Discussion: Spotting a Forex Scam
In the article how to choose the best forex broker, we have mentioned about evaluating the authenticity of a broker. Some of our readers sent us questions that how they can identify scams that are happening in the name of forex trading so that they can stay away from it (or at worst case, get out of a forex scam).
So we thought to write a detailed article on the topic: how to spot forex scams that still happens even after strong financial regulations.
Is Forex a Scam?
It is hundred percent true that Forex is NOT a scam. But the problem is that there are plenty of scams that linked with forex trading. In past decades, regulators have significantly caught up to the scammers, therefore, making them increasingly rare at present. But we all know, where there is lots of money, there exists enemies to that money. So, although very rare, scammers still exists.
First, we must know that why people believe forex to be a scam?
All these started in 1999 when the Forex trading became available to retail traders. The next few years witnessed a rise in the number of fraud brokers that seem to shut up their business without notice. Majority of those brokers were from non-regulated countries. They used to charge few thousand dollars in fees and brokerages, and then suddenly disappear.
These scenarios from the past forces majority of us to believe that forex is a scam.
But the picture started to change from since 2007. Indeed, at present, the number of forex scammers reduces drastically.
Oh! Come on... They still exist... That’s why we are writing this article.
So, the conclusion is that the Forex itself is a legitimate endeavor. In fact, forex trading is a real profitable business if you do it correctly.
How Does Forex Scams Work?
Usually, forex scams offer you some investment opportunities that are too-good-to-be-true. They used that as a honeypot to attract you towards that investment opportunity.
Especially, if you are a beginner and lack trading experience, scammers will try to exploit your optimism and fears.
That is the first step they take to step in and make you an exciting always-winning offer. If you start believing those dreamy offers, you will fall under their control.
That's the reason we repeatedly tell you to keep in mind that the Forex trading is of extremely high risk. No one in this world can give you a guarantee of profit. Losses are inevitable. So you must learn money management. Just keep in mind that forex trading is not a get rich quick scheme. You cannot get an unexpected outcome just by depending on others.
How to Spot Forex Scams?
Identifying a forex scam is quite difficult. In fact, there is no single way to spot forex scams.
There are seven most common characteristics that cover 99% of the scams that run in parallel with the forex market. The best way for you is to match those characteristics and try to avoid those scammers.
Here, I’m listing those common tricks that most scammers used to trap traders.
Forex Trading Scam 01: Guarantee of Unexpectedly High Returns
In this type of forex scam, the broker may describe you some investment opportunities that have high returns. Usually, they show a fixed monthly income of 20%-40% of your capital investment.
They may even tell you that you will not need any kind of trading knowledge for investing with them and you will get handsome returns just by doing simple things.
Sounds Crazy, Rights?
Actually, these strategies are similar to honeypots. They use these attractive investment opportunities to attract customers. Usually, they target beginner investors or someone who lacks knowledge about trading.
Forex Trading Scam 02: PAMM Account / Forex Mutual Fund
PAMM stands for Percent Allocation Management Module. It is also sometimes referred to as Forex Mutual Fund. This is the newest type of scam that is designed to attract technical peoples.
In this scam, the broker will offer you the opportunity to have your forex trades managed by highly-skilled Forex traders who can provide outstanding returns. They will show you that your small account will be linked to another high-value account and you will get a profit percentage according to your investment amount.
They may also show you an attractive profit of 30%-50% on your investment so that it gets hard for you to reject the offer. To support their statement, they will also show you some false records on their website. Remember that majority of these offers are scams, and you will also lose your capital if you ever believe them.
Though there are some authentic brokers who offer real PAMM account, 99% of the other offers are false promises. Also, the actual return you can get from a real PAMM account is about 2%-5% per month (Max).
Forex Trading Scam 03: Automatic Robots and EA
This is a highly technical scam that is running in the new generation forex industry. These scammers promote their system’s ability to generate automatic trades that can make you reach even while you sleep. Previously it was termed as Expert Advisor Systems (EA) and presently it is popular in a name of “automatic robot”. They will promote fake historical data and try to sell you those robots for a few thousand bucks.
