The FX market, which comprises currency options and futures contracts, has a daily value of almost $7.5 trillion as of April 2022. Because of the enormous amounts of money that are flying about in an unregulated market that trades instantly, over-the-counter, and without accountability, forex scams give dishonest operators the chance to make quick fortunes.
Even though many once-popular scams have ceased due to the Commodity Futures Trading Commission’s (CFTC) aggressive enforcement actions and the creation of the National Futures Association (NFA), a self-regulatory organization funded by interested parties and forex brokers, in 1982, some old scams still exist and new ones keep popping up.
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The Historical Point-Spread Scam
An earlier point-spread forex fraud was based on computer manipulation of bid-ask spreads. The point difference between the bid and ask basically represents the commission of a broker-managed back-and-forth transaction. These spreads often differ depending on the currency pair. The scam occurs when dishonest brokers overstate the bid-ask spread.
For instance, rather than the usual two-point to three-point spread in the EUR/USD pair, some brokers provide spreads of seven pips or more. The smallest price fluctuation that a certain currency rate may cause is known as a pip, according to market custom. Since most important currency pairs are priced to four decimal places, the last decimal place indicates the least amount of change. When you throw in four or more pip gains on each trade, fees may eat away at any potential revenues from a successful transaction, depending on how the forex broker sets up their trading charges.
Even while this scam has decreased over the last decade, you should be wary of offshore retail brokers that do not hold a license from the CFTC, NFA, or their home country. When asked about their actions, some companies have been known to leave and disappear with the money that their customers have paid them. Stricter enforcement has resulted in some bad-faith individuals receiving jail sentences, but the risks cannot be totally removed.
Working with a broker you can trust is essential.
How the Signal-Seller Scammed
These days, the so-called signal traders commit a typical scam. Signal sellers might be retail organizations, managed account companies, pooled asset managers, or individual traders who charge a daily, weekly, or monthly fee for a system that allegedly uses expert advise to predict the optimal times to purchase or sell a currency pair.
These companies or individuals often boast about their vast trading experience and unique trading abilities, with many positive reviews where alleged customers share their success stories. The unsuspecting trader merely needs to hand over a certain amount of money to join in on the fun. The quantity of these services has significantly expanded in recent years.
The most egregious signal-seller scammers just steal money from several traders before disappearing. Other people will occasionally recommend a lucrative trade in order to keep the signal money flow going. Even if there are signal sellers who are reliable and execute transaction functions as intended, it pays to exercise caution and carry out extra due diligence when choosing such a service.
Tricking “Robots” in the Present Market
Many automated forex trading systems are vulnerable to ongoing frauds, both classic and contemporary. According to the scammers, their system can consistently generate revenue through automated transactions that require little to no human involvement. The trading systems are frequently called “robots” or “bots,” and they are offered for a one-time or continuous fee. Many of these systems have never been submitted for formal assessment or had their performance claims independently verified.
Examining a forex robot requires testing the trading system’s parameters and optimization codes. The system will only offer arbitrary buy and sell signals if they prove to be erroneous, providing the naive traders with no real trading edge and reducing them to just gambling. Even though not all systems are bad, traders should research them carefully before making an investment.
Other Considerations
Costly trading services and systems: Many trading systems are quite costly, and the fact that they can run into the thousands may be the biggest red flag in and of itself. In particular, one should steer clear of system suppliers that provide programs at exorbitant prices with the promise of spectacular results. Instead, look for reasonably priced suppliers whose innovations have a track record of success.
Money mixing: Another persistent problem is the practice of money mixing. If there is no record of segregated accounts, clients cannot be certain that their money isn’t being misused. Retail companies are more likely to misappropriate investors’ funds by stealing them, paying ostentatious salaries, buying luxury, or even disappearing with the money. While Section 4D of the Commodity Futures Modernization Act of 2000 addressed fund segregation in the United States, other nations do not take the issue as seriously.
Additional scams and warning signs occur when brokers deny investors the ability to withdraw funds from their accounts or when the trading platform has problems. For example, can you enter or exit a trade while market activity is volatile after an economic announcement? If you can’t withdraw money, warning signs should show up. In the event that the trading platform fails to meet your liquidity needs, warning signs should reappear.
The Bottom Line
Even if legislative changes over the years have made the system legal for reliable operators and eliminated many dishonest dealers, it is still advised that you do your own due investigation. Before choosing a broker, find out if they are a member of the NFA’s Background Affiliation Status Information Center (BASIC). Look for severe red flags, such outrageous fees or promises of unrealistically high profits, if a trading service piques your interest.