Get to know about the forex scams and their different types and how one can point out all the red flags that indicate the fraudulents. Following are the types discussed by the broker Nick Bauer, broker of The Investment Center.
Brokers who are fake or unscrupulous:
Unsuccessful brokers aren’t always con artists; occasionally, the trader is to blame for the broker/trader relationship’s failure, whether it’s because the trader is too emotionally committed, lacks a trading plan, or doesn’t comprehend the market. Of course, there are situations when the broker is inept rather than dishonest, making mistakes rather than defrauding traders.
Fake brokers, or those that seek to profit from traders without providing any value in return, generally fall into one of the following categories:
- Price Slippage – When the predicted price of a deal differs from the actual price when it is sold, this is known as price slippage. This is sometimes profitable for the trader, and other times it is not. When a broker initiates a deal, it offsets another position in the market to reduce risk and then executes it after the offset position is determined. If the offset position deteriorates, the trader price deteriorates as well. If the offset position is better, the price for the trader should be more significant as well – but a scam broker will not pass this difference along to the client.
- Liquidity – When a broker’s capital is insufficient to cover deals. This isn’t a fraud in the traditional sense, but it is a surefire method for a trader to lose money. This increases the chance of insolvency, putting the trader’s money in danger. Multiple withdrawals may be a concern for inept brokers who lack sufficient liquidity to conduct their firm correctly.
- Churning: Individual brokers are frequently compensated on a commission basis, based on the number of deals they make. Churning is the practice of doing unneeded buy/sell transactions to increase commissions. Churning hurts the trader and might result in legal action being taken against it if the broker is licensed.
- Commingling of Accounts – There is a risk of accounts becoming commingled when accounts are maintained, and management of money is taken away from the trader. This implies that a trader’s assets will be pooled with others, making it impossible to identify their activity and performance — a perfect setting for fraudulent brokers to ‘skim’ funds for their objectives.
- Unable to Withdraw – It’s critical to have fast access to any funds that a broker is managing. Traders should always be aware of the whereabouts of their funds. It’s a significant red signal if you can’t get your money when you want it – it might suggest the brokerage isn’t as liquid as it advertises or that your accounts have been commingled.
Funds for Investment Management:
Investors may be enticed to deposit large quantities of money in exchange for a part of the profits generated by their trades being managed by “extremely experienced” traders.
The fund managers are given custody of the money in these funds, and they can then utilize the funds for their objectives.
Percent Allocation Management Module/High-Yield Investment Program (HYIP) (PAMM):
Investors are asked to make a small initial investment in a high-yield scheme that promises large payouts comparable to managed funds. Initial investors are paid out of existing investors, as is characteristic in Ponzi schemes, and the system relies on a steady influx of new investors to keep the money coming.
Typically, little to no actual forex trading is done in these schemes – but when no new investors sign up, enormous losses are reported, and the HYIP owner departs with the remaining monies.
Checklist of Red Flags:
- Outrageous profit claims
- Performance is based purely on historical data; no real-time information is available.
- There is no past performance information available.
- There isn’t an identified contact in the brokerage – or you can’t find one.
- Requesting a significant amount of money
- Extremely high win/loss ratio
- Reviews that aren’t unbiased aren’t good.
- Claims of a “secret formula.”
- Offshore headquarters are not licensed.
- Check with the operated agencies indicated below whether you are under disciplinary action.
If any forex investment opportunity or broker states that selling is a guaranteed method to generate money, it is the easiest and most apparent method to recognize a scam. Forex is a viable trading option that may provide profits – but it is not a dependable source of instant wealth, and it should never be promoted as such. It is a fraud if any broker, or trader tries to offer you anything guaranteed to make you a billionaire.