Forex Trading Scams to Watch

Forex scams can take many forms. Here are three of the most popular ones.

1
Signal Sellers

Stock Market Illustration
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One of the challenges a rookie Forex investor faces is determining which operators in the Forex market are honest and which are not. Signal sellers are an example. 

Basically, a signal seller is offering a system that purports to identify favorable times for buying or selling a currency pair. The system may be manual -- the trader enters the info and gets a result -- or it may be automated.

Some systems rely on technical analyses, others rely on breaking news and many employ some combination of the two. But they all purport to provide information that leads to favorable trading opportunities. Signal sellers usually charge a daily, weekly or monthly fee for their services.

Some analysts propose that many or even most signal sellers are scam artists. A frequent criticism is that if it were really possible to use a system to beat the market, why would the individual or firm that has this information make it widely available? Wouldn't it make more sense to use this incredible signaling system to make huge profits? 

Other analysts distinguish between known scammers and others, such as , that offer a well thought-out signaling service. 

Behind these opposing views is a larger difference of opinion about whether anyone can predict the next move in a trading market. This disagreement is fundamental and won't be settled in this short article. Nobel Prize-winning Economist Eugene Fama proposes in his well-regarded Efficient Market Hypothesis that finding these kinds of momentary market advantages really isn't possible.

His economist colleague, Robert Shiller, also a Nobel Prize winner, believes differently, citing evidence that investor sentiment creates booms and busts that can provide investment and trading opportunities.

The best way to determine if a signal seller can benefit you is simply to open a practice trading account with one of the better-known sellers. Be patient, and eventually you'll determine that predictive signaling really works for you or that it doesn't. Finally, that's the only thing that matters. 

2
Phony Forex Investment Management Funds

In the world of investing, outrageous claims are the surest sign of potential fraud
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In the past few years, Forex Management Funds have proliferated. Most of these (if not all) are scams. They all offer the investor the opportunity to have his Forex trades managed by highly-skilled Forex traders who can offer outstanding market returns in return for a share of the profits.

The problem is, this "management" offer requires the investor to give up control over his money and to hand it to someone he knows little about other than the hyped-up and often a completely false record of success available on the scammer's website and brochures. 

The investor, however, may end up getting nothing, while the scammer uses investors' funds to buy yachts and private islands!

A good rule of thumb in the Forex market, as with other investments, is that if it sounds almost too good to be true -- annual returns of more than 100 percent, for example -- it almost certainly is.

3
Dishonest Brokers

Trader watching stocks crash on screen
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Although the Forex market is not entirely unregulated, it has no central regulating authority. The Forex spot market is completely unregulated and accounts for the majority of trades. Unsurprisingly, some Forex brokers do not deal fairly with their customers and, in some instances, defraud them.

There are two ways of avoiding bad brokers. Before engaging a Forex broker, look the brokerage up on a website that identifies dishonest Forex brokers. Better yet, trade with a broker that also handles other stock market trades and is subject to SEC and FINRA oversight. While the Forex trade itself may be unregulated, no broker subject to such oversight would risk its license by defrauding Forex customers.

Your Best Defense

Read TheBalance.com and other credible resources like DailyFX.com to understand how the market works. Before you invest, trade extensively in a practice account. Your results will tell you what to do next.