How to Avoid Forex Trading Scams

The foreign exchange (forex) market is huge, with an average daily trading volume of more than $5 trillion, including currency futures and options.1 It's also not very well regulated. That means the opportunity still exists for many forex scams that promise quick fortunes through "secret trading formulas," algorithm-based "proprietary" trading methodologies, or "forex robots" that do the trading for you.

Before getting involved in forex trading, perform your due diligence. Visit the Background Affiliation Status Information Center (BASIC) website created by the National Futures Association (NFA) to learn how to choose a reputable broker and avoid scams. The NFA is the futures and options industry's self-regulatory organization.

Before dealing with the public, every company or person who wants to conduct off-exchange forex business is required to become a member of the NFA and to register with the Commodity Futures Trading Commission (CFTC).2 The CFTC is the government agency that oversees futures and options trading. You can search BASIC to find out what regulatory actions, if any, have been taken against a particular individual or firm.

1. Signal Sellers

One of the challenges a rookie forex investor faces is determining which operators to trust in the forex market and which to avoid. Signal sellers are one group of operators to consider carefully. 

A signal seller offers a system that purports to identify favorable times for buying or selling a currency pair. The system may be manual, in which case the user must enter trading info, or it may be automated to put through a trade when a signal occurs.

Some systems rely on technical analysis, others rely on breaking news, and many employ some combination of the two. But they all purport to provide information that leads to favorable trading opportunities. Signal sellers usually charge a daily, weekly, or monthly fee for their services.

A frequent criticism of signal sellers is that if it were possible to use their system to beat the market, why would the individual or firm that has this information make it widely available? Wouldn't it make more sense to use this incredible signaling system to make huge profits for themselves? 

Other analysts distinguish between known scammers and more reputable sources of market information that offer a well-thought-out signaling service. 

Behind these opposing views lies a larger difference of opinion about whether anyone can predict the next move in a trading market. This fundamental disagreement won't be settled any time soon. 

Nobel Prize-winning economist Eugene Fama proposes in his well-regarded efficient market hypothesis that finding these kinds of momentary market advantages isn't possible.

His economist colleague Robert Shiller, who's also a Nobel Prize winner, believes differently, citing evidence that investor sentiment creates booms and busts that can provide trading opportunities.

The best way to determine if a signal seller can benefit you is to open a trading account with one of the better-known forex brokers and enter practice trades that don't involve real money based on the signals. Be patient, and with time, you'll determine whether predictive signaling works for you or doesn't. 

2. Phony Forex Investment Management Funds

Forex management funds have proliferated, but most of these are scams. They offer investors the "opportunity" to have their forex trades carried out by highly-skilled forex traders who can offer outstanding market returns in exchange for a share of the profits.

The problem is, this "management" offer requires the investors to give up control over their money and to hand it over to someone they know little about other than the hyped-up and often a completely false record of success available on the scammers' website and brochures. 

Investors often end up with nothing, while the scammers use investors' funds to live high on the hog.

A good rule of thumb in the forex market, as with other areas of investment, is that if it sounds too good to be true, such as annual returns of more than 100 percent, for example, it's almost certainly a scam.

3. Dishonest Brokers

Although the forex market is not entirely unregulated, it has no single, central regulating authority.5 The forex spot market, however, which accounts for the majority of trades, is completely unregulated. Unsurprisingly, some forex brokers do not deal fairly with their customers and, in some instances, defraud them.

Aside from searching the BASIC website, you can help yourself avoid a bad broker by dealing with one that also handles stock market trades and so is regulated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). While the forex trade itself may be unregulated, a broker subject to SEC and FINRA oversight probably wouldn't risk its license for other securities by defrauding its forex customers.

Reprinted from The Balance  the copyright all reserved by the original author.