To take part in the online retail trading of forex you will need to have a trading account and this means you will need to get one through a forex broker. Obviously then the first source of possible forex scam comes from the brokers themselves. Unfortunately the booming of the industry has attracted many crooks and swindlers who set up shop just to trick unsuspecting traders and make a run with their money.
One of the most commonplace ways used by such unscrupulous brokers in order to scam their clients wishing to trade forex online is by manipulating the bid/ask spreads. The spreads usually offered by most trusted brokers are around 2-3 pips, compared to the spreads that scam brokers have, which are around 7-8 pips. Although it might not seem like a lot at first glance if you multiply the small difference in spreads by the times each client trades per day and the number of different traders, which could well in the hundreds or even the thousands, then you can easily calculate the magnitude of the rip-off taking place.
Another popular method used by swindler brokers to scam forex traders is stop hunting. Abusing the knowledge they have of knowing where their clients have placed their stops, fraudulent brokers will often make a run for those stops, effectively closing out the clients’ positions and ripping the clients off once again.
Moreover, scam brokers often do not segregate their own company accounts from the accounts holding the client’s funds and even “cook” their books in such a way as to show they are solvent when in fact they are not. In these cases, brokers go bankrupt and they cannot compensate their clients, once again ripping them off and causing them to lose all the money in their trading accounts.
Other tricks used by fraudulent brokers include misleading clients by promising unrealistically high yields and profits just to deceive them into opening accounts and making deposits but never delivering on what they promise, or forcing clients to sign up to bonus schemes with many strings attached which are subject to unattainable volume generation thresholds, thus rendering it impossible for clients to ever withdraw those sums.
A scam forex broker may not even try to be as sophisticated when ripping off people. Sometimes they may simply prey on the lack of knowledge and ignorance of inexperienced traders and pretend they are a trusted entity, through corporate cloning for example or the creation of mirror/forge sites and just take your money and run.
However, not all hope is lost. The online retail forex industry is a highly regulated one and regulators across the globe are making huge efforts to protect investors by identifying scams, warning against them and enacting relevant rules to prevent them. For example, having segregated accounts is a must for all regulated brokerages.
Therefore, the shortest route to avoiding forex broker scam is choosing to make your transactions only through brokers which are properly licensed and regulated. This may not be so easy as many brokerages try to mislead you and make you believe that they are regulated when in fact they are not.
Consequently, you should not take a broker’s word for granted. Always check with the regulator in each jurisdiction to confirm the validity of a broker’s claim to be regulated. Moreover, you should bear in mind that not all jurisdictions are equally well regulated as other and therefore besides choosing a regulated brokerage, you should also avoid those firms based in poorly regulated jurisdictions, which are often some obscure, far away tax havens.
You can find out more about the most well known online forex industry regulators in our relevant chapter, which includes details of how to contact them if you have fallen victim of scam by a firm in their jurisdiction.
If you are a US trader then always remember to verify if a broker is registered as a Futures Commission Merchant (FCM) with the Commodities Futures Trading Commission and also if they are a member of the National Futures Association, as the purpose of these two regulatory agencies is to protect the public against fraud, manipulation, and abusive trade practices.
In a nutshell, and as the foremost method of protecting yourself from forex scam by brokers, you should always stay away from unregulated firms and never deposit any money with entities that are not properly and duly licensed and regulated by reputable authorities, national or otherwise. If you fail do so, then chances are you will never be able to get your money back.
As a final thought, since the internet is such a useful tool nowadays, besides researching a particular broker through regulators and watchdogs it is also extremely insightful to check out the personal experience of other traders with a particular broker on forums and chat-rooms to learn from the wisdom of others and avoid brokers that have scammed other traders in the past.