Forex Trading Red Flags For Scams You Need To Know

Traders and investors across the globe need to understand what to look for in their partners. With plenty of scams out there, you can protect yourself with a little bit of knowledge.

Despite efforts to reform the Forex industry, many scams remain. Evolving with the times, scammers continue to invent new ways to fool even professionals into accepting their legitimacy.

Yet, even with regulators stepping up across the globe, many cases fall through the cracks. Some of them are complete fly-by-night schemes intended to milk you for one large transaction. Others fake their competence, luring you in over weeks and months.

We see this happening both with people claiming to be so-called ‘Trading Professionals’ as well as with brokers. Each has their own niche in the world of Forex scams. They leverage greed and desire to manipulate their victims.

However, with just a little bit of knowledge, you can combat them by spotting alarming patterns ahead of time. There are some easy, common sense approaches that you can follow to steer clear of these vipers.

The trader that’s too good to be true

We all laugh at the infomercials where some guy stands in front of a nice car and a mansion, talking about how he made millions in the real estate market. It seems both cheesy and fake. 

No way you would ever fall for that!

Except, that’s essentially what you find with so-called gurus. They lure you in with all the promises of riches in glory fit for a king. They claim how easy it is to make money, and how quickly you should be able to become a millionaire. Quite often, they will present their ideas in very simple terms that make sense at face value. Sometimes, their strategies may actually work.

The cold hard truth is that trading isn’t something you perfect overnight. Many professionals take years, and sometimes several blown up accounts before they manage to turn a consistent profit. Sure, there are plenty of traders to make quick fortunes in the market. More often that’s a function of lucky timing than a strategy or trader who can outperform at such a substantial level for extended periods of time.

Where we often struggle is when they straddle the line between believability and plausibility. What they offer almost seems too good to be true, but still fits within the realm of reasonable.

However, it’s a little easier to spot these traders than you might realize. There are some simple clues that tell you everything isn’t on the up and up.

  • Win rate over 90% – It’s entirely possible to win 90% or more of your trades, but it’s exceptionally rare. If you’re winning that high of a percentage then the risk/reward ratio should be skewed to heavily favor large losses. For most trading, there’s a natural tradeoff between the risk/reward ratio and win-rate.
  • Living the glamorous life – There’s a famous saying, ‘Act like you’ve been there before.’ Successful traders don’t really need to market themselves as flashy figures. Generally, their results are good enough to get them enough business. At the very least, they aren’t typically driving around in Ferraris. 
  • Lack of tangible proof – If you were a successful trader, wouldn’t you be able to prove it? Anything from account ledgers to bank statements? Any trader worth their salt can back up their claims. If you ask for evidence and they don’t have any, that’s usually a signal they aren’t what they claim.
  • They can’t explain their strategy – Every so often, you’ll come across a trader that either stole their strategy from someone else or simply made one up out of thin air. Professional traders work for years to hone their craft, so they know the ins and outs of their strategies pretty darn well.
  • Excess returns – You can have great months, it happens. But turning over 20% or more a month regularly is tough for even the best traders in the world. Profiting from Forex trading isn’t a sprint, it’s a marathon.
  • No stop loss – Even traders who don’t use stop-loss orders still have a stop out plan. Otherwise, you’re basically buy and hold.  If you come across someone without one, run far away fast!
  • They only provide static proof – Professional traders make money consistently. They didn’t have one glorious day and then never make a dime again. When you see someone with phone screenshots or proof that all come around the same day, chances are they aren’t consistently profitable.
  • Less than reputable broker – There’s plenty of scams on the brokerage side of the business. Real traders don’t have the time or desire to deal with suspect firms. If the trader you’re looking at uses a broker you’ve never heard of or seems sketchy, chances are the trader is as well.
  • References  – While there are some newer traders that have yet to build relationships, most will have references you can speak with. If the trader can’t provide them and they’ve been in the business a while, something’s probably amiss.
  • Questionable behavior – Professional traders have the word professional in the title for a reason. They understand the business side and act in ways that create ethical dilemmas or questions for their partners. While sometimes a good trader can do this, it’s best to just avoid it altogether.

Some of this may seem obvious. However, these scam artists are good at what they do. They find ways to get you emotionally caught up, causing you to take leave of your senses. 

That’s why one of the best things you can do is take time with anyone who claims to be a great trader. Good ones will be able to answer your questions over a course of days or weeks. Scammers will want to move on quickly. By taking your time, you disconnect the emotions from the decision-making process.

When in doubt, always talk it out with a friend or a trusted professional.

Bad side of brokers

The history of Forex is littered with the bodies of brokers that came and went. Quite often, large swaths disappear when you see outlier moves in the market they fail to hedge. 

But it doesn’t take a black swan event to make brokers disappear. There’s plenty that work at the fringes, seemingly legitimate, and then gone the next day. Additionally, there’s plenty of brokers who are legally legitimate but don’t operate in the interests of their customers.

So, with that in mind, let’s cover some of the things to look for with broker scams.

  • Approved regulator – One of the top things you need to look for in any broker is who they are regulated by and where they are regulated. For example, U.S. brokers are regulated by the Commodities and Futures Trading Commission (CFTC). The UK has the Financial Conduct Authority (FCA). Brokers that operate in multiple jurisdictions will often have several certifications from the various governing bodies.
  • Reviews – Any broker that’s been around a little while will have customer reviews to take a look through. However, if they deal with professional and institutional clients, you can ask for a list of referrals. Those are always the best way to learn about a broker’s reputation.
  • Customer support & service – Although automation does quite a bit these days, you should be able to talk to a person no matter who you’re dealing with. While brokers don’t need to be available 24/7 necessarily, they should be around when you need them. Additionally, they should have a built-out dispute resolution system to handle larger issues.
  • Clear fee structures – Not every broker is upfront about how they make their money. It should be abundantly clear from any reputable broker where they charge fees, whether it’s straight commission, spread based or otherwise.
  • A-Book vs B-Book – You should always be able to find out whether the broker is a straight-through-processor (STP) A-Book or B-Book that takes the other side of the trade. If they don’t know the difference, then you should probably step away.

Again, just because a broker isn’t working in your best interest doesn’t make it a scam. However, there is a lot of gray area. Scams attempt to do things that are illegal in most cases. Yet, what’s illegal in one country may be legal in another.

That’s why the governing bodies are critical. Knowing that your broker is accredited by an institution with high standards gives you peace of mind.

Final Thoughts

Even taking all of these things into consideration may not be enough. That’s why it’s always helpful to have someone you trust that can help you along the way.