Forex Brokers: Are They a Scam?

Last Updated July 23rd 2021
5 Min Read

Financial markets are huge and are a hotbed of activity that involves innumerable participants. There are corporates and individuals who work tirelessly to maximise profits. The forex market is a large and integral part of this ecosystem and attracts a fair share of traders. Many are small-time players and even beginners who are at the mercy of larger forex brokers. After all, around $6.5 trillion in foreign currency is traded each day on the forex markets.

Needless to say, anyone starting off or even with some experience will always be anxious whether they are dealing with the right partner.  Can I trust my broker? Am I at risk of being scammed? How can I find a forex broker who will not scam me? These are natural concerns anyone new or inexperienced in any trading market can have.

With something so specialised and niche as forex, it is even more valid an apprehension. We will try and examine the basic concepts and the factors that govern forex trading to clear these questions in this article. 

The Nature and Challenges of Forex Trading 

The very nature of forex trading is linked to volatility and uncertainty surrounding the ups and downs of the forex rates in the global markets. There are multiple currencies and pairs involved that complicate the situation. Moreover, the variables include not just developments in the financial market but also, and more relevantly, in global politics. 

Forex Brokers and Scams

As in every industry, and especially in finance, there are chances of financial irregularities and scams happening in the world of forex trading too. The lure of quick and easy bucks is all too real and there is always someone looking to beat the system. 

The commonly used techniques in the forex market include ghosting or spoofing that involves a trader taking an unnaturally large position in a currency pair by making a big order. This helps to mislead the market and other traders into thinking there is a fresh, sudden interest in that combination that, in turn, results in others joining in unwittingly. Traders who are just starting out are prone to be more vulnerable to this trap.

Another ill-intended technique is front running where a broker, in the knowledge of a client placing a large order, precedes it by a similarly large one for himself. Front-running is illegal because the broker exploits market-moving knowledge that is not made public yet.

One of the modern-day forex scams is the signal-seller scam with hidden risk strategies. Here, a broker or company offers to identify the best times to trade daily/weekly/monthly for a fee. They lure the trader to use their system, with frequent recommendations and later disappear with the clients’ money.

Stay away from phoney investment scams, unregulated trading platforms and fake forex investment funds. Do not fall for the bogus marketing salesperson who promises that all you need to do is to invest money and sit back and enjoy the returns.

Beware of forex robot programs that use algorithms as indicators to open and close a trade. You can search online for the forex robot scam list to help you stay away from some of the identified scammers.

The promise of attractive promotional offers and high returns lure in greedy, gullible clients. Lack of transparency and delayed or non-existent payouts are bound to happen in such cases. In extreme cases, which are not uncommon, scammers also develop software and apps that are designed to defraud users. 

This is not to say that such malpractices happen all the time in the forex market. Often the regulations hold their ground and the built-in controls pre-empt frauds from happening. But scammers, as in any industry, always look for new loopholes and situations to exploit and are on the lookout for potential victims to fall prey. 

Choosing the Right Forex Broker

Often, it is possible to avoid a potential scam just by choosing the right forex broker. Given the size of the forex market, there are a large number of brokers who operate in the industry. This includes big corporates, medium sized companies and also several small firms and even individual brokers. So how do you choose the right forex broker?

Check the credentials of the company first by visiting their website, if it is an online broker. This, in particular, is one of the most vulnerable areas for scams and the rise of the online trading platform has spawned many scammers. The absence of direct meetings of any company representatives and interaction only online through an app or software is fraught with risk. Be aware of online scams where you are asked to invest your money through websites on the pretext of fetching high returns on your investments. Do not install any random app that guarantees a high level of performance and promises to make you rich overnight. 

To check the legitimacy and transparency of the broker and the accessibility of their platform and features, you could test the broker by depositing a small amount. Perform a trade with smaller sizes and then request a withdrawal. 

Always check where the forex company or brokerage firm is located. Choose a firm that belongs to a more developed country like the United States, Canada, or the United Kingdom. Your broker should fall under regulation from a jurisdiction that can hold him responsible for any issues.

Make sure that the brokerage company is registered with the Securities and Exchange Commission (SEC) and compliant with forex trading regulations. An SEC-registered brokerage firm is more compliant, trustworthy and transparent. 

The best way to safeguard yourself from scammers is to ensure that you are trading on a regulated exchange. This allows you to verify the registration of a broker and view job and disciplinary history on the Financial Industry Regulatory Authority's registration database.

Forex scammers tend to target beginners or traders who are not aware of what is going on in the market. The best way to avoid getting scammed is to be well-informed about the trade before you enter the world of forex trade.

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