Foreign exchange trading, or forex trading, is a legitimate way to make extra money. However, with it’s growing popularity, there has also been a rise in forex scams. It’s important to know how to identify a forex scam before you decided to engage in trading. In this post, I’ll share exactly what to look for to avoid falling prey to a forex scam.
What is forex trading?
Forex trading is simply the practice of exchanging one currency for another. The ability to exchange currencies is important for things like international travel, conducting international business, and foreign trade. Because there is no one universal currency, there must be a way to exchange the equivalent value of one currency for another. This is where foreign exchange comes into play.
Forex trading takes place in the foreign exchange market. This market is a primarily unregulated, over-the-counter market with over $5 trillion on average being traded each day. Currencies from every country make up the foreign exchange market and, as a result, it is the largest market in the world.
Like many things, the internet has made forex trading accessible to the everyday consumer. Individual investors who engage in forex trading are doing so in hopes of profiting from their trades. The whole objective is to exchange your currency for one that you expect to go up in value, earning you a profit.
Forex trading example: How it all works
For example, say you purchase 1,000 Euros at a EUR/USD exchange rate of 1.18. This means that you will pay approximately $1,180 (USD). Later, the exchange rate increases to 1.20 and you exchange those same 1,000 Euros back to US Dollars. In this case, you will get back $1,200 (USD)—for a profit of $20. As simple as this may sound, forex trading is actually quite complex. Many factors play into the value of a currency and, ultimately, exchange rates. This makes the market very volatile and risky to engage in if you don’t know what you’re doing.
What kind of forex scams exists?
With such a large volume of activity and no centralized governing body, there is ample opportunity for individual traders to fall prey to a forex scam. There are a few that are fairly common that you should be aware of if you decide to trade. Let's get into them.
Robot trading systems
The promise of earning money in your sleep is alluring. After all, we all want to earn passive income. Well, in the case of forex, there are scammers who will promise trading systems, or robots, that will do the hard work for you. The trade is conducted by computers and automatically makes buy and sell decisions based on specific parameters. The appeal is that you are promised to make money while the robot does all of the work. Needless to say, these systems aren’t tested and vetted by any outside source to confirm it’s legitimacy.
In any case, it isn’t a good idea to fully rely on any system to make decisions about your money and investments. As much as we tend to believe that computers are mistake-proof, they aren’t. Furthermore, no one (not even a computer) can predict world events or other economic signals that will impact the market. So although having a robot trade for you may seem appealing, you may want to avoid them.
Signal sellers are companies or individuals who charge to provide advice on when to buy and sell a particular currency pair. Typically, these signal sellers require that investors pay some sort of recurring fee in exchange for this information. These people often make guarantees of outperforming the market and have somehow gotten trading down to a science.
The scam is that these signal sellers will collect money from traders without providing any information. Even worse, many aren’t even qualified—through experience or otherwise—to provide advice. In fact, a quick Google search will expose how easy it is to market yourself as a signal seller. It may be hard to identify these signal sellers as scammers, as they often provide rave reviews and quote a history of making large profits. Regardless of what information they present, beware.
Multi-level marketing forex scams
The popularity of forex has been perpetuated by the emergence of multi-level marketing (MLM) businesses centered around forex trading. These businesses already come with their fair share of skepticism and it’s no different when it comes to forex. Some popular forex MLMs require members to pay a monthly fee in exchange for daily trade signals and forex educational materials. Members are then incentivized to recruit more people by receiving tiered commissions. With these companies, the emphasis is less on trading and more on recruiting new members. The fact of the matter is that you don’t have to join a business or even pay a membership fee to trade in the forex market.
A forex broker is a company that grants you access to a trading platform to buy and sell currencies. You will need a broker in order to do forex trading. Unfortunately, not all brokers are honest and legitimate—finding ways to take your money or inundate you with fees. Some are even unregulated, which means that they do not answer to any governing body. So, in the chance that you are scammed, there’s not much hope for legal recourse.
It is always a good idea to do your research on any broker that you plan to use. You can do a background check of sorts on the Background Affiliation Status Information Center (BASIC) website created by the National Futures Association.
Fake forex funds
You may come across forex funds that promise guaranteed returns on your initial investment. Fake funds will boast abnormally large annual returns that seem very enticing. But, as the adage goes, if it seems to good to be true, it probably is. Instead, consider less risky and proven index or mutual funds for your investment endeavors.
How do you identify a forex trading scam
As you would expect, scammers do a very good job of trying to conceal their dishonest practices. Nonetheless, there are a few things that can serve as clues that something is a scam.
1. A guarantee of success and/or large profits
Nothing about the market, specifically the forex market, can be guaranteed. This market is influenced by too many factors that can change at any moment. So if someone is boasting guaranteed profits or specific results, they are peddling a scam.
2. No substantial proof or background information
It’s very easy to come across pictures of charts showing profits. Scammers are savvy and they will only show profits and not losses within a period of time. In worse cases, they may even show charts from demo trading accounts that aren’t even a reflection of real trading. Do not base your decision to work with someone or purchase a product based on this or any other limited information. Ask for background information and full disclosure of the profits and losses. If they refuse or remain vague, it’s probably a scam.
3. Unsolicited marketing
Unsolicited and persistent marketing is typically a sign of fraudulent behavior. If you find yourself being pushed to purchase a product or service with little information and time, it may be an attempt to scam you. Be particularly cautious if they begin to ask for personal information that can be used for things like identity theft. If it feels uncomfortable and pushy, avoid it.
How to avoid a forex scam
The best thing that you can do to avoid a forex scam is to educate yourself. The more you know, the less likely you are to be taken advantage of. Knowledge is the best thing to be armed with. Do your research—learn more about the foreign exchange market, terminology, and the legitimate resources that are available to assist you with trading. Consider setting up a demo trading account with a trusted broker to practice before putting actual money on the line.
As with any type of investing, take your time before you make rash decisions with your money. You should also consider hiring a financial advisor who can educate you on trading and help you develop a holistic financial plan. Moreover, ask lots of questions!
There are other ways to earn extra income if you are unsure
Forex trading isn’t the only way that you can earn extra income. There are much easier and less risky ways to generate more income. If you’re unsure about forex trading or afraid that you may fall victim to a forex scam, consider picking up a side hustle. In fact, there are several work from home jobs that are available to make extra cash. A few to consider are:
- Freelance writing
- Data entry
- Becoming a social media manager
- Being a virtual assistant
- Online tutoring
These are just a few ways that you can make money online on the side. You should also look for opportunities to negotiate a pay increase and generally eliminate unnecessary expenses from your budget.
Final thoughts on forex trading scams
In your pursuit to find ways to earn extra money with forex trading, you may run into your fair share of scams. So, it’s important to do your due diligence and research before engaging in the market. Remember, if it seems too good to be true, it probably is. If you want to learn more about investing, be sure to check out our free resources. You can also learn more about investing in the latest Clever Girl Finance book, Clever Girl Finance: Learn How Investing Works, Grow Your Money.