How to avoid forex trading scams

Daichi Hoang is the webmaster of Best Forex Brokers based in Sydney, Australia. He provides the following advice to help traders avoid risky forex scams and understand the true merits of forex trading.

forex tradingIf you are one of the many people in South Africa attracted by the supposed riches available in forex trading, you need to be extremely careful about losing your money to scammers.

According to Google Trends, South Africa ranks as the number one nation in the world for user searches in forex trading and this alarming search trend is no doubt fueled by opportunistic scammers who expose ordinary citizens to both offline and online adverts filled with popular catchphrases like “financial freedom” and “passive income”.

It’s important to have a clear understanding that the forex market itself is not a scam. It is simply the exchanging of currencies, which happens on a daily basis. You have most likely participated in the market at some point, whether exchanging money to travel overseas or buying something on the Internet with a foreign price tag.

There are several ways in which you can participate in the forex market, each with specific things to look out for if you are considering taking part. Let’s have a look at them in detail.

1. You could become a forex trader

You are trained either in person or through a digital course to become a forex trader. You conduct your own trades, in your own time and are solely responsible for your account. Typically, the only cost involved is paying the fee for the course which could be a one-time fee or an ongoing subscription.

What to look out for: The hard honest truth is that you will not become an expert trader making truckloads of cash overnight, in weeks or dare I say months. How many people do you know who became experts in their field in such a short time? Any course promising to turn a beginner into a professional trader in a short space of time is a red flag and you need to be very careful.

There is certainly a chance that you could be taught an excellent trading strategy, but how are you mentally able to execute the strategy like a 10-year veteran? If you were given the world’s greatest recipe by the world’s best chef, are you able to replicate the dish as a beginner?

Becoming a trader is the hardest and longest road for success in forex. Professional traders are employed by the largest financial institutions to manage millions of dollars in a day’s work and it would be unreasonable to suggest that a training course could get you to the same level.

My advice: If the idea of not turning into a professional trader in a few weeks time bothers you, stop right now and find another hobby. If you genuinely enjoy a challenge that takes both time and discipline, welcome aboard. I strongly suggest you start with either a “micro” or “mini” account which are worth 1/100th and 1/10th the value respectively of a “standard” account which will help maintain your trading balance. You won’t win big, but you won’t lose big either and it’s all about gaining experience.

2. You could invest in a forex managed fund

You have some money to invest and you place it into a fund which trades forex. The fund manager is responsible for all the trading and you are charged a performance fee periodically, typically each month.

What to look out for: Put very simply, promises of outrageous returns. If a fund is doubling your money in a few months, everyone on your street would be investing. I won’t say that such a fund doesn’t exist – after all, it is posible for a stock on the stock market to occasionally make incredible gains, but such cases are few and far between. If you are presented with a fund that is performing at excessively high levels, you need to be looking into the actual trading history of the fund to understand what kind of trades they are placing.

The problem with data is that it can be presented in many different ways to make it look good. The raw data is what you need to check to understand the real performance. For example, a fund that increased 50% in the last month sounds great, but what if at one point in the month it was negative? They will most likely not tell you that part.

My advice: Managed funds are nothing new. There are plenty around which invest in stocks, minerals, resources, property, etc. They too have very poorly performing funds and excellent funds so it’s really up to the individual to do their due diligence to find a fund that offers a good balance between risk and reward. As with any kind of investment, you risk capital in order to potentially make gains.

If you are considering investing money into a forex fund, at a bare minimum make sure that you or someone who knows forex trading is able to look at the fund’s trading history to conduct a risk analysis.

3. You could buy a forex system and run it

Forex systems, also known as Expert Advisors or Forex Robots are automatic trading algorithms that are developed to run with the popular forex trading platform called MetaTrader. They are probably the most advertised type of forex investment online.

What to look out for: I almost want to say avoid these at all costs. Using the time-tested “If it sounds too good to be true… ” theory, almost all of these robots fall into this category. Every single robot shows incredible gains, but there is a reason behind this. Generally these robots are built by back-testing which is the process of applying “what-if” scenarios to historical data. So these companies will come up with the perfect system to fit what has already happened in the past and their performance statistics are based on “what this system would have made” – which is a lot easier to find than a system for predicting the future.

If a system tries to push the sale by claiming there are limited copies available, walk away. A market that trades over $5 trillion dollars a day does not get affected by extra people trying to make the same trade.

My advice: The only reason why I don’t completely rule out robots is because in today’s age, computer algorithms are extremely common and used in many industries. Computers are able to think faster than humans, process more data at a much quicker speed and make decisions based purely on data, without emotions. Also, history tends to repeat itself so I can see some merit in using an algorithm, but the most important thing to remember – and this applies to any prediction model based on historical data – is that past performance is no indication of future results.

If you must try a forex robot, invest small by opening a “micro” or “mini” account as described earlier. Invest what you are absolutely willing to lose and if the system makes your initial deposit in profit, take it out so the worst you can do is break even (minus whatever the system cost was). After that, I would strongly suggest making periodic withdrawals or setting up your account so that once it reaches a lower threshold, all trading is stopped until you manually activate it again.

Summary

Why is the forex trading industry so popular for scammers? For one, it’s a decentralised network, hence there is a lack of governance and this gives opportunistic scammers free reign in advertising. It’s slowly becoming regulated but until there is tighter control, you need to protect yourself by understanding what red flags to look out for.

Top five forex trading alarms

  1. Any notion that you can become a successful trader in a short period of time
  2. Any performance that seems too good to be true
  3. Systems which claim outrageous winning percentages
  4. Managed funds which don’t disclose trading history
  5. Any systems which have “limited copies”

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