Forex is renowned for its reputation as the most liquid market in the world, with a staggering $5 trillion churned out every single day. The volume of trading in forex has grown even more so during the prevailing coronavirus pandemic, a fact that has been supported by several analysts and brokerages Q1 earnings.
But with such an overflooded industry and an enormous amount of money floating around, it’s important to remember that not all brokers are as good as they seem.
So if you’ve decided to start trading the financial markets, one of the most important aspects of the game plan is choosing a legitimate broker.
Several industry malpractice participants and con artists take advantage of its complexity & attempt to fool new investors from lack of education and lack of local regulations.
While many of the scams in the forex market are no longer as pervasive as they used to be, some still exist. Whether you’re new to forex or not, here are 5 simple indicators that’ll throw up a red flag and help you spot a scam.
So, how can you spot a forex scam or broker?
- Unfair trading conditions
- High spreads and commissions
- Overnight financing
- Signal-seller scam
- Using robots without verifying
Let’s start first with unfair trading conditions. Perhaps when checking a broker’s website or reviewing material from a potential account manager, you notice a few things – minimum deposit, account types, limited educational tools, or long market execution.
These are a few examples of how a broker can already trick you into thinking you might get rich. Pay attention to the signals and make sure there’s transparency on their end.
Often brokers have applied inexplicable commissions and fees to boost their own profit margin at the expense of its investors. Falling victim to the number of scams scattered across the forex market is exactly what has given this industry a bad name.
Spreads and Commissions
Spread prices and commissions on instruments are crucial. Savvy traders go for low spreads and no commissions as they are already used to the markets. But ensure you read up on terms and conditions of the instruments you want to trade, while verifying spreads that are within a range that won’t wipe out your account right away.
Slippage and high spreads are common issues, but also major problems for inexperienced traders as the danger of losing money is all too real. Brokers might entice you with low spreads in the beginning, but try to make sure they keep the pricing throughout.
Usually, the more money you can fund your account with, you’ll find yourself with better spreads. This is because often brokers offering low spreads usually require higher minimum deposits. In any case, search well before landing with one broker. The days of having to pay a 3-pip spread for EUR/USD are over.
If you’re a day trader, this point doesn’t apply to you. However, if you are a trader that likes to take some risks, keep your open trades overnight. All night trades calculate a certain amount as a fee. Some brokers are very good at scamming clients with these late-night fees. Professional brokers will have their overnight financing rates available, so make sure to keep yourself well informed, before waking up in the morning with no funds in your account.
Using Signals to Scam You
A forex scam will always try to trick you into thinking that one trade idea or signal will make you lots of money. This is based on a subscription that most often results in you paying for a service that doesn’t verify and is quite simply a pure scam.
These signal scammers claim to identify favourable times to enter the markets, but they’re often just collecting money from traders. The unsuspecting trader hands over X amount for the privilege of trade recommendations, with many signal-seller scammers collecting the money from a certain number of traders and disappearing. Perhaps they’ll recommend a good trade every so often, but only to allow the signal money to perpetuate.
Be sure to read plenty before signing up with a service that is slowly becoming a wider problem.
Finally, using robots as a forex-developed trading system is the most recent sophisticated trading scam. Indeed, some of these tech-infrastructures resemble platforms that could do the work for you, but most often they won’t bring you any profits.
Many of these robots have never been submitted for formal review or tested. However, there are of course brokers with verified robots, but you need to do the right research before putting money into one of these approaches.
At TIOmarkets, our mission is to make forex trading transparent, easy, seamless and enjoyable for beginning and experienced traders. Register here to trade with us.