Top 3 Forex Scams and How to Avoid Them
Every day, unsuspecting traders fall prey to investment scams. Familiarise yourself with their deceptive practices, and arm yourself with the knowledge to identify red flags.
Scam #1: Fraudulent Finfluencers
Ponzi schemes, also known as pyramid schemes, have made a comeback with social media. Fraudulent finfluencers, an abbreviation of “financial influencers”, lure users in with glamorous posts and the promise of high returns with little to no risk.
However, these schemes are all based on a fraudulent premise: they can only pay returns to early investors by using money from later investors. Eventually, every Ponzi scheme will collapse as the stream of new users slows, with investors set to lose all or part of their funds.
In 2022, the BBC chronicled GS3 Trades, a Forex investment scheme promoted on Instagram. Users were drawn in with the promise of high returns, easy withdrawals and the lie that the business was regulated by the FCA. They could see the value of their investments rise on paper, until one day, it all came to an end. Investors ultimately lost in excess of £3.8 million(1), and many lost their life savings.
Here are some red flags that can help you spot a Ponzi scheme:
- The promise of high or consistent returns with little to no risk;
- A lack of clarity over how these returns are actually generated;
- Withdrawals are discouraged or made conditional on recruiting others;
- Celebrity endorsements or testimonials that often turn out to be false.
Scam #2: Scam Expert Advisors
Expert Advisors are small programmes that can help you automate a given trading strategy. For example, they could open a position in a currency or security once the 10-day moving average rises above the 20-day moving average, and close the position automatically once the trend reverses. Trading rules can use any indicator, and are fixed from the outset.
Expert Advisors rose to prominence with the MetaTrader trading platform, however, trading scripts are now available across most trading platforms. You could create your own if you have programming skills, but most people turn to market places to buy or rent Expert Advisors. Some EAs can be incredibly expensive, sometimes costing thousands of dollars.
Here are a few things you can to avoid scam Expert Advisors:
- Avoid expensive Expert Advisors, as the more expensive it is, the greater the profit you'll need to generate simply to breakeven. This could prompt you to take on more risk than you otherwise would.
- Read customer reviews of the Expert Advisor you're looking to purchase, as well as reviews of other scripts published by the author. Focus on negative reviews to understand its weaknesses. You may want to avoid Expert Advisors with no reviews.
- Be suspicious of smooth and rising growth charts, as they can be generated through back-testing. Don't assume an investment will do well in the future simply because it's done well in the past in a simulated environment. In fact, it may perform poorly in a live trading account.
Scam #3: Unregulated Forex or CFD brokers
Scammers posing as established Forex or CFD brokers are a common type of scam. They often use fake websites or social media accounts made to look like the business they're impersonating. Once you've deposited money, they will often refuse to process your withdrawals and suspend their service shortly after that.
To avoid scammers posing as legitimate brokers:
- Look for typos or misspellings in their website's name. For example, a scammer seeking to impersonate FxPro.com may register Fx-Pro.com as a domain name, create a copy-cat website and match FxPro's regulatory information.
- This is also why it's a good idea to use a domain name age checker like this one to find out when a domain was first registered. Be weary of recently registered domains.
Others may set themselves up as a new broker, sometimes running what appears to be a legitimate business for months. This is possible through the use of white-label Forex broker services, whereby a third party provides the underlying trading platform and technology, whilst the broker takes care of marketing and customer support. Eventually, fraudulent brokers will suspend withdrawals, steal customer funds and shut up shop.
Here are a few more things you could do to avoid fraudulent brokers:
- Trade through regulated brokers overseen by credible financial regulators. For example, prefer brokers regulated in the United Kingdom or the European Union over those that are only regulated in offshore jurisdictions. Our Licence Checker service monitors the validity of their licences in these countries in near real-time to help connect you with reputable brokers.
- Trade through brokers covered by investor protection schemes. If you open an account with a broker regulated in the United Kingdom, you may be able to claim up to GBP 85,000(2) in compensation through the Financial Services Compensation Scheme (FSCS) if the firm was authorised by the FCA. The European Union offers a similar scheme, with amounts capped at EUR 50,000. Some offshore brokers offer compensation too through an industry body called the Financial Commission.
Forex scams and fraudulent schemes are an unfortunate reality. That's why TrustedBrokers only works with established brokers, overseen by credible regulators. We also monitor the validity of their licences in near real-time and mark valid licences with a checkmark to help you make an informed decision. Protecting your hard-earned capital by investing through a trusted broker is one key to your investing success.
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About the author
I'm Stéphane, a trader and an entrepreneur. My mission with TrustedBrokers is to help you find the right broker for you, whether you're a beginner or a pro. I've personally used and tested the brokers on our service, opening and funding real-money accounts, contacting customer service and placing trades. I started my career in investment banking in London.
- 1. BBC. (2022). Scam Land: The unlicensed 'forex trader' who promoted a £3.8 million scheme. https://www.bbc.co.uk/bbcthree/article/1bee6bdc-9cc6-4415-84fc-6536ec31d46c
- 2. Financial Services Compensation Scheme. What we cover. https://www.fscs.org.uk/what-we-cover/