nowhere on the Internet

If you are asked to participate in a free webinar, or are offered free courses or investment advice, then it is probably a scam. Do not trust messages or emails that approach you from out of nowhere.

While no reliable industry source or company will contact you in such way, but even if you get contacted, you should only trust communication from credible sources that at least have a proper online presence and long business standing, reputation & creditability.

Additionally, you should check their history, management, regulation, office address, contact information, and reviews.

Do not trust information that is given to you for free and be sure to verify it from 3rd party reliable industry sources and do not provide your personal details in return.

4. Brokers that Limit Withdrawals

Do not work with a broker or an entity or individual who tries to limit your withdrawals from your own account held with them.

This is very common in investment scams & with fake brokers; most people get to know about this when they request their withdrawals - many would experience issues in their first big withdrawal, and they will give all kinds of reasons for delays.

You should always read the reviews about the entity online before depositing.

If a forex broker is using any reason to place restrictions on the amount you can withdraw, you should take it as a red signal. The forex broker may be financially unstable or indulging in malpractice.

Once you start working with a new broker, try and make a test withdrawal to see if it is processed smoothly.

General rules to follow to Avoid Falling for Such Forex Scams

1. Educate Yourself 

The first step to becoming a forex trader is to educate yourself on the practical know-how and nitty-gritty of the industry.

You need to familiarise yourself on how the industry works and how experienced traders conduct their activities.

Start by learning the basics of Forex Trading including technical analysis, fundamentals & the risks of forex trading, and the market players like regulators, brokers.

You may want to consult a professional investment adviser on how to best approach the forex industry.

2. Start with a Demo Account

The best way to learn how to trade is to use a demo account that several notable brokers offer. A demo account gives you the practical experience of trading in a near real market environment without the risk of losing your money.

With demo trade, you can practice - when and how to enter your orders, how to use risk protection, and what kind of research, strategy & market analysis to implement.

It's important to note that demo trading environment may greatly differ from real market conditions. Choosing a reliable & genuine broker will ensure that there is lower discrepancy in demo & live conditions.

Once you are practiced in demo for few months, you should go live with only little capital that you feel comfortable with.

3. Do Not Trust Opportunities that seem too good to be true

The forex industry is full of scammers that make promises that sound too good to be true.

As a rule of thumb, you should never trust anyone that is making such a promise.

To be successful in the forex industry you need to have years of experience and volumes of knowledge. Remember that there is no shortcut in the forex industry.

4. Only Trade with Regulated Entities & Brokers

As already mentioned, it is essential that you should only trade with brokers who are regulated by a government authority.

Different regulators operate in different countries and are known by different names. And some regions have their collective financial agencies & policies like: ESMA & MiFID in case of EU.

Major forex market regulators include: TheFCA of UK, CySEC of Cyprus, BaFin in Germany, ASIC in Australia, NFA of the US, FSCA in South Africa, CMA in Kenya.

Check for regulator in your region and search their policies and signup with a regulated entity licensed by them.

5. Read Reviews and Compare Fees

Before settling on a forex broker, you must read their reviews and check trustworthy information websites, forums for user reviews & other trader experiences.

No forex broker will have overwhelmingly positive reviews, but you can always find trustworthy brokers with a good history, near flawless track record.

Further, you should compare the brokerage fees and other hidden fees that are charged by each broker.

6. Conduct Proper Risk Management and Assessment

Even if you are sure about all aspects of your broker, you still need to know all the risks, assess and manage them properly.

It is essential for all traders to do research on proper risk management techniques such as stop-loss orders and negative balance protection.

Practising risk management techniques will ensure that you keep trading for a long time without sustaining any heavy losses. Every good trader has inculcated a habit of risk management and you should too.
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