As of April 2022, the FX market, which includes currency options and futures contracts, was worth approximately $7.5 trillion every day. Forex scams provide dishonest operators with the opportunity to make rapid fortunes because of the vast sums of money that are floating about in an unregulated market that trades instantaneously, over-the-counter, and without accountability.
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Some old scams still exist, and new ones continue to emerge, even though many once-popular scams have stopped because of the Commodity Futures Trading Commission’s (CFTC) aggressive enforcement actions and the establishment of the National Futures Association (NFA), a self-regulatory organization funded by interested parties and forex brokers, in 1982.
The Point-Spread Scam of the Past
Computer manipulation of bid-ask spreads was the foundation of an old point-spread forex scam. The commission of a back-and-forth transaction handled by a broker is essentially reflected in the point difference between the bid and ask. Usually, these spreads vary from one currency pair to another. When dishonest brokers inflate the bid-ask spread, the fraud happens.
For example, some brokers provide spreads of seven pips or more in the EUR/USD pair instead of the typical two-point to three-point spread. According to market tradition, a pip is the smallest price movement that a particular currency rate produces. The final decimal place represents the lowest change because the majority of significant currency pairings are priced to four decimal places.) Depending on how the forex broker sets up their trading costs, commissions may eat away at any possible earnings from a successful transaction when you factor in four or more extra pip gains on each trade.
You should be cautious of any offshore retail brokers who are not licensed by the CFTC, NFA, or their country of origin, even if this fraud has subsided during the past ten years. When questioned about their behavior, some businesses have been known to pack up and vanish with their clients’ money. Although some bad-faith actors have been sentenced to jail time as a result of stricter enforcement, the hazards cannot be completely eliminated.
It is crucial to work with a broker you can trust.
The Scam of the Signal-Seller
The so-called signal dealers perpetrate a common swindle in the current day. Retail businesses, managed account companies, pooled asset managers, or individual traders who charge a daily, weekly, or monthly fee for a system that supposedly determines the best times to buy or sell a currency pair based on expert advice are known as signal sellers.
With a large number of glowing testimonials where purported consumers share their success stories, these businesses or people frequently brag about their extensive trading expertise and distinctive trading skills. To participate in the fun, the unwary trader only has to give over a specific sum of money. Over the past few years, the number of these services has increased dramatically.
The worst signal-seller fraudsters just take money from several traders and then vanish. In order to maintain the signal money flow, others will sometimes suggest a profitable deal. It pays to be cautious and conduct additional due research when selecting such a service, even if there are signal sellers who are trustworthy and carry out trade functions as planned.
“Robot” Tricking in the Current Market
Numerous automated forex trading systems are susceptible to persistent scams, both new and old. The con artists claim that their system can reliably make money through automated transactions that need little to no human intervention. The trading systems, which are provided for a one-time or ongoing cost, are sometimes referred to as “robots” or “bots.” The performance claims of many of these systems have never been independently confirmed, nor have they ever been submitted for official evaluation.
Testing the settings and optimization codes of a trading system is an essential part of examining a forex robot. If they turn out to be false, the system will only provide arbitrary buy and sell signals, giving the unwary traders no actual trading advantage and causing them to do nothing more than gamble. While not all systems are terrible, traders should thoroughly investigate them before investing.
Other Things to Think About
Expensive trading systems and services: A lot of trading systems are really expensive, and the fact that they may cost up to several thousand dollars may be the largest warning sign in and of itself. System vendors that provide programs at outrageous costs backed by promises of amazing outcomes should be avoided in particular. Seek out affordable vendors whose technologies have a proven track record instead.
Commingling of monies: The practice of commingling monies is another ongoing issue. Clients cannot be sure their money isn’t being abused if there is no record of segregated accounts. Retail businesses can more easily misuse investors’ money by commingling it, paying extravagant wages, purchasing luxuries, or even vanishing with the money. Although fund segregation was addressed in the United States by Section 4D of the Commodity Futures Modernization Act of 2000, other countries do not take the matter as seriously.
When brokers refuse to let investors withdraw their money from their accounts or when there are issues with the trading platform, there are additional frauds and warning indicators. Can you enter or leave a deal, for instance, during erratic market activity following an economic announcement? Warning indicators should appear if you are unable to withdraw funds. Warning indicators ought to appear once again if the trading platform doesn’t perform up to your liquidity requirements.
The Bottom Line
It is nevertheless recommended to conduct your own due diligence even if regulatory developments over the years have eliminated many dishonest sellers and made the system legitimate for trustworthy operators. Examine if a broker is a member of the NFA’s Background Affiliation Status Information Center (BASIC) before selecting one. If a trading service piques your curiosity, look for serious warning signs such exorbitant prices or claims of unreasonably high returns.