Spotting Forex Trading Scams
In recent years, investors have witnessed increased number
of investment opportunities and offerings. While the
complexity and success of these investment products vary,
technological innovation has made the Forex market one of
the fastest growth areas. Many of the leading Forex
brokers reported up to 500% rise in the number of new
retail customers. However, the growth of the Forex market
has been accompanied by a sharp rise in foreign currency
trading scams.
Many of these Forex scams are promoted on the radio,
television, newspapers and the Internet. Investors who
fall victim to these schemes, often lose all of their
money.
As an illustration, let’s examine the facts of a recent
case involving Forex fraud and its consequences. W learned
of a foreign currency trading opportunity through an
infomercial on the radio. K, the owner of a Forex asset
management firm, spoke during the infomercial, promising
viewers significant profits with minimum risk. After
seeing the infomercial, W contacted K, and later attended
a seminar presented by K and his firm. The seminar was so
convincing that W wrote a check to K for $100,000.
Several months later, W received statements (which were
false) from K’s firm reflecting significant returns on his
initial $100,000 investment. Thereafter, W attended
another seminar and decided to invest more money. W took a
loan and invested another $800,000 in K’s Forex trading
operation. Short while after W’s second investment, the
Securities and Exchange Commission filed a complaint
against K and his firm for engaging in a scheme to defraud
investors. K’s firm’s assets were frozen, including the
$900,000 invested by W. A receiver was appointed to
distribute the remaining assets of K’s firm to defrauded
investors. The assets were distributed on pro-rata basis
with no legal preference given to any of the victims.
Since K’s firm’s assets were not enough to satisfy all of
the defrauded investor’s claims, W received only about
$22,000 of the $900,000 he invested.
Since a whole book can be written on the various tactics
and methods used by Forex scam artists, in this article, I
will focus on the major warning signs that one needs to
identify to avoid falling victim to Forex swindlers.
1. Promises of Little or No Risk
If you encounter a Forex firm that claims to have
developed a foreign currency trading strategy that carries
very little or no risk, stay away. The reason Forex
trading can be very profitable is because it also carries
a very high risk of loss. The Forex market is very
volatile, and, without good money management, an investor
can lose most if not all her capital within few days.
Thus, individuals and firms who make claims that are far
from market realities, as is riskless Forex trading, are
really after your money.
2.Guarantees of Large Profits
Beware of firms that guarantee large profits in Forex
trading. These so called “guarantees” are mere ploys to
entice investors and make them believe that their money is
safe and that they will definitely make large profits.
Such claims are simply untrue, because even the best
professional traders cannot guarantee that they will make
a profit any given day. The Forex market, as most
financial markets, is very unpredictable. Hence, be
suspicious of such claims and those who make them.
3.Employment Ads For Forex Traders
Many Forex trading firms use employment ads to attract
individuals with capital to trade using their systems. The
employment ads, which often appear in newspapers and on
the Internet, state that a foreign currency trading firm
is looking for individuals to teach them how to trade the
foreign currency market using firm capital. Those who
reply to the ad are convinced by the firm that they will
make a fortune trading currencies if they participate in
the firm’s training program. During the training process,
which often occurs on a demo system, the novice traders
are encouraged and told that their demo trading records
show that have made significant profits, that they are
ready to make real money and would very successful.
Despite the firm’s assessment of the novice trader as a
brilliant newcomer, no firm capital is provided to the
trader, instead the excited novice is told to use her own
capital to trade using the firm’s platform. In addition to
various fees imposed on traders using the firm’s platform,
the Forex firm makes money as an introducing broker. Each
time the novice trader trades through the firm’s system, a
good part of the spread charged by the broker is shared
and goes into the firm’s coffers. After few months, the
novice trader loses all of her capital and leaves. The
Forex firm, having made money during the novice trader’s
short stint, moves on to new traders eager to become rich
trading foreign currencies.
4.Is the Forex Firm a CFTC or NFA Member
Before you sign a check and give your capital to a Forex
company, make sure you investigate the entity. Check to
see whether the Forex firm, with which you want to do
business, is registered with the United States Commodity
Futures Trading Commission or the National Futures
Association. Many scam artists falsely claim that their
firms are registered with the CFTC or the NFA to gain a
perspective investor’s trust. Do not trust anyone,
research the firm and the background of the individuals
involved before parting with your hard earned money.
The Internet has paved the way for many new opportunities
for retail investors. The Forex market is both exciting
and fast paced. Investor’s who are careful and diligent
are likely to avoid the perils of this market, and will
profit from the growth and opportunities of foreign
currency trading.
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