Forex trading interests lots of people because of the potential returns. However, trading this asset class is extremely difficult. This is further compounded by the fact that many scammers are out there trying to take money from people, making forex a market that is difficult to trust.
This article will cover various forex scams and how to identify them.
Is forex a scam?
The forex market is a legitimate trading market. This is where the world’s currencies are traded and is not a scam.
However, the forex market is ‘zero-sum’, which means that for every winning investor there must be a loser. No value is added through trading currencies which means there is the potential for increased risk of scams.
Are forex signal trading companies a scam?
Many forex trading signal companies are scams but that doesn’t mean all forex trading signal companies are a forex trading scams.
However, you should be careful of all these companies and do your own research.
Can you verify who the creator/trader says he or she is?
Often a quick Google search will do the work for you. For example, I came across one forex trading instructor who had claimed to have taught “tens of thousands of people across the globe” – yet Google had never heard of this guy until a few months ago, which makes you question where these tens of thousands of people heard from him and why they trusted him.
Companies House also showed that his company was set up just a few weeks ago, along with the Facebook page that he was running ads from.
Maybe he was telling the truth but the evidence suggested otherwise.
Is forex trading a pyramid scheme?
Foreign exchange trading is not a pyramid scheme.
Trading forex, or foreign exchange, is the buying and selling of currencies in search of profits.
The act of trading itself is not a pyramid scheme.
The confusion comes because many ‘forex traders’ are not forex traders at all, but run affiliate scams that are multi-level marketing which are similar to pyramid schemes.
What is multi-level marketing?
Multi-level marketing is a form of marketing that compensates the individual for recruiting new sales people and earning from their commissions, as well as anyone else they introduce.
The individual can also earn from product sales which means multi-level marketing is not a pyramid scheme, but many have accused it of being a ‘legal pyramid scheme’ because individuals focus on recruiting individuals rather than selling product.
Many forex traders make their money not by trading, but by recruiting individuals to the broker and making money from their trades and the people they introduce too.
What are the types of forex scams?
- Signal sellers
- Affiliate scammers
- Spread manipulation
- Binary options scammers
- Automated trading algorithms
- Trade management scams
- Investment fund scams
Signal sellers are almost certainly scammers.
Many of these sellers claim to have win rates of over 90%.
If that was true, and they trade one of the most liquid markets in the world, then they would soon be the richest person on the planet.
And if they’re on their way to becoming the richest person on the planet, why are they selling “90% win rate” signals to you for £9.99 a month?
Magic money-making machines don’t exist. But if they did – they would not be accessible to the likes of you and I.
The signal seller scam has been around for years. The FCA (Financial Conduct Authority) banned the sale of signals in the UK, so these scammers now give away their signals for free, which leads us onto the next scam.
Forex affiliate scammers are the most common type of scammer in the UK.
The scam works by setting up social media accounts such as instagram and YouTube, and posing in front of rented cars (often Lamborghinis) and mansions they don’t own.
This is done to give the impression that the ‘trader’ makes a lot of money trading, whereas in reality the scammer makes money by introducing clients to the broker in order to receive a commission.
Often the trader will feature in prominent UK newspapers such as The Daily Mail, The Sun, and one trader even made it onto Channel 4, before they realised they had been duped and deleted the articles.
I exposed this scam in MoneyWeek (free to read) in February 2020 whilst many UK newspapers were happy to post stories about these superstar traders many months after this.
The stories went viral and earned the newspapers clicks, and the trader got credibility and a lot more sheep to fleece.
The sad reality is that you cannot trust journalists to do basic due diligence on trading stories – especially if they know the story is clickbait.
Spread manipulation is when the scammer is able to literally change the spreads on the accounts that they introduce.
This means that those that are introduced to the broker may be at the mercy of the introducer widening the spreads in order to increase their own commissions at the expense of the referred trader.
Always check with the broker that the broker does not give the authority to manipulate the bid and widen the pips to anyone else if you are introduced.
Binary options scammers
Binary options scammers are similar to the affiliate scammers.
Binary options are options that will expire worthless or pay out with a high reward.
Naturally, the scammers show only the successes and hide the fact that almost everyone loses trading money trading options as almost all of these expire worthless.
Automated trading algorithms
Automated trading algorithms or trading robots are usually scams.
As I said earlier, magic money-making machines don’t exist and any automated trading algorithm that makes money would be prohibitively expensive.
Anyone telling you that all you have to do is sign up to the automated trading algorithm or forex robots and you’ll make money in your sleep is probably peddling you a false promise.
Trade management scams
This scam is one of the most common scams in Facebook groups and other chat channels.
The ‘trader’ will pretend to be making lots of money, giving it the big one with the usual spiel of large numbers and fancy cars, but as they want to ‘give back’ they will manage your money too and split the share of the profits.
What happens is a Ponzi scheme where the money is spent on luxuries for the trader and new people are recruited to pay the old traders back – giving everyone the impression the trader actually makes money.
