If you do an internet search on forex broker scams, the number of results returned is staggering. While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business. Fortunately, they eventually get weaned out.However, when you’re looking to trade forex, it’s important to know which brokers are reliable and viable, and to avoid the ones that aren’t. In order to sort out the strong brokers from the weak, and the reputable ones from those with shady dealings, we must go through a series of steps before depositing a large amount of capital with a broker. Trading is hard enough in itself, but when a broker is implementing practices that work against the trader, making a profit can be nearly impossible.
Separating Fact from Fiction
When faced with all sorts of forums posts, articles and disgruntled comments about a broker, we must remember that many traders fail and never make a profit. Many of these disgruntled traders then post content online that blames the broker (or some other outside influence) for their own failed trading strategies. Thus, when researching a potential forex broker, traders must learn to separate fact from fiction.
When faced with all sorts of forums posts, articles and disgruntled comments about a broker, we must remember that many traders fail and never make a profit. Many of these disgruntled traders then post content online that blames the broker (or some other outside influence) for their own failed trading strategies. Thus, when researching a potential forex broker, traders must learn to separate fact from fiction.
In many cases, it may seem to a trader that a broker was intentionally trying to cause a loss. Complaints such as: “As soon as I placed the trade, the direction of the market reversed;” “The broker stop hunted my positions;” or “I always had slippage on my orders, and never in my favor” are not uncommon. These types of experiences are common to all traders, and it is quite possible that the broker is not at fault.
New forex traders often fail to trade with a tested strategy or trading plan. Instead, they make trades when psychology dictates they should. If a trader feels the market has to move in one direction or the other, there is a 50% chance he or she will be correct. When the rookie trader enters a position, often he or she is entering right at a time when their emotions are waning; experienced traders are aware of these junior tendencies and step in, taking the trade the other way. This befuddles new traders and leaves them feeling that the market – or their brokers – are out to get them and take their individual profits. Most of the time this is not the case, it is simply a failure by the trader to understand market dynamics.
On occasion, losses are the broker’s fault. This can occur when a broker attempts to rack up trading commissions at the client’s expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers’ rates have not gone to that price. Luckily for traders, this is not likely to occur. One must remember that trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. Overall, it is in the best interest of brokers to have long-term clients who trade regularly and thus sustain capital or make a profit.
The slippage issue can often be attributed to a psychological phenomenon. It is common practice for inexperienced traders to panic; they fear missing a move, so they hit their buy key; or they fear losing more and so they hit the sell key. In volatile exchange rate environments, the broker cannot ensure that an order will be executed at the desired price. This results in sharp movements and often slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not. Even in more transparent markets, slippage occurs, markets move and we don’t always get the price we want.Therefore, often what is perceived as a scam is just the trader not understanding the market he or she is trading.
The Real Problem
Real problems can begin to develop when communication between a trader and his or her broker begins to break down. If a trader does not get email responses from his or her broker, the broker fails to answer the phone, or provides vague answers to a trader’s questions, these are red flags that a broker may not be looking out for the client’s best interest.
Real problems can begin to develop when communication between a trader and his or her broker begins to break down. If a trader does not get email responses from his or her broker, the broker fails to answer the phone, or provides vague answers to a trader’s questions, these are red flags that a broker may not be looking out for the client’s best interest.
Any arising issues should be resolved and explained to the trader and the broker should also be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader in this case is the trader’s inability to withdraw money from a trading account.
Protecting Yourself
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:
Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:
- Do an online search for reviews of the broker. Take what is said and filter it based on what was said in the first section; could this be just a disgruntled trader? In the same search, find if there are outstanding legal actions against the broker.
- Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.
- Read through all the fine print of the documents when opening an account. Incentives to open account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say he or she cannot withdraw because the bonus cannot be withdrawn. Read the fine print and make sure to understand all contingencies in regards to withdrawals and whether incentives impact withdrawals.
- If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more and then attempt a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.
Note: It should be pointed out that a broker’s size cannot be used to determine the level of risk involved. While big brokers get big by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn’t always safe.
What If You’re Already Stuck With a Bad Broker?
Unfortunately, options are very limited at this stage, however, there are a few things you can do:
Unfortunately, options are very limited at this stage, however, there are a few things you can do:
- Read through all documents to make sure that your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have only yourself to blame.
- Be stern with your broker, but not rude. Point out the course of action you will take if he or she does not adequately answer your questions or provide a withdrawal.
The spot forex market is said to trade at over $1 trillion a day. Combine that with currency options and futures contracts, and the amounts could literally be another couple trillion traded on any given day.
Historically Speaking
In its 2009 report, the Foreign Exchange Committee at the Bank of International Settlements estimated the total numbers of forex related transactions to be $3.2 trillion. With this type of money floating around an unregulated spot market that trades over the counter with no accountability, forex scams can only increase with the lure of earning fortunes in limited amounts of time. Many of the old popular scams have ceased, due to serious enforcement actions by the Commodity Futures Trading Commision and the 1982 formation of the self regulatory National Futures Association. However, many scams still exist, and new ones keep arising.
In its 2009 report, the Foreign Exchange Committee at the Bank of International Settlements estimated the total numbers of forex related transactions to be $3.2 trillion. With this type of money floating around an unregulated spot market that trades over the counter with no accountability, forex scams can only increase with the lure of earning fortunes in limited amounts of time. Many of the old popular scams have ceased, due to serious enforcement actions by the Commodity Futures Trading Commision and the 1982 formation of the self regulatory National Futures Association. However, many scams still exist, and new ones keep arising.
