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Forex Scams: How to Spot Them A Mile Away
Many of these Forex scams are promoted on the radio, television, newspapers and the Internet. Investors who fall victim to these schemes, often lose all of their money.
As an illustration, lets examine the facts of a recent case involving Forex fraud and its consequences. W learned of a foreign currency trading opportunity through an infomercial on the radio. K, the owner of a Forex asset management firm, spoke during the infomercial, promising viewers significant profits with minimum risk. After seeing the infomercial, W contacted K, and later attended a seminar presented by K and his firm. The seminar was so convincing that W wrote a check to K for $100,000.
Several months later, W received statements (which were false) from Ks firm reflecting significant returns on his initial $100,000 investment. Thereafter, W attended another seminar and decided to invest more money. W took a loan and invested another $800,000 in Ks Forex trading operation. Short while after Ws second investment, the Securities and Exchange Commission filed a complaint against K and his firm for engaging in a scheme to defraud investors. Ks firms assets were frozen, including the $900,000 invested by W. A receiver was appointed to distribute the remaining assets of Ks firm to defrauded investors. The assets were distributed on pro-rata basis with no legal preference given to any of the victims. Since Ks firms assets were not enough to satisfy all of the defrauded investors claims, W received only about $22,000 of the $900,000 he invested.
Since a whole book can be written on the various tactics and methods used by Forex scam artists, in this article, I will focus on the major warning signs that one needs to identify to avoid falling victim to Forex swindlers.
1. Promises of Little or No Risk
If you encounter a Forex firm that claims to have developed a foreign currency trading strategy that carries very little or no risk, stay away. The reason Forex trading can be very profitable is because it also carries a very high risk of loss. The Forex market is very volatile, and, without good money management, an investor can lose most if not all her capital within few days. Thus, individuals and firms who make claims that are far from market realities, as is riskless Forex trading, are really after your money.
2. Guarantees of Large Profits
Beware of firms that guarantee large profits in Forex trading. These so called guarantees are mere ploys to entice investors and make them believe that their money is safe and that they will definitely make large profits. Such claims are simply untrue, because even the best professional traders cannot guarantee that they will make a profit any given day. The Forex market, as most financial markets, is very unpredictable. Hence, be suspicious of such claims and those who make them.
3. Employment Ads For Forex Traders
Many Forex trading firms use employment ads to attract individuals with capital to trade using their systems. The employment ads, which often appear in newspapers and on the Internet, state that a foreign currency trading firm is looking for individuals to teach how to trade the foreign currency market using firm capital. Those who reply to the ad are convinced by the firm that they will make a fortune trading currencies if they participate in the firms training program. During the training process, which often occurs on a demo system, the novice traders are encouraged and told that their demo trading records show that have made significant profits, that they are ready to make real money and would very successful. Despite the firms assessment of the novice trader as a brilliant newcomer, no firm capital is provided to the trader, instead the excited novice is told to use her own capital to trade using the firms platform. In addition to various fees imposed on traders using the firms platform, the Forex firm makes money as an introducing broker. Each time the novice trader trades through the firms system, a good part of the spread charged by the broker is shared and goes into the firms coffers. After few months, the novice trader loses all of her capital and leaves. The Forex firm, having made money during the novice traders short stint, moves on to new traders eager to become rich trading foreign currencies.
4. Is the Forex Firm a CFTC or NFA Member
Before you sign a check and give your capital to a Forex company, make sure you investigate the entity. Check to see whether the Forex firm, with which you plan to do business, is registered with the United States Commodity Futures Trading Commission or the National Futures Association. Many scam artists falsely claim that their firms are registered with the CFTC or the NFA to gain a prospective investors trust. Do not trust anyone, research the firm and the background of the individuals involved before parting with your hard earned money.
The Internet has paved the way for many new opportunities for retail investors. The Forex market is both exciting and fast paced. Investors who are careful and diligent are likely to avoid the perils of this market, and will profit from the opportunities foreign currency trading has to offer.