Only FCA (Financial Conduct Authority) authorised people are allowed to manage money – I reported one of these scammers to the FCA but sadly as the potential victim hadn’t handed over her money there was “no crime committed”.
I’m not sure how this works as attempted crime is still a crime, but the FCA disagree.
Investment fund scams
Investment fund scams have been around for years and becoming increasingly sophisticated.
Fake websites, fake LinkedIn profiles, and fake picture and video testimonials can all be set up to convince the website visitor that the firm is real and has expert advisors.
The website often will claim to have an investment opportunity high returns or high yields that are often unrealistic and provide the reason that their ‘expertise’ delivers these results for clients.
Often, they will use a variation of an existing name in order to increase the likelihood of familiarity.
Always check the FCA’s website to see if the company is FCA authorised to manage assets or provide investment advice.
Regardless of how smooth the person on the phone is and how thick they lay the high-pressure sense of urgency on, never give your money without conducting your checks.
What is B-Book trading?
B-Book trading is where a broker executes trades internally from its own book. The broker will offer traders positions that are not hedged in the market. B-Book trading is a way for the broker to make extra profits from the traders it provides a service to.
The reason many brokers pay a lot of money to affiliates to attract new investors is because the brokers know that 90% of traders will blow their trading account within three months.
Brokers usually hedge positions that they offer to clients, so that the broker doesn’t lose money and earns its bread by the commissions and fees it charges.
But if 90% of traders lose money then some brokers will run a B-Book which sees the broker profit from the trader’s losses by taking the other side of the trade.
This means there is an incentive for the broker to see its own client lose because it is making money from losing traders.
Is there a legit forex trading training that isn’t a scam?
There are legitimate forex trading training that aren’t scams.
Tom Dante is a retail trader with a large following because he also outs frauds and offers lots of useful information (here’s his website).
I have not taken his trading course because I don’t trade forex – but I’ve learned a lot from him and would recommend anyone interested in forex trading checking his website out.
Are forex courses worth it?
That depends. Do you see the value in paying to learn a new skill?
If so, then picking the right provider may be for you.
But if you don’t have the motivation and lack the effort it’ll take to invest time learning a new skill then maybe give it a miss.
Like anything, trading is a skill which requires focused learning and patience.
Don’t buy courses from anyone pushing dreams and hard sells – that includes people pretending they’re making £20,000 pressing a few buttons in a helicopter over New York (yes, I’ve seen that).
How do I know whether a forex trading platform is legitimate?
Checking whether a forex trading platform or forex broker is legitimate or not is easily done.
Head to the FCA’s Financial Services Register and check whether the broker is listed with a license or not.
Do not sign up with brokers that are not registered on this list and do not register with foreign brokers.
Foreign brokers are not subject to the same rules and regulations as the UK and they may use spread manipulation, a hidden monthly fee or exchange commission, and other nasty tricks against clients such as B-Book trading.
How to avoid a forex scam
Avoiding forex scams is easy if you know the warning signs to look out for.
First of all, if it seems too good to be true… it probably is.
Forex scammers are usually easy to spot. They will do anything to get you to place down deposits and start trading.
Self-proclaimed billionaires, instagram accounts showing luxury cars and jets that are rented, watches, and fancy holidays, signal sellers, exclusive trading algorithms with high profits – all of these scream ‘scam’.
The reality is that trading is hard work and most people fail – but you will never see a scammer highlight this. If trading was so easy then everyone would be doing it.
You can also check the following:
Make sure you only use brokers that are UK-based. Foreign brokers may be scams and it will be impossible to get your money back once it is outside of the UK.
Ensure that your broker actually has a physical address (and not just a virtual office) and a working telephone number that you can contact for support.
The FCA regulates all companies and individuals that operate in the financial services industry.
Always check that a brokerage is registered on the FCA’s Financial Services Register.
User reviews are worth checking on any broker.
It’s true that people only tend to leave a review after a bad experience (nobody goes home and decides to write about a nice dinner – but if the service is rude then you can be sure it’ll show up on TrustPilot) but often these reviews leave clues.
If people are complaining about getting slippage in their orders (stop and limit orders being executed poorly), difficulty in withdrawals, or getting stopped out despite the price going nowhere near the level, then you should be wary.
Forex trading vs stocks: Which should you choose?
The foreign exchange market (FX market) is notoriously difficult and high risk. You are pitted against the world’s smartest people, with bigger research budgets than you, bigger bankrolls than you, and a larger influence than you.
It is hard to get an edge in a zero-sum market because for every £1 made somebody else needs to have lost £1.
When it comes to stocks, indices trend higher over time and this means it’s a positive-sum game, where it is possible to have more winners than losers and value is added.
I trade stocks because it is easier. To learn about trading stocks, download my introductory book to the UK stock market: How To Make Six Figures In Stocks.
You can also trade stocks through trading CFDs, but this comes with leverage and is not recommended for beginners.