If you’ve got experience in trading in the stock market, then chances are good that you’ve learned how to spot a stock scam or to notice the signs of stock manipulation along the way. Scams that hinge on the unscrupulous activity of stock promoters and company insiders display certain visible characteristics (such as unwarranted spikes in volume or sudden price volatility) that can be identified and investigated. It’s more difficult, however, to identify a stock scam that’s put into action by unscrupulous stockbrokers (such as front running or circular trading), because the retail investor does not have any insight into the brokerage house’s internal practices and therefore, has no independent means of researching or confirming their hunch that certain activity may be fraudulent. This situation parallels exactly the dangers of getting taken in by a forex scam.
Because of the size and the liquid nature of the forex market, it’s impossible for any single individual or groups of individuals to manipulate the market from the asset side, thus, forex-related scams all involve unethical or illegal activity on the part of a forex broker, dealer or trading firm. If you train yourself to know what the signs of such fraudulent activities are, you’ll lessen the chances of falling prey to their unfolding, so here’s some tips to help you steer clear of hazardous waters:
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1. Beware Unrealistic Promises: Many brokers tout their firm and their trading platform as low-risk, while simultaneously trumpeting the incredible profits that can be made in the foreign currency markets. Unfortunately, it’s not possible to have these two statements exist in the same universe at the same time. While it’s true that significant profits can be generated by trading forex, it’s also axiomatic that the opportunity to enjoy large gains correspondingly goes hand-in-hand with the assumption of large risk, therefore, prudent retail traders should steer clear of forex brokers who emphasize the supposedly low-risk nature of their proprietary system, or who advertise and promote their firm and its services as being associated with less inherent risk than that of their competitors. It simply cannot be true, and such brokers should be avoided.
Promises of exceedingly high returns should be as summarily avoided as promises of low risk. In the final analysis, the only one who can assure you that your forex trading returns can be significant is you, as evidenced by the talent and skills which you may develop and gain through your trading activities, beginning with your practice demo account and extending into your trading with live cash. If you have the skills and the talent, the chances that you can turn a profit from your activities are that much greater; if, however, you have problems grasping the nuances of the market, or if you stumble on the analytics, indicators and tools needed to increase your chances of forex trading success, then despite the outrageous promises made by certain unethical firms, you’re probably not going to be able to turn your forex trading activities into a meaningful source of income. The bottom line is that no third party can guarantee your success, or your corresponding profits, in any business venture.
2. Beware Falsely-Advertised Job Opportunities: The internet and newspapers are flooded with ads from forex brokers purporting to offer job opportunities to wannabe-traders who display a certain talent and affinity for the forex markets. These offers are almost always predicated on the “applicant” participating in certain training seminars at a central location, after which they are to gain experience by trading in a demo account; applicants are told that if they show promise after a certain amount of practice trading, they’ll soon be trading on behalf of the firm with the firm’s own capital. The scam here is that almost every applicant is taken aside by “management” and told that they indeed show promise, that their practice trades have been highly profitable, and that the novice trader has displayed such striking natural talent that they’d be best served by trading for their own account, wherein they’re sure to make a fortune. The goal is to get the excited newbie to open a live trading account and to stake that account with their own cash, in the knowledge that the novice trader will certainly lose their funds to the firm. In the worst cases, the trader is financially ruined, while the firm simply continues to advertise for more such gullible individuals.
3. Beware the Lack of Price Transparency: All money market brokers—the brokers who advertise their platform and services to the retail trading public, offering demo accounts, webinars and the like—make their profits off of padding the spread between the bid and the ask for any currency pair, and correspondingly passing along this increased point spread to their retail clients. In principle, there’s nothing wrong with this practice, as it represents a legitimate way for the broker to be remunerated for the services which they provide their clients. The problem occurs when the currency spread is increased beyond the level commensurate with the services provided by the broker, to the point where a retail forex trader’s profit is dissipated by the broker’s spread.
On a typically traded liquid currency pair such as EUR/USD (or USD/EUR), any broker charging more than two or three pips per transaction should be assiduously avoided. While it might be justifiable that the broker charges upwards of four pips to execute client trades in the more exotic currency pairs, novice forex traders shouldn’t be trading in these exotic currencies and thus, this point is moot. Do not open your trading account with any forex broker who hesitates to reveal how many pips (the smallest increment in forex trading) his firm adds to their bid/ask spread for their trouble.
Retail traders who require complete price transparency might be better served by avoiding market makers altogether and instead opening their trading account with an ECN broker. In general, while ECN brokers may offer their clients an account with fewer features and may require a higher minimum deposit, they charge a fixed commission on each trade and as such, the retail forex trader can calculate their exact cost of doing business.
4. Beware the Leverage: In stocks, it’s the dreaded margin call; in forex trading, it’s the need to cover a badly leveraged trade with cash from your own pocket. Either way, it’s a call no one wants to get. Forex brokers offer their clients easy leverage in ridiculously high amounts. While US-based brokers are strictly regulated in the amount of leverage they are permitted to provide, non-US brokers are subject to no such restrictions. Any broker who allows you to open a so-called “mini” or “micro” account, but who then correspondingly tells you that you are required to make use of the offered leverage in order to be able to trade in their minimum lot size, is a broker to avoid. It’s too easy to fall prey to the siren call of the profits that can be earned by trading in larger, leverage-based increments; however, it’s just as easy to forget that f your trade goes south, you’ll have to repay the entire leveraged loss…and you’re still on the hook for the broker’s fees for the losing trade.
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5. Beware the Robot: Many brokers now offer their clients the ability to purchase a forex trading “system”, also known as an electronic assistant or simply a ‘robot”. These systems purport to be programmed in such a way that the retail trader’s trading activities are optimized, incorporating stop loss and take profit points preset by the retail trading client. The robots are then additionally promoted as a means for the retail trader to maximize their trading profits by allowing the robot to continue to trade while the client is sleeping, or otherwise away from their computer.
While many such systems have withstood the test of the markets and professional analysts, most such robots are worthless to the retail investor. The randomly-generated buy and sell signals which they transmit are largely baseless, and cannot replace the instinct and intellect of even a novice trader. Further, there is no need for any trader to be active in the markets 24 hours a day, seven days a week. These “systems” are merely software programs, none of which can replace your own decision making abilities; if you are a beginning forex trader, do not rely on any software program to tell you which trades to make or when to make them.
Remember that forex brokers make their profits off of you, and not off of their own trading activities. This makes for a fundamental conflict of interest between the broker’s priorities and yours: simply put, he wants to entice you to trade with increasing amounts of your own capital, and he wants you to ultimately lose. He’ll move on to the next client, and you’ll be left holding the financial bag for your poor choices. Do your research and investigate all brokers thoroughly before committing to trade with any one, making certain that you consider working only with brokers regulated by the CFTC or the NFA, or their overseas counterparts. Protect yourself further by regularly moving your trading profits out of your forex account and into another vehicle, so that you are not tempted to leverage against them. As with any form of financial investment, remember: if it seems too good to be true, it probably is.
For further information or any questions, please do not hesitate to contact us. It is our pleasure to help you.