The foreign exchange (forex) market is one of the world’s largest financial markets, with over $6.6 trillion in currency futures and options traded every day. Forex is largely an over-the-counter market, meaning trading occurs on electronic platforms, and via smartphones between central banks, corporations, and market participants. In this article we’ll cover is forex legal, what are forex scams and how can you avoid them.
Why Does Forex Trading Should Be Treated Cautiously?
If you’re somewhat new to the forex market, you could easily fall into the hands of unscrupulous people looking to take your hard-earned money through forex trading scams. At the click of a button, you could be trading major foreign currencies, such as the Japanese yen, U.S. dollar, British pound, or even Australian dollar. There are hundreds of currency pairs to trade, so you can be sure to find forex that appeals to you. That said, many ask, “is forex a pyramid scheme?” The short answer is no. However, scammers have invented pyramid schemes behind forex trading.
Forex scams are often “too good to be true opportunities” that promise quick cash as a way of persuading you to part away with your money. Having a sound trading education and knowledge in the forex market could help you avoid such forex trading scams.
Is Forex Legal in the U.S.?
Many people may have made assumptions that forex trading in the U.S. is illegal, which is untrue. Forex trading is legal in the U.S., but there are rules and regulations that differ from other countries. The U.S. forex market has strict regulations which brokers must adhere to before dealing with the public.
Although forex is legal, the industry is full of scams and swindlers targeting new traders with little knowledge about the market. Doing your due diligence before venturing into the industry, and knowing how to avoid forex trading scams, is prudent.
How to Avoid Forex Trading Scams
Forex trading scams will always be around as long as the forex market exists. The best way to avoid falling into such scams is to be informed.
1. Educate Yourself About the Forex Market
As in the case with any other investment, venturing into the forex market unprepared involves some risk. You may have seen media reports stating that forex trading is a scam because many novice traders have fallen victim to forex trading scams.
However, a large number of reports of money being stolen in the forex industry are the result of weak trading and not scams. If novice traders work to become better traders, they’ll be better informed about the potential risks and avoid forex trading scams altogether.
2. Research Brokers Before You Begin
Before getting involved in forex trading, carefully research multiple brokers and be sure to evaluate each. Finding a reputable forex broker can be overwhelming, but it will minimize the risk of loss as well as being scammed.
The Background Affiliation Status Information Center (BASIC) was created by the National Futures Association (NFA), and is a valuable tool for tutorials on how to choose a broker and avoid forex scams.
Every trader who wants to conduct an over-the-counter forex business must be a member of NFA — an independent self-regulatory organization of the futures and derivatives market. Brokers should also register with the Commodity Futures Trading Commission, a government body that regulates derivatives. If a broker is not a member of any regulatory body, that’s a red flag.
How to Spot a Forex Scam
Forex trading scams vary, though the most common are trading sites that guarantee big profits with little to no risk. It’s important to note that a 100% profit guarantee does not exist— every investment involves risk. The bottom line is that if something sounds too good to be true, it’s probably a scam.
Here are some of the ways you can spot forex scams:
1. Shady Signal Sellers
One of the challenges novice traders encounter is finding trustworthy operators in the forex market. Signal sellers are operators that new traders need to be cautious with. They are a modern-day scam and are increasingly becoming popular in the forex market.
Forex signal sellers are managing account companies, pooled asset managers, retail firms, or individual traders that offer trade signals that promise to identify good times to trade. Often, signal sellers will ask for money from unsuspecting traders for the privilege of trade recommendations and then disappear.
Another critical marker of signal seller scammers is broker-tied signals. Some signal sellers will give you trading signals only if you register with a specific broker, usually a shady broker — this is no doubt a scam.
The best way to figure out whether a signal seller can help you is by opening a paper trading account with a reputable forex broker, then entering practice trades based on signals. Over time, you’ll know if predictive signaling works for you or not.
2. Phony Forex Investment Management Funds
Forex investment management funds are growing popular, but nearly all of them are scams. These funds often promise traders that they have highly skilled traders who can make substantial market returns in exchange for a share of profits.
They may even opt to open a trading account for you, usually with an unregulated broker, and place trades on your behalf. After a few trades, they wipe out your account, laying the blame on the market.
3. Dishonest Brokers
Forex scammers will always find different ways to steal money. Those that provide vague answers to your questions are common red flags. The forex broker may lie to you that they are regulated, or may not be transparent with its fees and compliant policies.
4. Robot Scams
Forex trading scams present themselves in many ways, and robot scams are prevalent in the industry. A forex robot is a trading software that follows a defined set of instructions to automate trading decisions. Such robots can do just about anything, from giving you signals to placing a trade.
However, not all forex trading robots are scams. For instance, popular robots for retail traders can be set up using Expert Advisors (EAs) around MetaTrader trading platforms. That said, perform your research before putting your money in any approach.
Watch out for forex robots that guarantee a very high percentage of returns within a short period of time or use unregulated brokers that no one has ever heard of.
5. Email Spam Asking for Personal Info
Forex trading scammers may also ask you for personal information, such as your full name, phone number, and address. Don’t share your details with someone you know little about.
6. No Background
Scammers will likely have no background information. Even if they have, the details are something to worry about. Always ask for background information before working with an individual, broker, trader or fund manager. If they refuse to share their background details, that’s a red flag, and you stay away from the service provider. You can do a quick search online and verify if the individual or the company is legitimate.
The Bottom Line: If It’s Too Good to Be True, It Probably Is
Forex opportunities that seem “too good to be true” are likely scams. If an investment promises more than 100% annual returns, it’s a scam and you should steer clear.
Forex trading scams have been on the rise, and you can easily avoid them by using a regulated, established broker. Additionally, read online reviews from other customers, as it will give you an insight into the broker’s legitimacy. As with all investing, do your due diligence before investing in forex trading.