How to Avoid Forex Trading Scams

The foreign exchange (forex) market is vast. It has a mean daily trading volume of more than $5 trillion, which includes currency futures and options. It's also doesn't have many rules.

That means there is still a chance for many forex scams. These scams promise quick fortunes through "secret trading formulas" or algorithm-based "private" trading methods. Some claim to have "forex robots" that do the trading for you.

Here are some actions you can take to lower your chances of being scammed.

Research Brokers Before You Begin

Before getting involved in forex trading, perform your due diligence. Visit the Background Affiliation Status Information Center (BASIC) website created by the National Futures Association (NFA). You can find tutorials on learning to choose a broker and avoiding scams.

The NFA is the rule-making body of the futures and options industry. Before dealing with the public, every trader who wants to conduct an off-exchange forex business must become an NFA member. They should also register with the Commodity Futures Trading Commission (CFTC).

The CFTC is the government agency that oversees futures and options trading. You can search BASIC to find out what legal actions have been taken against any individuals or firms.

Although the forex market is not entirely lawless, it has no central rule-making body. The forex spot market accounts for most of the trades. It also has the fewest rules.

Forex brokers have standards they must comply with, set by the rule-making authorities that have jurisdiction over them. Many have been fined or banned by the NFA ever again.

Besides searching the BASIC website, you can help yourself avoid a bad broker by dealing with one that also handles stock market trades. A broker who trades on the stock market is watched by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA).

Brokers subject to SEC and FINRA oversight have more to lose from acting unethically. They wouldn't risk their licenses for other securities by cheating their forex customers.

Avoid the Signal Sellers

One of the challenges a rookie forex trader faces is finding operators to trust in the forex market. Signal sellers are one group of operators new traders should consider carefully. 

A signal seller offers a system of signals they promise will identify the best times to trade. The system may be manual, where the user must enter trading data. It might also be automated to put through a trade when a signal occurs.

Some systems rely on technical analysis, while others rely on breaking news. Many of these systems employ some combination of the two, but they all purport to provide data that leads to profitable trading opportunities.

Signal sellers usually charge a daily, weekly, or monthly fee for their service.

Most of the signals used by traders are publicly known and discussed. There is also plenty of information on reputable, free websites about trading signals. One of the key markers of a fraudulent signal seller is that they sell instructions on how to use their new system to beat the market.

Traders use trading signals to enter and exit trade positions. These signals have names such as Fibonacci retracement levels, Bollinger Bands, and others. These are valid signals used by traders, so look for non-popular trade signal names. If no one else has heard of the signals, they are probably not valid.

Behind any claims of whether a system is believed to work lies a larger belief that no one can predict the next move in a trading market. There are opposing thoughts on this subject.

Nobel Prize-winning economist Eugene Fama, in his well-regarded efficient market theory, proposes that finding these kinds of short-lived market advantages isn't possible. His colleague Robert Shiller (also a Nobel Prize winner) believes something different. Citing evidence, he claims that investor sentiment creates booms and busts that can provide trading opportunities.

Demo trading accounts are the best way to learn to trade and test strategies.

The best way to figure out whether a signal seller can help you is to open a trading account with one of the better-known forex brokers. Create a demo account, and enter practice trades (that don't involve real money) based on the signals. With time, you'll figure out whether you can make predictive signaling work for you or not.

Watch Out for Phony Forex Fund Managers

Forex management funds are becoming more common, but most of them are scams. They offer traders the chance to have their forex trades carried out by highly skilled forex traders who can provide high market returns in exchange for a share of the profits.

The problem lies in that the trader has to give up control of their money and hand it to someone they know little about. Hype and false success records on the scammers' website and brochures lead people to give them their money. 

There are several rules of thumb used in the forex market. Like in other areas of trading, if it sounds too good to be true, it is. Annual returns of more than 100%, for example, are without a doubt a scam.

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.