Like all financial markets, the forex trading world also has its share of frauds and schemers.
You may hear some companies offering trading robots that can help you rake in large profits with zero risks.
Perhaps you’ve also read about trading signals that you simply have to follow, and you’ll be milking the forex market like a cow in no time.
These tools – trading robots and signals – are not frauds in and of themselves. On the contrary, many successful traders use these instruments to trade better.
However, how some shifty individuals may present them to you – hoping to get you to buy these products – makes them a sham.
This lesson will help you open your eyes to the reality of forex trading scams and, hopefully, avoid them in the future.
Lesson Highlight
- The common forex scams involve trading robots and signal providers. While there are legitimate providers, they are more of an exception than a norm.
- Verifying whether the broker or service provider is regulated by a regulatory body ensures that the trader has backup support in case a conflict arises between them and their broker or service provider.
- Trading robots act like forex account managers in that both services execute trades on behalf of their clients. However, trading robots are software programmed based on specific trading parameters.
Forex Robots
Trading robots and automated trading are not new concepts in forex. Forex robots are not the same as the futuristic ones you see in movies and TV shows.
Instead, these trading bots are simply programs you can install or plug into your trading platform to help you by automatically executing trades. These robots rely on mathematical algorithms and technical analysis to “decide” when to open and close positions on your behalf.
Unscrupulous persons use the advantage of trading bots in the forex market to mislead others into buying the robots they sell. They usually market these to inexperienced and beginner traders as a surefire way of bagging huge profits.
If you’re a forex market novice, these automated trading programs – often sold cheaply – can seem like a good deal. Imagine making thousands of dollars by using a robot you bought for about the price of a fast-food meal.
What makes these robots a “scam” is the fact that forex trading is and always will be risky, no matter how advanced or fancy the program you’re using. As of today, no single trading bot can help you trade with zero risk.
Forex Signals
Forex trading signals are like trade robots. These tools use technical indicators and mathematical algorithms to determine your best trading course.
You’ll also get everything that trading bots can do from forex signals. What makes these tools different from a forex robot is they can’t execute trades for you.
This automated system can evaluate current market conditions and other technical indicators, but it’s still up to you to open or close trades.
As with trading bots, deceitful people sell forex trading signals at low prices to beginner traders.
Forex Broker Scams
Just as there are individuals taking advantage of less experienced traders, so too are their institutions that do the same.
Some brokers participate in activities that financial regulators will frown upon. Some of the most infamous ways a broker can “cheat” clients are by manipulating bid-ask spreads and stop hunting.
While the usual bid-ask spread for brokers ranges from just 2-3 pips, some raise this to as much as 7-8 pips per trade. Manipulating spread costs this way lets dishonest brokers earn tons of money each day, depending on their daily trading volume.
On the other hand, stop hunting involves brokers intentionally triggering their clients' stop loss orders. Brokers know where their clients place their stop loss orders and can manipulate prices to set them off.
Doing so can force affected clients out of their trades and create high levels of volatility at the same time.
Forex Regulatory Agencies
While there are untrustworthy individuals and brokers out there, you shouldn't be discouraged from trading in the forex market.
Many countries have financial regulatory authorities that actively monitor forex-related activities in their jurisdictions to prevent underhanded tactics like those you read earlier.
Some of these regulators include the following:
- Commodities Futures Trading Commission (CFTC, US)
- Financial Industry Regulatory Authority (FINRA, US)
- Financial Sector Conduct Authority (FSCA, South Africa)
- Financial Conduct Authority (FCA, UK)
Dealing only with brokers recognized and regulated by any of the various financial authorities worldwide can help you avoid becoming a victim of broker-led scams.
In the next lessons, you’ll learn about forex robots and trading signals in more detail.
