Published on November 12th, 2020 | by Sunit Nandi0
How to Spot a Forex Trading Scam
Just like any other business, Forex has its share of scams. Their prevalence often makes the average person wonder whether Forex is legit at all. There are three major types of Forex scams that people fall for. By making an effort to understand how they work, you can see the pattern and hopefully be on the lookout for similar shenanigans.
1. Forex Robot Scams
A robot is a computer program that uses algorithms to make decisions about when and where to enter or exit trades. The concept itself is entirely legitimate. Forex robots do exist and can work quite well. Expert Advisors (EAs) on the MetaTrader 4 and MetaTrader 5 platforms are examples of this. However, there are MetaTrader 4 scams that take advantage of this functionality and claim to provide performance that they simply cannot achieve. Here are some things to look out for when evaluating a Forex robot to see if it could be part of a scam.
- Overly emotional marketing. Is the developer of a Forex robot resorting to telling you how their robot can change your life or how big your garage will have to be to hold all the Ferraris you’ll own? It’s a good sign that they either don’t have the numbers to back up the performance they are claiming or that the numbers they have are not legitimate.
- Unrealistic performance metrics. Forex robots that claim to get insanely high returns can be totally bogus.
- Using an unregulated broker or being on a warning list. Some Forex robots show outstanding returns on brokers that are not regulated by any major authority. Such a situation should make you question whether they are using an account with the same spreads you would be getting if you opened an account. It seems unlikely that someone running a legitimate Forex robot would want to use it on an unregulated broker. Many Forex regulatory agencies, such as the FCA (Financial Conduct Agency), have warning lists with businesses or brokers that are suspicious or known to be perpetrators of scams.
2. Forex Signal Seller Scams
Unlike Forex robots, signal sellers send you buy or sell signals, and it is up to you to trade on them. Trading signals contain all the information you need to carry out a trade. They provide the currency pair, entry, exit, stop loss, and take profit levels. Like Forex robots, these signal providers can also be scams, and here are some things to look out for.
- No live or verified track record. Any signal provider should be happy to give you a link to their track record in real-time if they are, in fact, providing a legitimate product. If they are hesitant to do so or if the statistics they do give are for a demo account and not a live one, you should be wary of becoming involved.
- Subscription fees. Some signal providers will only give you verification of their trading results if you subscribe to their service. Furthermore, whether their signals are profitable or not, their business will always be beneficial because of the fees they are earning. However, a legitimate signal provider will want to keep you profitable so that they can continue to earn the subscription fee from you.
- Signals specific to one broker. Some Forex signal providers offer signals only if you sign up with a particular broker. There is no reason why Forex signals should be specific to a specific broker except that the signal provider gets a kickback for sending you there. This is not to say that this is a scam in and of itself; it is just a particular business model.
3. Phony Forex Investment Management Funds
Forex investment funds are usually presented to a potential investor as a chance to have an expert professional Forex trader manage your account. Many of these so-called professionals are pros alright, but they are far from experts. Their con often consists of exaggerated claims of performance or simply a referral to another trader from which the “fund manager” gets a kickback.
- Unrealistic performance claims. If a fund manager claims he can more than double your money over the course of a year, it should sound too good to be true. And we know if something is too good to be true, it probably is.
- Referral links to open an account. If a fund manager wants you to open and fund an account with particular referral links, this likely means that they are getting a commission from the broker you are signing up with. So, they get a fee for each position opened or closed, whether the trades are winners or losers. This creates a conflict of interest for the so-called fund manager, as they have no interest in whether your trades profit or lose.
- Hard to get ahold of. If your fund manager has reviews or word-of-mouth testimonials that suggest they are hard to get ahold of, that is a sign that they are not on the up and up. Legitimate financial professionals should be able to address any concerns you have about your investments, especially when they present themselves as taking on this responsibility when you open an account with them.
- What is a Margin Call? How and Why Does it Happen? A margin call occurs when the used margin in your account is not adequate to cover your trades. When this occurs, your broker forcibly closes your trades because you no longer have sufficient collateral to back the funds you borrowed to open your positions. You can think of the used margin as a good faith deposit that allows you to keep a position open using the leverage provided by the broker. Once you begin to lose so much that your good faith deposit begins to be lost, the broker steps in and protects themselves. Margin calls can be avoided by prudent usage of stop loss orders. When your account is adequately funded, there should be no reason to suffer losses so significant as to require a margin call. Leverage is a tool and a powerful one. It can greatly multiply your profits, but can also greatly multiply your losses. Set your stop loss on every trade you open and have sufficient funds to give you the flexibility to set it where you need to. The Ins and Outs of Forex Trading Successful Forex trading requires a good grounding in fundamental analysis and technical analysis, as well as an understanding of the mechanics of trading itself on the particular platform provided by the broker with whom you have opened an account. You should understand the different order types provided by the platform: limit, stop, trailing stop and market. You should be able to make sense of the candlestick charts that are typically used in Forex and be familiar with at least the common indicators like the MACD (Moving Average Convergence/Divergence) and the Relative Strength Indicator (RSI). Forex trading is not gambling. You should trade a demo account until you feel completely comfortable trading with real money. There is also skill involved in executing a trade properly. Prudent traders will set stop loss and take profit levels when they open a trade. It’s not just picking a winner and a loser; you must also determine the best time to buy and the best time to sell. How to Become a Forex Currency Trader To be successful at Forex trading, you will need a sufficiently-funded account. Some experts claim that as much as $10,000 to $20,000 is required to adequately fund a Forex account. Having more funds is better because this means that you will have enough cushion in case of losing trades. If you go on a losing streak, you will be able to recover. If you had a small, underfunded account, your account could be wiped out quickly and you would not have the flexibility you need to set reasonable stop losses before your margin call is triggered and your trade is automatically closed. You will need to pick a Forex broker. You should only choose legitimate Forex brokers, who are reputable and regulated. Brokers without verification processes are dead giveaways as unregulated brokers because regulators require brokers to perform KYC and other identify verification processes to prevent money laundering. Brokers who are regulated are subject to financial requirements that protect clients from conflicts of interest and financial insolvency on the part of the broker. Client funds are also protected up to a certain amount if the broker goes out of business.