Top 5 Forex Scams & How to Avoid Them

The post Top 5 Forex Scams & How to Avoid Them by Stjepan Kalinic appeared first on Benzinga. Visit Benzinga to get more great content like this.

“Loss” is a short but fearsome word. The Napoleon among the nouns. And it is almost always negative. This is why, as Eric Weiner argues, we do not experience a loss — we suffer a loss. The event comes onto us suddenly, and then we have to live it out gradually. Although occasional losses in investing are a part of the process, losses due to forex trading scams can be devastating. This article outlines some of the most common warning signs of forex scams — how they work and how to detect them.

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Scam #1: PAMM Scam

Percentage allocation management module (PAMM) is a practice that allows attaching your account to a different one to reproduce the performance — or in simpler terms, copy the trades.

This is a legit practice that works through a limited power of attorney, yet it is often abused. There are many services with artificially inflated or fake results. In the worst scenario, a PAMM owner can be the unregulated offshore broker itself. Through a broker’s access to the software, it is easy enough to manipulate the showcase account and lure investors.

Once enough money is following the fake account, all that remains is to crash the account or outright steal the client’s money.

Extra consideration: If you think you will quickly stop the account and request a withdrawal if things go south, you are still not safe. When the perfect forex trading scam happens, a broker extends the trading session in order not to honor the withdrawal requests before planned losses occur.

Scam #2: Expert Advisor Scam (Robot Scam)

Expert Advisor (EA) is a trading algorithm designed to automatically buy or sell on the forex market. Although there are legit automated systems out there, EA scams are among the most popular ones due to their subtlety.

The main problem with an EA is that it is hard to verify the results, as backtesting is not as reliable as forward testing. Sellers often promise high, unrealistic returns —  while the system might work for a time, if it is not self-optimizing (usually not), eventually it will fail due to changing market conditions.

In the “perfect scam” scenario, the EA seller will direct you to open an account with a market maker broker (a broker that trades against your positions) or even a shady offshore broker for a fee, so when the EA eventually fails, you will use your trading account as well.

Scam #3: Signal Scam

This one is like the EA scam but with your participation. You will receive signals —  direct instructions on when to buy or sell that will supposedly create profits. Perpetrators will often claim outrageous success rates and high returns. In turn, you will need to pay the membership fees or deposit your money through affiliate links to certain brokers (usually offshore and unregulated). Often those brokers will be the market makers whose main interest is for you to lose money.

This can be particularly devastating to gullible investors who will deposit the money to the offshore broker and allow the “broker-agent” to trade that money, promising high returns. After a short good period (with fake results), an investor will be asked to deposit even more money. This cycle repeats until the investor requests a significant profit withdrawal. At that point the scammer agent disappears, the offshore broker stops responding, and your money is gone.

Scam #4: Broker Scam

There are 3 main types of manipulation that a broker can do to conceal their exposure, disrupt your trading or outright steal your money. Keep in mind this includes the Market Maker type of broker —  which is in direct conflict of interest with your trading. (When you win, they lose money.)

• Price manipulation: While not as prevalent as it used to be, brokers still manipulate prices to push the clients out of their positions. In that scenario, the broker artificially manipulates the price so that a short-term spike, which sometimes lasts seconds, pushes your order to the stop loss.

This manipulation is evident when comparing different price feeds:

Price manipulation on the Gold chart; source: forextrader.live (used with permission)

• Routing manipulation: While a broker might claim to be a straight-through processing (STP) or electronic communication network (ECN) broker, they might decide to not route them to the market liquidity provider but to a market maker, or keep them “in house“ on the B-book.

This manipulation prevents your actions to influence the market price, essentially cutting you off from the real market.

• Operational disruption: This includes anything that prevents you from conducting regular trading operations —  execution delay, slippage, requotes or random disconnections. This is sometimes done by the broker to play mental games on traders. Emotional traders are more likely to commit mistakes, thus giving their money to the brokers that kept their traders on the B-book.

Scam #5: Education Program Scam

Caveat emptor! Let the buyer beware!

The internet is swarming with various courses and training programs. Although there are quality materials out there, occasionally you will find overpriced courses offering repacked free courses.

While technically not illegal, this is highly unethical behavior that gives a bad reputation to the financial education industry.

How to Spot and Avoid Forex Scams

Most (if not all) forex scams can be avoided with precautions and common sense. A rule of thumb is to follow the money.

Three questions to ask in any situation:

• What am I giving money to (for any product or service)?
• Where is my money going (for any deposit)?
• Is this too good to be true? (It usually is.)

The following table shows how routing the potential victims toward unregulated brokers is the culprit in the majority of popular scams.

Just like “All roads lead to Rome,” in the forex world all roads eventually lead to the broker. This is why broker research is of the highest importance. Yet, even a reputable broker might not save you from being overcharged for education —  so before purchasing such a product, familiarize yourself with the free basic education or check out our guide on the best forex trading courses.

For learning more on crypto, check out the top 5 Bitcoin and crypto scams.

Forex Broker Regulations

As forex grew in popularity over the years, regulatory bodies of the largest markets stepped in to establish the legal framework. This only allows companies with vetted business practices to conduct their business in those markets.

Brokers are required to submit to various regulations —  minimum capital requirements, client funds segregation, funds insurance, retail leverage limitations and others. The most used regulatory agencies in the world are Commodity Futures Trading Commission (CTFC) and National Futures Association NFA (U.S.), CySEC (Cyprus), FCA (U.K.), ASIC (Australia) and BaFin (Germany).

Best and Trusted Forex Brokers

Don’t fall victim to forex scams. Using a regulated, trustworthy broker is necessary with any financial instrument but especially when trading forex. In the list below you can find our comparison of the best forex brokers.

Don’t Fall Victim to Fraudsters

Few things have changed the world as much as globalization. The direct effect of it is improving quality of life due to lower costs because of specialized production.

And, that is impossible without foreign exchange markets —  as goods cannot change hands without currencies changing hands. This makes forex one of the largest, most lucrative markets in the world. However, you should remain guarded, do your due diligence and avoid getting wrapped up in get-rich-quick schemes. Yes, someone like George Soros made $1 billion in a day shorting the British Pound, but that’s the biggest aberration and exception to the rules of investing you’ll find. Most of the time, you take it slow, make measured investments and build your portfolio over a long period of time—not with a “scheme” that turns out to be forex scams.

Yet, this attracts scammers as well. The psychology of greed is well documented, and scammers know what to do to attract interest. So, next time you spot an offer you cannot refuse,  ask yourself some of the questions raised in this article. It might end up being just like a pot of gold at the end of the rainbow —  a nice idea, but still just an illusion.

Frequently Asked Questions

The post Top 5 Forex Scams & How to Avoid Them by Stjepan Kalinic appeared first on Benzinga. Visit Benzinga to get more great content like this.