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How to spot a Forex Trading Scam

Forex market is the largest financial market in the world with a $6.6 USD daily trading volume. But FX market is decentralized, meaning that there is no central exchange. Most of the trading is done Over-the-counter through retail brokerages, banks & institutions.

About 4-5% of the forex market trading volume is contributed by retail trading. The figures for retail trading have been growing quickly especially with the increase in retail trader participation in recent years.

Despite the ongoing pandemic, participation by retail investors & traders around the world is at an all-time high, and many local & international brokers are seeing their best year in terms of earnings, trading volume.  

A prime example of a rapidly expanded user base of a company during the pandemic was of eToro, an Israeli trading platform that witnessed its subscriber base increase from 13 million to 17 million within a single quarter, that’s a 30% jump. Not only did it increase its user base but it also traded volume worth $1.5 trillion, which was 400 percent higher than 2019.

Though these staggering numbers might bewilder most investors, there’s an altogether entirely new aspect to retail investing that gets overlooked and this is online scams.

Many scammers have emerged online to trick investors and cheat them of their money. Most of these scammers are fly-by-night brokers, forex bucket shops, or pyramid schemes.

With the growing online trading user base, it’s important that users are aware of all the schemes that they can be tricked into. This article will enlist a detailed step-by-step procedure to help you not fall prey to scams online.  

What are the most common Forex Trading Scams?

  • Unlicensed Brokers:

This is the most common scam that happens almost everywhere. This happens mainly due to the lack of technical knowledge of investors. Let’s understand this in very simple terms.

If a broker wants to offer trading services in a country, they need to get license from the country’s regulator. Let’s say that a broker wants to offer trading services in the UK, then it needs to get a license from the FCA. And there are similar regulators in most countries.

The FCA has a long list of policies and regulations that the brokers have to fulfill and follow to legally offer trading services in the UK. In case the broker is found to be in violation of the FCA’s rules and regulations then it can be heavily penalised & its license can be revoked.

If someone in the UK is aggrieved by the broker’s services then he/she can approach the FCA and file a complaint.

But let’s say the broker that you are trading with is unlicensed or licensed offshore & registered in Seychelles for example, then the likelihood of recovery in case of scam by the broker is very low.

So, if you have a problem with the services provided by the offshore broker in Seychelles, then you will have to file a complaint with that offshore regulator & file a case under that jurisdiction. Still, there’s no guarantee that you will get your money back.

According to Trade Forex Malaysia, these offshore brokers exist because they are able to offer a high leverage ratio under Offshore regulations. Most regional regulators in the EU, Asia have put restrictions on leverage that can be offered by licensed brokers for CFD trading. Traders must always ensure that the broker that you are about to choose it regulated in your country to ensure the safety of funds.

If there is no local regulation or local broker in your country for Online Forex trading, but it is not illegal to trade CFDs & forex, then you should choose a Top-tier regulated broker that is licensed by FCA, ASIC, CySEC, FSCA or similar regulation.

  • High Yield Investment Programme (HYIP) or Multi-Level Marketing (MLM):

A good way to spot a scam is when the broker or scammers expects urgent action from you, for example, the person/organization might offer you a scheme that can triple your money in a week from forex or CFDs, but you have to deposit the money within 30 minutes to avail this scheme.

When a broker or any organization is hurrying you like this then you can be certain that it’s a scam because no regulated broker can advertise like this as it’s banned by the regulators.

Since users are not aware if a particular broker or organization is legalised or not, the scammers take advantage of this fact. The general public easily gets attracted to schemes that claim to double or triple their money in quick time.

A common HYIP that frauded millions of people around the world in most developing countries is MMM. The MMM Ponzi scheme promised investors 30% returns on their investment. Since so many investors came forward to invest in this scheme, till date there is no estimate as to how many people lost their money. The scam took place over so many countries and investors never got their money back as well.

Another type is a MLM scheme is where unlicensed organizations offer incentives to users who make their family members and friends sign up. Often time they provide referral fees to get more users onto the trading platform. They make users do all their marketing and get more people on board. At last, they will close the platform and run away with the money. The people who marketed this platform will be held liable at last.  