We are not telling you that robots do not work, they do work in certain market conditions but they can’t make you rich (but can make you poor). Also, they are not that expensive. In a normal market, the price of a trading robot is not more than $500.
Forex Scam 04: Forex Point-Spread Scam/Market Manipulator
The oldest type of forex scam that is based on manipulation of bid/ask spreads in the computerized terminal. These spreads usually differ between currency pairs. The scam occurs when the spread differs widely among brokers. Or even in some cases, the broker manipulates the price chart to hit your stop loss. They may even delay the execution of your trade so that you make losses.
This type of scam includes many other frauds such as forex bucket shop, SL hunter etc.
The best way to detect this type of scam is to compare the price chart of that broker with the price chart of some other reputed broker. If charts differ drastically (like more than 10 pips) then you are probably a victim of forex scam. Also, watch the delay occurring in order execution, if you found frequent delays then think about changing your broker.
Forex Scam 05: The Signal-Seller Scam / Forex Tips
Fundamentally, signal sellers offer a system that pretends to identify favorable times for buying or selling a currency pair. The system may be automated or manual (the trader enters the info and gets a result).
Some systems depend on technical analyses, others rely on breaking news and some may employ a combination of this two. But they all guarantee to provide information that will help you to identify favorable trading opportunities. These signal sellers or tips providers usually charge a daily, weekly or monthly fee for their services.
Though not all of them are fraud, 99% are. They used to forward messages that they receive from other tip providers without doing an actual market analysis.
The best way to check if a signal seller can benefit you is very simple. Just ask them to provide 2-3 demo signals and test those signals in your demo trading account. Be patient, and you'll find out that if those predictive signals really work for you or that it doesn't.
Forex Scam 06: Deposit Bonus / Double Bonus
This is the starting of a bigger scam. Any broker offering you a double bonus, or any amount of deposit bonus or any free account balance are probably a fraud one.
The fee of brokers is very small, in fact, they profit in penny amount. Brokers usually profit from the spread. Now think about that a 2 pip spread which would give him a profit of approx $0.0002 per transaction [See our guide on calculating pip value]. Then how and why he will provide you a $100 bonus for trading??? It’s just a scam.
When you will try to withdraw your profit, they will just deny that showing you some terms and conditions. Thus, you will also lose your capital.
Forex Scam 07: Holy Grail Scam/ Ultimate Trading System
Holy Grail is thought to be a cup that Jesus Christ used in his Last Supper. It is believed that the Holy Grail is the source of eternal life.
Every new investor, when first starts to learn technical analysis, used to search for a Holy Grail system can give 100% positive results. So that they can win every trade they place by referring to that system.
Unfortunately, there exists nothing that can give you 100% correct prediction.
But, this is where this forex scam starts. These scammers target beginner and inexperienced traders who are searching for a full-proof system. They will promote their system by showing false data and also may include some positive testimonials from different professional looking paid models.
If you start believing them, you are in their control. They will sell their junk system to you in exchange for a hefty fee, usually, $10K or more.
We are again telling you that there is no such thing as an ultimate trading system. Learn how to trade and do it on your own. Don’t make yourself available to these scammers.
Identifying Forex Scams - Final Thoughts
Identifying a Forex scam, can be both difficult and time-consuming. But to save your hard earned money from those scammers you have to do that difficult job before investing.
Don't fall into any investment opportunity which assures you to provide a super-attractive return.
So, before depositing your hard-earned money with just anyone, be sure to do your own research so that you can avoid fraudulent brokers and scammers. Just keep in mind that, despite strict regulations, there are plenty out there.
Lean the forex trading properly, do not search for any shortcuts, and stay away from these scammers.
We hope that you have enjoyed the above article explaining how to spot a forex scam. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about any of these scams. Also, let us know if you have any time offered with any of the above opportunities by a scammer. This will help others to stay safe from a forex trading scam.