How to Avoid Forex Scams

 You don’t have to guess it right, you only have to be on the right side of the market. An obsessive compulsive FX trader. 6 years of trading experience under the belt and still a learner.

In the article that I posted last week, I have discussed about how I was approached through an anonymous email to launder money out of Hong Kong and a real life example of a Forex trading signal company that promised to help its clients earn $100,000 a month – guaranteed (I wrote that this company is bordering on being a Forex scam).

This time around, I want discuss how we could avoid falling victim to Forex scam. However, rather than writing an extensive literature on how to avoid Forex scam I suggest that you read this advisory letter from Commodity Futures Trading Commission, CFTC on this topic.

The following are some of the important points that are highlighted in the letter:

  1. Understanding Legitimate Foreign Currency Operations
  2. Warning Signs of Fraud:
    a) Stay Away From Opportunities That Sound Too Good to Be True
    b) Avoid Any Company that Predicts or Guarantees Large Profits
    c) Stay Away From Companies That Promise Little or No Financial Risk
    d) Don’t Trade on Margin Unless You Understand What It Means
    e) Question Firms That Claim To Trade in the “Interbank Market”
    f) Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
    g) Currency Scams Often Target Members of Ethnic Minorities
    h) Be Sure You Get the Company’s Performance Track Record
    i) Don’t Deal With Anyone Who Won’t Give You Their Background

Prior to 1) invest in Forex trading signals, 2) invest in a currency fund or 1) opening a Forex Trading account with a broker, – ask yourself this, “What interest does the party have in the deal?”

Example 1: Trading Signals

If I am interested to subscribe to Forex trading signals provided by a company that claims it could make 10,000% return on my investment – I would have to ask myself this, “What interest does this company have in this deal?” Does the company have my interest first before its own interest? Many money managers and trading signals have the intention to make positive return for you on your investment. In return, they charge you a fee for helping you to make higher return than if you invest the money yourself. However, at 10,000% return??? If I created FX trading signals that could make 10,000% return on the money that I invest, I would keep the signals to myself. If I sell the trading signals to the public, although I would receive fees in return for my service, in the long run, the returns are much less than if I keep the signals to myself and trade my own money.

Imagine this, as a creator of lucrative trading signals if I sell the signals, then there will too many buyers chasing the same offers as I do and too many sellers chasing the same bids. Everyone is buying and selling based on my trading signals. This is not a signal that promised 20-30%. This is a signal that promised 10,000% return! Even Warren Buffett’s Berkshire Hathaway only gained 20.3% on average a year. I could imagine the trading volume generated by the trading signals that promised 10,000% return would be astronomical. If one has traded Forex before in his or her life before knows that it is very difficult to get your trade executed if your trade size is enormous.

Even Warren Buffett wrote in his owner’s manual that he couldn’t promise you results! What more a no more an online trading signal boutique that guarantees you $100,000 every month or 10,000% return!?

Example 2: Forex Brokers

Scams commit by Forex brokers are different from those of illegitimate companies that sell Forex trading signals or illegitimate currency funds. One possible scenario is that the broker runs away with the money that you deposited. One way to ensure that never happens is to open a trading account with a Forex broker that is registered with NFA and CFTC. These regulatory bodies required any firm that operates as a Futures Commission Merchant (Forex brokers fall into this category) maintains an Adjusted Net Capital of U.S. $ 500,000 and meet a host of rules to protect investors like you and I.

I do not consider forex brokers that hunt stops or ones that widen their spreads unreasonably during economic news release as scam. Those are unethical business practices. That is why it is important that you open trading account with Forex broker that is registered with the NFA and CFTC. In the event the broker commits unfair business practices, you as a client could take your complain to the NFA and CFTC. The NFA or the CFTC will hear your complain and fine the Forex broker if they found the broker guilty of charge.

Try not to open trading account with forex brokers that are based in countries that do not have sufficient legal authority to watch over these brokers’ conducts. There is a reason these companies open their business there!

Finally, if you have any questions or qualms, I highly suggest that you contact NFA or CFTC. They will help you answer any of your questions on how to avoid Forex scams.