The old forex scam was found based on computer manipulation of bid/ask spreads. The point spread between the bid and ask basically reflects the commission of a back and forth transaction processed through a broker. These spreads typically differ between currency pairs. The scam occurs when those point spreads widely differ among brokers. Brokers often do not offer the normal two- to three-point spread in the EUR/USD, for example, but spreads of seven pips or more. Factor four or more pips on every million dollar trade, and any potential gains resulting from a good investment are eaten away by commissions. This scam has quieted down over the last 10 years, but be careful of those offshore retail brokers who are not regulated by the CFTC, NFA or their nation of origin. These tendencies still exist and it’s quite easy for firms to pack up and disappear with the money when confronted with actions. Many saw a jail cell for these computer manipulations. But the majority violators have historically been U.S.-based companies, not the offshore ones.
Signaling the ScamA popular modern-day scam is the signal sellers. These are people who may be a retail firm, pooled asset manager, managed accounts company or individual trader who promises to trade based on professional recommendations that will make anyone wealthy. They tout their long experience and trading abilities with backing by people who will practically testify in court on how great a trader and friend the person is, and the vast wealth that this person earned for them. All the unsuspecting trader has to do is hand over X amount of dollars for the privilege of trade recommendations. Many of these people simply collect money from a certain amount of traders and disappear. Some will recommend a good trade now and then, to allow the signal money to perpetuate. While this new scam is slowly becoming a wider problem, many signal sellers are honest and perform trade functions as intended.
Scamming in Today’s Market
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These people tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot,” because of the ability to work automatically. Either way, many of these systems have not been submitted and tested by an independent source for formal review. Examination factors must include the testing of a trading system’s parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should research the system they wish to implement into their trading strategy.
A persistent scam, old and new, presents itself in some types of forex-developed trading systems. These people tout their system’s ability to generate automatic trades that, even while you sleep, earn vast wealth. Today, the new terminology is “robot,” because of the ability to work automatically. Either way, many of these systems have not been submitted and tested by an independent source for formal review. Examination factors must include the testing of a trading system’s parameters and optimization codes. If the parameters and optimization codes are invalid, the system will generate random buy and sell signals. This will cause unsuspecting traders to do nothing more than gamble. Although tested systems exist on the market, potential forex traders should research the system they wish to implement into their trading strategy.
Other Factors to Consider
Many trading systems traditionally have been quite costly. Just a few short years ago, $5,000 was not much to pay for a system. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system. Be especially careful of system sellers that offer programs at exorbitant prices justified by guaranteeing phenomenal results. Although many crooks exist that sell systems, plenty exist that are decent and legitimate and have systems that have been properly tested to potentially earn substantial income.
Many trading systems traditionally have been quite costly. Just a few short years ago, $5,000 was not much to pay for a system. This can be viewed as a scam in itself. No trader should pay more than a few hundred dollars for a proper system. Be especially careful of system sellers that offer programs at exorbitant prices justified by guaranteeing phenomenal results. Although many crooks exist that sell systems, plenty exist that are decent and legitimate and have systems that have been properly tested to potentially earn substantial income.
Another persistent problem is the commingling of funds. Without a record of segregated accounts (A type of pool investment that is similar to a mutual fund, but is considered an insurance product. Proceeds received by the insurance company are used to purchase underlying assets, and then shares of the segregated funds are sold to investors.) , individuals cannot track the exact performance of their investments. As a result, many principles of retail firms are able to pay themselves exorbitant salaries, buy themselves houses, cars and planes or just disappear with a customer’s money. The allure for some is too great to perform their proper roles and duties. Section 4D of the Commodity Futures Modernization Act of 2000 addressed the issue of segregation. This act introduced strong regulating toward segregated brokerage accounts, allowing clients to opt out of such investment strategies. What occurs in other nations is a separate issue.
Warning Signs
Other scams and warning signs exist when brokers won’t allow withdrawal of monies from investor accounts or when problems exist within the trading station. Can you enter or exit a trade during an economic announcement that is not in line with expectations? If you can’t withdraw money, warning signs should flash. If the trade station doesn’t operate to your liquidity expectations, warning signs should again flash. An important factor to always consider when choosing a broker or a trading system to satisfy your personal goals is to be skeptical of promises or promotional material that guarantees a high level of performance.
Other scams and warning signs exist when brokers won’t allow withdrawal of monies from investor accounts or when problems exist within the trading station. Can you enter or exit a trade during an economic announcement that is not in line with expectations? If you can’t withdraw money, warning signs should flash. If the trade station doesn’t operate to your liquidity expectations, warning signs should again flash. An important factor to always consider when choosing a broker or a trading system to satisfy your personal goals is to be skeptical of promises or promotional material that guarantees a high level of performance.
Of the 193 cases filed with the NFA in 2008 for rules and law violations, 166 were settled within nine months, but only 23% received lost funds. Therefore, similar to the circumstances that present themselves in a Ponzi scheme (A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.) , even when those who deliberately engage in forex scams are brought to justice, investor reimbursement is not guaranteed.
Summary
Supposed scams are often nothing more than traders not understanding the markets they are trading, and then blaming the broker for their losses. But there are times when brokers are at fault. A trader needs to be thorough and do research on a broker before opening an account. If the research looks good, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then another deposit can be made. If you are already in a problematic situation, you should verify that the broker is doing something illegal, attempt to have our questions answered and if all else fails, report the person to the regulatory body.
Supposed scams are often nothing more than traders not understanding the markets they are trading, and then blaming the broker for their losses. But there are times when brokers are at fault. A trader needs to be thorough and do research on a broker before opening an account. If the research looks good, then a small deposit should be made, followed by a few trades and then a withdrawal. If this goes well, then another deposit can be made. If you are already in a problematic situation, you should verify that the broker is doing something illegal, attempt to have our questions answered and if all else fails, report the person to the regulatory body.
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