The spot Forex market trades over $3 trillion a day. Combined with currency options and futures contracts the number jumps considerably higher.
Although many of the old popular Forex scams have been eliminated due to severe enforcement actions by the Commodity Futures Trading Commission (CFTC) and the 1982 formation of the self-regulatory National Futures Association, many scams continue to exist and no sooner is one snuffed out, then a new one emerges. In fact, with the increase in Forex brokers entering the market, it is not at all surprising that the swindles and deceptions have proliferated in this market along with them.
One of the most common types of Forex scams involves Forex robots or auto trading systems. Many of these systems are trustworthy while others need to be scrupulously researched. While most auto traders perform technical analysis and then decide when to open or close trades, other robots have been programed to perform numerous extra trades that put additional commissions in their owner’s pockets. Or they can place trades that may turn out to be more profitable but carry additional risk.
Commission free Forex accounts are another means often employed by Forex brokers to take financial advantage of their clients. Choosing a commission free-brokerage rather than a trade-based one might sound fine to some traders, but keeping in mind that brokers must be making money somehow, it is important to understand how they are doing so from the trading process. If it sounds even a bit shady, it probably is.
In most cases, instead of commissions on trades, these brokers are speculating on the bid/sell spread, resulting in a situation whereby the trader hits his/her take profit level at a much slower speed. These spreads typically differ between currency pairs and that’s where the deception takes place. Although this type of scam has been reduced over the last 10 years, there are still offshore retail brokers who are not regulated by the CFTC, NFA or a local regulatory authority and can still fool the masses.
Signal Seller Scam
An additional modern-day scam is the signal seller. Signal sellers may be a retail financial firm, managed account company, or an individual trader who promises to make millions of dollars based trade based on professional recommendations. They back up their claims of experience and trading abilities with names of people who will recommend them and ask the unsuspecting trader to open an account and hand over a certain amount of dollars. This process opens the door to a simple fraud as these so called ‘advisors’ simply pocket your money and run.
Another type of problem in Forex trading is the commingling of funds. Every trader should maintain a separate record of his/her account. Without a record of segregated accounts, individuals cannot track the exact performance of their investments. Many brokers use their clients’ money towards inflated salaries, elegant homes, and automobiles. Others simply abscond with a customer’s money. When this sort of scam was at its height, Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue and introduced strong regulation for segregating brokerage accounts. Foreign brokers, however, of which many are Forex brokers, don’t always abide by this rule.
Tricks and scams exist in the world of Forex. Take the time to thoroughly investigate your broker before opening a trading account.