In recent years, the forex market has taken the world by storm. Forex trading is gaining popularity and the main reason being it is the world’s most liquid market. Statistics show that more than $5.3 trillion is traded every day, dwarfing any other Stock Exchange in size. When it comes to forex trading, just about anyone can try their hand on this global trading platform. It’s not all rainbows and sunshine though, as forex trading is ripe for scams.
However, before we get into forex trading scams, let us first understand what forex trading is all about.
Forex Trading Explained
The word forex market is short for foreign exchange market. Forex trading in simple terms means the buying and selling of global currencies. Traders, also known as currency speculators, gain profits from the difference in exchange rates and valuations. Exchange rates change by the second and traders buy currencies hoping to sell them at a higher price later on. Constant price fluctuations can make an individual, institutions, and companies a great deal of money.
Newcomers are encouraged to trade through brokers who are well versed in the market. In turn, these brokers make a commission from each transaction. To make money from forex trading, you require significant changes in exchange rates which will account for commissions your broker will take from transactions. It is important to note that the forex market is a legitimate endeavor. It is not a way to ‘get-rich-overnight’ kind of business. Instead, you need to treat it as a real business.
The forex market is volatile which makes forex trading so attractive to traders since it can bring about greater chances of high profits. On the other hand, the volatility can also magnify losses if the market moves against you.
What Are Forex Trading Scams?
As mentioned earlier, the foreign exchange market is a legitimate trading market. Without this market, it would be impossible to do cross border business, sell exports, and buy imports. With more and more people getting into this lucrative business, more people are questioning the whole concept and mechanism of forex. Some people wonder whether the business is a scam hiding behind all the profits and success forex advertisements.
The truth is that there have been cases on the rise about brokers who prey on less informed traders. However, you should be able to distinguish between an inexperienced broker and a fraudulent one. A poorly run brokerage will lead to more losses than profits. On the other hand, scammers take advantage of the complexities of the forex market. They maliciously withhold important information about the market. They claim that their software robot, information or their scheme will bring success.
Types of Forex Trading Scams
● Ponzi or pyramid schemes
This is a common form of scam where fraudulent brokers promise high returns from a small investment that is required upfront. Initially, the investor will gain some returns and this motivates him or her to recruit friends and family into the scheme. Usually, the investment opportunity advertised does not exist and returns are funded by new members joining the scheme. When the number of investors starts going down, the scammers take the money and close the scheme.
● Managed accounts
This type of scam involves a fraudulent broker taking an investor’s money and using it for themselves instead of investing it. When the investor asks for their money back, the broker is not able to provide the funds.
● Software scams
These types of scammers use fake software to generate misleading figures to convince customers to invest with them. Understand that no robot is able to adapt or thrive in all environments and markets.
Other types of forex trading scams include:
- Manipulation of bid/ask spreads
- High yield investment programs
- Signal selling
- Boiler room scams
How to Avoid Forex Trading Scams
To avoid being scammed, you need to learn all about trading on the forex market. Find a broker or teacher of forex that is trustworthy. You need to be able to tell when your broker has made profits when they say they have. Don’t just rely on their word of mouth. Also, do not trust automated computer programs. Instead, learn to make your own analysis.
When trading through a company, make sure you check its authenticity. Check the location of the company and where the business is registered. Forex scammers often prefer operating in locations where the local law makes it hard for them to be prosecuted internationally.
Factors to Consider When Choosing a Forex Trader
The forex market is very competitive and choosing a broker to trade with can be a daunting task. Let’s take a look at some of the qualities you should consider when picking a legitimate forex broker.
- Ensure that the broker is a member of a regulatory body
- Honest brokers will allow you to deposit and withdraw your funds freely
- The broker’s trading platform should be stable and user-friendly and,
- The broker should easily be reached in case of problems