Is Forex Trading a Scam?

Money falling from briefcase of running businessman
Gary Waters/Getty Images

Forex is not a scam, but there are plenty of scams associated with forex. Regulators have significantly caught up to the scammers over the years, making them increasingly rare. 

Scams are a big problem faced by everyone in the forex industry. As with any new industry, there are plenty of people out there looking to take advantage of newcomers.

Forex itself is a legitimate endeavor. Forex trading is a real business that can be profitable, but it must be treated as such.

It is not a get rich overnight business, no matter what you may read elsewhere. However, it is possible to have a profitable legitimate forex business. Like any other real business, though, there is no free lunch.

Defining a Scam

A scam or fraud is an intentional deception in order to take unsuspecting money from a person. In this sense, scams are rare and are becoming increasingly so. There is a distinct difference between a poorly run brokerage and a fraudulent one. Even a poorly ran brokerage can run for a long time before something takes them out of the game.

Why Do People Believe It to Be a Scam?

Forex trading became available to retail traders in 1999. The first handful of years was wrought with overnight brokers that seem to shut up shop without notice. The common denominator was that these brokers were based and non-regulated countries. While some did take place the United States, the majority seem to happen overseas where all it took to set up a brokerage was a few thousand dollars in fees.

Since 2007, the occurrence of shops vanishing with clients funds has become very rare. Over the last few years, Forex brokers mainly have been acquired by others, or the shops of the shutdown have been futures brokers whose clients were also able to trade Forex futures but not spot Forex such as MF Global.

Due to the Swiss National Bank removal of the Swiss peg to the Euro, two brokerages went under. One broker in New Zealand and Alpari's UK division due to losses exceeding excess capital.

How to Avoid Being Scammed?

The first advice we could give you is to check where the brokerage is headquartered. Regulations have increased greatly in the last 5 to 10 years, and it has, rightfully so, become increasingly expensive to do business in highly regulated countries like the United States or the United Kingdom.

Outside of location, you can do diligence based on how willing the broker is to talk about execution and their books. In other words, you can ask them how long they've been in business and how many countries they are regulated in. The more the better.

The simple act of finding out who you should call if you feel that you've been scammed (before investing with a brokerage) can save you a lot of potential heartache down the road. If you can't find someone to call because the brokerage is located in a non-regulated jurisdiction, it's best to find alternatives who are regulated.

What to Do If You Feel You're Being Scammed?

Depending on your location, you should speak to your governing authority.

Most of the regulations that have passed have come from requests of clients at brokerages that have failed or if it clients feel they have been cheated. Therefore, you can have a role in cleaning up the FX market continually.