Forex Trading Scams to Watch

The foreign exchange (forex) market involves very active trading, at levels of over $1.8 trillion each day as of January 2018. This doesn't even include futures and currency options, which put the trading at closer to $5 trillion daily. 

The forex market hasn't had much in the way of regulation historically, although things have started to improve in recent years. Unfortunately, the opportunity still exists for many forex scams that tempt new investors with a promise of quick fortunes through "secret trading formulas," algorithm-based "proprietary" trading methodologies, or "forex robots" that do the trading for you.

Before choosing a broker or platform, perform your own due diligence by visiting BASIC (the Background Affiliation Status Information Center) created by the self-regulatory NFA (National Futures Association) to learn how to choose a reputable broker and avoid scams. 

Regarding forex scams, following are some of the more common scams you need to be aware of so that you don't get taken in by them while educating yourself on the best way to trade forex.

 

01
Signal Sellers

Stock Market Illustration
erhui1979/Getty Images

One of the challenges a rookie forex investor faces is determining which operators to trust in the forex market and which to avoid. Signal sellers make a good example. 

Basically, a signal seller is offering a system that purports to identify favorable times for buying or selling a currency pair. The system may be manual, where the trader enters the info and gets a result, or it may be automated.

Some systems rely on technical analysis, others rely on breaking news and many employ some combination of the two. But they all purport to provide information that leads to favorable trading opportunities. Signal sellers usually charge a daily, weekly or monthly fee for their services.

Some analysts propose that many or even most signal sellers are scam artists. A frequent criticism is that if it were really possible to use a system to beat the market, why would the individual or firm that has this information make it widely available? Wouldn't it make more sense to use this incredible signaling system to make huge profits? 

Other analysts distinguish between known scammers and more reputable information sources such as Metatrader, that offer a well-thought-out signaling service. 

Behind these opposing views lies a larger difference of opinion about whether anyone can predict the next move in a trading market. This fundamental disagreement won't be settled any time soon. 

Nobel Prize-winning economist Eugene Fama proposes in his well-regarded Efficient Market Hypothesis that finding these kinds of momentary market advantages really isn't possible.

His economist colleague, Robert Shiller, also a Nobel Prize winner, believes differently, citing evidence that investor sentiment creates booms and busts that can provide investment and trading opportunities.

The best way to determine if a signal seller can benefit you is to open a paper money or practice trading account with one of the better-known forex brokers and enter practice trades using the signals. Be patient, and eventually, you'll determine whether predictive signaling works for you or doesn't. 

02
Phony Forex Investment Management Funds

Broken piggy bank

 Dan Brownsword/Getty images

In the past few years, forex management funds have proliferated. Most of these, if not all, are scams. They offer an investor the "opportunity" to have his forex trades managed by highly-skilled forex traders who can offer outstanding market returns in return for a share of the profits.

The problem is, this "management" offer requires the investor to give up control over his money and to hand it to someone he knows little about other than the hyped-up and often completely false record of success available on the scammer's website and brochures. 

The investor often ends up getting nothing, while the scammer uses investors' funds to buy yachts and private islands.

A good rule of thumb in the forex market, as with other investments, is that if it sounds almost too good to be true, such as annual returns of more than 100 percent, for example, it's almost certainly a scam.

03
Dishonest Brokers

Trader watching stocks crash on screen
Caroline Purser/Getty Images

Although the forex market is not entirely unregulated, it has no central regulating authority. The forex spot market is completely unregulated and accounts for the majority of trades. Unsurprisingly, some forex brokers do not deal fairly with their customers and, in some instances, defraud them.

You have two ways to avoid bad brokers. Before engaging a forex broker, look the brokerage up on a website that identifies dishonest forex brokers.

Better yet, trade with a broker that also handles other stock market trades and is subject to SEC and FINRA oversight. While the forex trade itself may be unregulated, no broker subject to such oversight would risk its license for other securities by defrauding its forex customers.