  • Fake financial advisors (Signal Sellers, Robot Trading Systems)

The role of a Signal Seller is to offer advice to investors on what currency pairs to buy and when to buy them. For offering this advice, the Signal Sellers charge a fee.  

The problem that exists with these Signal Sellers is whether they are technically equipped to offer such services. No one person can guarantee a profit in the Forex market due to the various factors involved. So not even a Signal Seller can help you make profits all the time.

If the signal seller is not authorized by financial regulators in your country, then it is a high chance that it is a scam.

Another important factor that you need to keep in mind that the Signal Seller charges a fee regardless of the fact whether you make money or not. Some might charge a fee per transaction whereas some might charge a monthly or yearly fee but there is still no guarantee.

A popular question that arises of Signal Sellers is that if they are so smart to predict the moves in the market successfully then why can’t they use the same strategy to make millions themselves than offer such services?

A robot trading system is something like the RoboAdviser but without any proper system or data. With a Robot trading system, a computer makes all the trades and suggestions for you based on data. So, it’s impossible for even a robot trading system to correctly predict the market even with tonnes of data.  

No matter who it is, no person can give you a successful formula to make money in the market since there are too many factors that affect the price. Anyone offering such services is a scammer most of the time.

How to identify & avoid a Forex Scam?

  • Too good to be true Investment:

As an investor you need to ask yourself one simple question, if a person or an organization is claiming to offer services where you can double your money in a week or month, then shouldn’t everyone be a millionaire by now?

If such lucrative opportunities exist, then most smart investors would have exploited it already rather than selling it. So, start by logically thinking about whether such services that offer chances to double your money can even exist.

Then you should check who is the regulator in your country and find out if the organization or the person who is offering such schemes is regulated and licensed by the regulator.

Post that, check with other users or you can even call up the regulator to enquire about the scheme and if there are any complaints that are registered against the broker you are going to trade with.

When choosing a broker, talk to existing users who have used the broker and enquire about their services. Watch out for fake reviews that sound paid & praising everything about the company.  

Once you get all the information you want, you can make an informed decision.

  • Unverifiable background

Most often than not all organizations or brokers will have good data to back up their claims. If a scheme claims 100% returns with low risk, then they will have all the data to prove it.  

If they don’t have data or information on who the owners are, then it’s most likely to be a scam than a true outcome of their schemes or broker.

One of the best aspects of having financial regulators is that they mandate all licensed brokers to mention all the information on the website including the percentage of traders that lose on the broker’s platform, risks of CFD trading etc.

This information has to be 100% accurate since customers will have to make decisions based on that information. If the information is proven to be false during checks by regulators, then the regulator will penalise them or even blacklist the broker from offering services in their countries.

So, a good place would be to start on the broker’s website and read testimonials of past users.

  • Unlicensed broker

It’s mandatory for every broker to mentioned their registration details on the website. So, if you want to verify a broker and see if they have all licenses then you need to go on their website and get their registration details.  

But don’t be fooled, these registration details can be fake also.

So, once you take the details from their website then you can check it with your regulator. Once you get a green light from your regulator then you can go ahead and start the process of registration.

There are many well-known international brokers also who might not be regulated in your country but they are registered in a country that have a good regulator. You can choose to trade with them also as they offer international services and are regulated by the Top-tier financial regulators in the world. But it matters who is the regulator, so do your research and then decide.

What should you do if you have lost money because of a forex scam?

Most often than not, it’s near impossible to get your money back as the scammers would have already fled with your money. The best you can do is to report the scam to your local authorities and file an official complaint.

You can also go a step further and find out if other people have been affected by the same broker. If you find such people then you all can file a report and legally file a case in the place where the broker was registered.

The problem with offshore brokers is that the local authority where the broker is registered might not intervene or have a team in place to help catch the offenders. This is the reason why offshore brokers choose countries like Seychelles or Panama where the restrictions are less and it’s hard to arrest them.

In some cases, there are chances to recover your money if the offenders are caught. But it’s highly unlikely to happen in most cases since the scammers must have had a good plan to escape such liabilities.

All that being said, if you follow all the advice given in this article, then you will be in a good position to decide if a broker or a scheme a scam or not. Before you blindly invest in an investment scheme verify all the information you have & can get.