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How to Spot Scams in the Forex Market.

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Introduction.

The Forex market is a financial market, where investors buy and sell different currency pairs. The Forex market is an OTC (over the counter) market, which means that the market is not controlled or supervised by any single entity or institution, but rather by regulators or authorities in different regions. In Forex trading, currencies are traded in pairs. When you buy one currency, you are simultaneously selling another, and vice versa.

For example, when you go long on EUR/USD , you are buying the euro, while at the same time selling the US dollar, with the aim that the euro will go higher relative to the US dollar. Forex is an investment opportunity that has long existed in the world, but it has only become widely available to the retail trading community in the last decade or so.

Retail investors mostly trade Forex as CFDs (contracts for difference) , where there is no obligation to own the underlying. When trading CFDs, investors are speculating on the price changes in financial assets, which means they can profit from both rising and falling prices. Many people are also confused with trading vs investing, it is explained thoroughly in our blog here.

A key attraction of trading CFDs is leverage. That is, traders only need to place a little margin with the broker to control a much larger position in the market. This effectively means that profits on successful trades are amplified. But herein lies the danger of leverage – losses on unsuccessful trades are also boosted. So essentially, Forex is a high risk, high reward activity. Check out our blog here to know more detailed benefits of Forex.

Why Forex scams exists?

Forex is by far the largest financial market in the world, the spot forex market traded over $6.6 trillion a day as of April 2019, including currency options and futures contracts. That mega figure, coupled with the magic of leverage, always means that there is immense opportunity to make profits in the Forex market, even though this comes with a lot of risks as well. With this enormous amount of money floating around in an unregulated spot market that trades instantly, over the counter, this makes the Forex Market extremely liquid. Your money can get in and out instantly. It is the most traded asset class in the world.

The forex market is open 24 hours a day, 5 days a week. There has never been an easier time to access the world's forex market. At the click of a button, you could be trading on the direction of the Euro, British pound, Japanese yen, US dollar or even the Russian Ruble! There are hundreds of currency pairings to trade, so there are plenty of choices to find the ones that interest you most.

Technology has literally democratised the Forex market, and there are almost no barriers to entry in the retail scene. Forex trading requires a great deal of knowledge, skill and experience; but because anyone can start trading in an instant, vulnerable people are attracted to the opportunity without due consideration to the inherent risk. Because Forex is a massive goldmine, unethical businesses attempt to attract unsuspecting customers with promises of making big money round the clock.

And because of all such benefits that the forex market has, more people are attracted to it. People think about the benefits of Forex trading and expect the ability to make some quick and easy money. As long as the lucrative Forex market exists, Forex scams will always exist. It is therefore important for all investors to be able to identify and avoid Forex scams in the various forms they come in.

The scams in the Forex Industry comes in multiple forms. They can be ranging all the way from broker scam to other non-broker scams. One of the biggest challenges in identifying scams because many services and features nowadays in the forex industry looks very legitimate. So you have to be very careful and do your own research of whatever services or products that you want to buy.

Here some of the most common ways of getting scammed:

Point-Spread Manipulation

One of the ‘original’ scams since the start, the point-spread scams were computer manipulations of the bid-ask spread in favour of the broker. By increasing the spread between the bid and sell price to 7 or 8 pips  instead of the more usual 2 to 3, the broker is able to make more money.

This practice has largely been clamped down on in the US, but offshore brokers might still operate these scams. But nowadays there are many brokers that offer lower spread. But this is something that you should be always aware of.

Percentage Allocation Management Module (PAMM) Services

The PAMM takes its inspiration from the traditional hedge fund model, and as a legitimate product is a fantastic way for investors to take part in a managed fund. However, it is important to do proper due diligence first before investing. Here some key factors and red flags to look out for:
  • Professional Fund Managers with verified results.
  • ​High Returns.
  • ​High Fees.
Scammers often claim massive returns and will show you huge numbers and profits to lure investors in. Also these profits that they show you can be faked, so always do some digging. It is quite normal for there to be fees, but before investing, check the ‘fine print’ and understand what the fees are, how you can exit the fund if you choose to, and possible penalties for making an early exit. And also you need to ask how much percentage is going to be deducted at withdrawal. Some of them charge a high percentage and you are left with a very minimal amount.

Expert Advisors/Trading Robots

A Forex robot (expert advisors) is a trading program that uses algorithms, or lines of computer code, as technical signals to open and close trades. Not all Forex robots are scams. Example you can build Forex robots using Expert Advisors (EAs) within the popular MetaTrader suite of trading platforms.

Expert advisors and Trading Robots are very powerful automated trading tools if used with legitimate brokers. Investors should understand that trading software only automates a manual strategy. Robots are a process of automation. You give them the strategy and it trades whenever the given condition is fulfilled. So it has its benefits, but generating unlimited profits is not one of them.

When looking at robots with an attractive win rate, be aware of scalping which is multiple trades for tiny profits that make it look like the robot is wildly successful, but any good size loss would wipe out profits quickly. Make sure they are not using unregulated brokers, undiversified scalping strategies, unrealistic marketing messages and they are not offering very high percentage growth returns.

Forex Trading Signals

Trading signals providers send trade ideas or suggestions to traders that will help them take advantage of opportunities in the market. Trade ideas may include a currency pair, direction, entry price, stop loss and target levels. Signal providers offer tips in exchange for a daily, weekly or monthly fee. Signals can be generated manually or automatically by individuals or companies. They can be using technical analysis, fundamental analysis, or both, to generate trading signals.

There are many legitimate signals providers, but there are scam too among them. Key things to watch out for are high subscription fees, past results, verified results, winning rate, etc. if the winning rate is high like 90%, it's a red flag. Because even the most successful traders don't have so and you can be very profitable with only 40% or 50% winning rate because it all comes down to risk management and risk reward.

Another probable red flag is guaranteed returns. Profits and losses are part of Forex trading and cannot be forecasted. It is virtually impossible to generate guaranteed profits out of the market. There is no golden strategy that doesn’t generate some losing trades, and anyone promising guaranteed profits out of the Forex market is simply high on marketing.

Forex Brokers

The scary thing about Forex scams is that they can also be done by some Forex brokers. For example some brokers engage in Price Manipulation, large bid ask spread, stop hunts, high Leverage, etc. Leverage is a great innovation in CFD trading. But leverage is always a double-edged sword. You can earn big profits on successful trades, but losses are also huge on unsuccessful trades. Some brokers offer unusually high leverage levels of up to 2000:1 that lures investors to promises of big profits, but the natural market risks can wipe out the bulk of a Forex trader’s margin with a single losing trade.

Unsegregated Client Bank Accounts

Always ask your brokers for a segregated bank account. A client segregated bank account is an account whose sole purpose is to hold client funds for transactional purposes. Client accounts cannot be accessed by third parties and are separate from the account belonging to the company. Scam brokers will often operate a single bank account for both their clients’ funds as well as their own operational money. This means that when funds are dwindling on their accounts, they will be more likely to seek ways to boost operations using client money.

So it is important to identify a trustworthy broker which is regulated with reputable agencies such as ASIC, FSCA, FSA, FFAJ and various others before signing up for one. Regulated brokers are required to operate segregated bank accounts for client funds, separate from their working capital accounts. They are also subject to random platform checks that ensure they always offer transparent trading services to clients. Besides, investors should also check reviews from trustworthy sites online where they can read about experiences of other real traders.
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