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The foreign exchange is the biggest global market. Every day, it sees volumes that reach 3 trillion US dollars. In the past, Forex welcomed only big institutional players. Now, any individual can become a trader and partake in the exchange. Since the emergence of the retail segment, scams have been getting more and more elaborate. Discover the most common schemes today, and stay safe.
Why Do Forex Trading Scams Still Exist?
In some countries like Nigeria, the Forex industry is still unregulated, and the scam is rampant. Others have tough restrictions developed by entities like the Commodity Futures Trading Commission (CFTC) or the National Futures Association in the USA. Still, even there, scams keep appearing and reappearing, as fraudsters are very creative in devising new methods of deceit.
Some clients do not bother to do any research before delving into real-money trading. They have a vague understanding of how this market works. These people are easy and primary targets for fraudsters. Unethical Forex brokers promise quick profits, and they manipulate clients through many schemes. Sometimes, these scams are so cleverly formulated that even experts fall for them.
Whatever the methods, the goal is always the same: to pocket clients’ money. Such companies are short-lived: when an investigation starts, they vanish. Discover the most common schemes of Forex fraud, and look out for these red flags.
Are All Brokers Crooks?
Generalizing is a mistake. Brokers are not fraudsters by definition. It is true, though, that some providers do not connect you to the real market.
Those who set their own prices are known as market makers. This business model puts them in direct conflict with their clients’ interests. The other type — ECN — is more transparent. Here, a broker receives a commission regardless of their clients’ results.
The majority of Forex traders fail — as many as two thirds, according to some estimates. Still, this should not be attributed to Forex scams alone. Even professionals who use the best broker platforms have losing trades sometimes. In most cases, failure is rooted in poor trading skills and impulsivity.
Thus, brokers do not have to deceive to get their revenue. Of course, they can still boost their bottom line with a few tricks. More profit is always welcome — it is the end goal of any business. Watch out for these shady methods.
- Spreads vs. Commissions
Forex traders are always looking for tight spreads. Today, the conditions depend on your broker, type of account, and size of the deposit. In most cases, the bigger the investment — the better the spreads. This is because brokers with tighter spreads also require large deposits. Traders are advised to shop around, as conditions vary.
Commissions have become more common in recent years. ECN brokers charge a commission per trade, which is a fixed amount. The scheme is presented as more transparent than the market-maker model. However, there are a few caveats.
Check whether the spread plus commission offer is really that attractive. How much risk per trade do you normally accept? Calculate the risk value for each pip, and use the result to figure out the “spread” you will be paying. You may be looking at one of the many Forex scams.
- Overnight Financing
If you leave trades open overnight, this may entail a special fee. Day traders need not worry about it, as they close all positions before the end of their trading day. Adherents to other strategies, such as swing trading or position trading, should pay close attention to these overnight charges.
Most often, the broker will either deduct less than 1 pip or add 1 pip per open trade. The calculation depends on the interest rate differentials between the currencies in your pair. In most cases, the client loses. Overnight charges could be part of Forex brokers scams.
Not all brokers advertise their overnight fees for obvious reasons. Their clients realize they have been charged when it is too late. When asked, though, most companies will quote you their overnight financing rates. Compare these quotes for the same instruments if you are looking for the best deal.
Traders who prefer long-term strategies should calculate their overnight costs. Different brokers offer different conditions. Sometimes, these charges eat a significant chunk of your profits.
This is a legal term which describes a special case of a breach of trust. Unscrupulous brokers mix their client’s funds with their own funds. Traders cannot see how their investments are performing without a record of their unique accounts.
Through commingling, shady companies may pocket a large share of your money with you being blissfully unaware of the misuse. Eventually, these fraudsters will vanish into thin air.
- Dishonest Pricing
Manipulation of ask and bid is one of the oldest Forex trading scams. Brokers program their computers so that they tilt the figures in their favour. Basically, the point spread between these prices constitutes the commission for processing of a back and forth transaction. Spreads are different for different instruments, and they also depend on the broker.
For instance, the popular EUR/USD pair may have a normal spread of 2-3 pips, or a larger one (7 pips or more). If the spread is so wide, the commissions may eat away any potential profit. Remember: brokers that claim they offer commission-free trading still benefit from the spreads.
Not everyone makes a profit in the Forex market. Discover a comprehensive guide on what is Forex trading, and how to benefit from currency rates. Is Forex Trading Profitable?
Fortunately, the industry now has strict regulation that concerns spread setting. By law, brokers are allowed to offer smaller spreads than in the past. Still, you may run into unscrupulous offshore brokers that work illegally. These are not overseen by the CFTC, NFA or their nation of origin. For them, it is easy to just disappear when faced with investigations.
- Unnatural Stops
Not all traders realize that brokers do have control over price feeds. Market maker brokers, also known as dealing desk brokers, set their own prices, and they may not even make real trades. This is possible because Forex is an over-the-counter market, so there is no physical exchange.
The only thing that stops such brokers from ripping their clients off is competition. Today, you can easily compare quotes from different sources and use other price feeds to forecast trends. Hence, it is in their best interests to keep the quotes realistic. This means you need not worry about your broker making up the prices.
What can be alarming, though, is their attitude to stop loss orders. When many clients set their stop losses close to the actual market movements, their broker may be tempted to prevent the likely triggering. A shady firm may quickly push their price over that level, so you walk away as a loser.
This practice is especially convenient when some breaking news or shocks come. Important events cause a spike in the market price, either downward or upward. This is when dishonest brokers can set their prices a bit lower or higher. Of course, this may also happen due to mistakes. During dramatic spikes, if many clients complain about stopped-out trades, brokers may repay them.
- Sudden Outages
When the market is clearly trending, you may be prevented from placing winning trades. The connection to the broker’s server may be disrupted, or the order will be rejected for technical reasons. If this happens repeatedly, you may be dealing with a crook.
This doesn’t mean that a decent broker will prevent you from making any mistakes in Forex. They may happen due to inexperience, lack of skills, or strong emotions. Do not blame everything on the middleman.
- EA Robots
The concept of a robot that can place profitable trades automatically, even at night, is tempting. So-called Expert Advisors are presented as a tool for passive profits. These are pieces of software that can be bought or rented online. Sadly, few of them are tested by any independent sources.
Deceptive trading systems may use invalid parameters and optimization codes. As a result, they generate buy and sell signals at random. The owner almost always loses. Watch out for those Forex software scams.
Conclusion: Common Forex Scams
These are only some methods used by fraudsters. You can find more Forex scams reviews online. Despite all the regulatory efforts, crooks keep coming up with new ways to steal traders’ money. Even in the U.S., violators find ways to defraud the public.
Take time to research your broker’s background before funding your account. Learn more about Forex trading software scams and don’t fall for promises of incredible automated profits. In Forex, learning never stops. Subscribe to the best Forex YouTube channels to learn from pros.
A trader should be vigilant and be aware of Forex trading scams risks. If the trading terminal is glitchy, or withdrawals are delayed, you may be dealing with a shady broker. Be extra cautious and sceptical of flashy ads that promise quick and effortless results. Too many brokers fail to meet their clients’ expectations. Sadly, their existence feeds the misconception that Forex is a form of gambling. Nothing could be further from the truth.
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