Forex scams happen for a single reason: the internet is anonymous, and online forex traders have a lot of money. While forex scams are infrequent, and certainly less common than legitimate businesses, traders should know how to recognize a forex scam.
Because the foreign exchange market is an over the counter market, there is no central clearing center for trades. Compare this to the stock market, where a physical market allows for individuals and banks to buy and sell stocks to one another.
If a stock broker were to simply scam its clients, the stock exchange would notice immediately, as the exchange would stop receiving trades from the broker on behalf of the client. In the foreign exchange market, where buyers and sellers interact without a central market, this level of protection does not exist.
Previously, unscrupulous online forex brokers invented the best type of forex scam: taking investors money and giving them nothing in return, or never placing their trades by purchasing actual currency. In some cases, brokers would take on too many trades, and go bankrupt when skilled forex traders profited off the broker’s loss.
CTFC Fights Forex Scams
Much has changed since the early days of online forex trading. Whereas forex brokers once operated in the shadows, the Commodity Futures Regulatory Committee has stepped up regulation to fight off bad brokers.
The CTFC and National Futures Association (NFA) have created new regulatory steps to registering a forex brokerage firm in the United States. The fines for forex fraud has surged, and the cost of participation is ever rising. Brokerages now have to prove their legitimacy to open in the United States.
The CTFC also moved to limit leverage in order to protect forex traders. Whereas US brokers can offer leverage of only 50:1, the law allowed for unlimited amounts of leverage before 2010. Many forex scams would offer 500:1 leverage or higher, hoping that traders would leverage their initial investment to such incredible heights that very small market movements would leave them broke.
Naturally, as was the case with many forex scams, any loss by a trader was a gain to the brokerage. In US-regulated firms, this business model is simply not tolerated.
Brokers weren’t the only sore spot in the foreign exchange market, there are also scammers who sell the following products:
• Forex signals
• Automated trading robots (also known as expert advisors)
• Forex account managers (the most costly forex trading scam)
Scammers have a tendency to promise everything at the cost of nothing. In many cases, scammers sell information products or other intangible goods promising riches, fast profits, and, in some cases, automated profits.
In this chapter, we hope to help you steer clear of forex scams. Keep reading to learn more about how you can protect your money from illegitimate operators.