How Do Forex Scams Work?

Finding the right forex broker can be tough job ― especially if you don’t know what you’re doingThe first thing you should do is check whether your broker is regulated. If not, under the condition your broker goes bankrupt, will you get your money back?  

What steps are in place to protect you capital?  

I like knowing that my money’s segregated (held in another account) from my forex broker. Not all brokers segregate client funds. If your forex broker doesn’t separate your capital from their own, pay close attention to it. If there’s any sign of losing your money, immediately withdraw your capital.  

Invest as much as you can afford to lose with each forex broker.  

You must also know the steps required to deposit and withdraw funds. Does your broker charge any fees? If the steps are difficult or cumbersome, avoid that broker like the plague. Likewise if the broker charges too much to withdraw your capital.  

There’s lots more to think about when choosing your brokerSo, let’s talk about the common forex scams…   

Lack of regulations 

Unregulated brokers, such as those registered in taxfree jurisdictions, used to get away with murder. These days, with increased competition in regulated countries, more forex traders are more aware of the common scams and problems; therefore, they’re happening less often.   

Key financial market regulators are starting to crack down on leverage, scams and frauds to protect tradersThat said, lots of brokers are improving themselves because of the fear of losing licences or getting big fines.  

If you’re trading with an unregulated broker, you should be aware of the risks. For example, while unregulated brokers tend to offer more leverage, they might not segregate client funds and have higher withdrawal feesSince they might also offer lower trading costs, unregulated brokers tend to have poor technology and customer service.   

Here, potentially, you have no right to complain about any wrongdoing. If the broker claims they did no wrong, chances are you will lose your money. You possibly won’t be able to formally dispute the claim, either 

Traders still use unregulated brokers, despite the risks.  

In some countries forex is illegal, so there’s no other choice. In other cases, some traders like trading in taxfree jurisdictions, and have the ability to receive higher leverage and lower trading costs.  

If you use an unregulated forex broker, do your homework.  

We don’t recommend them for beginner traders.  

If you’re new to forex trading, use a regulated forex broker to stay safe. The only downside of using regulated brokers is potential leverage minimums and capital requirements, such as the need to have a certain amount of capital in your account. That said, when trading with regulated brokers, formal dispute processes are taken seriously.  

Regulators could freeze funds and strip licences from forex brokers, if they cross the line.   

False reviews 

When shopping for a forex broker, false reviews are extremely common.  

I’m sceptical of both ‘good’ and ‘bad’ reviews.  

Someone might have had a bad experience and write a negative review. At the same time, good reviews may be a sign of scammers. Unfortunately, you simply can’t trust any one single review. You need to read lots of reviews. But be aware some brokers pay websites to write positive reviews to encourage you to sign up.   

Here’s the story… 

You should view forex brokers as potential business partnersIf you were looking for a business partner, would you just trust one or two reviews? 

Of course not.  

You’d shop around, meet people, and see if you fit together.   

It’s the same thing in forex.  

I recommend trialling a few forex brokers and seeing which one you like. If you really like a forex broker, there’s no harm in searching for affiliate offers to potentially reduce your trading costs. I’ve trialled lots of brokers over my time and only recommend brokers on this site that I would use. 

Disclaimer: My recommendation will save you hundreds of hours researching forex brokers. But that doesn’t mean you should blindly go with them. I suggest signing up to a few and playing around with them to see who you likeThere’s two positives following this advice: 1) you’re researching the broker in a practical way; and 2) you could save on trading costs.  

Remember, forex brokers are business partners who you will be with for a long time.  

Dodgy websites 

If you go down the route of doing your own research, you will find heaps of websites that bash forex brokers. This will give you a bad impression and you might not do business with them. But think about why most negative reviews exist. 

It’s simple.  

A bad experience.  

I’m certainly guilty of leaving terrible restaurant reviews in the past. In this case, when most traders lose, they tend to blame someone else for their mistakes!   

Let’s say Joe likes to trade during periods with a lot of news flow. The news flow dramatically increases volatility one day and forex brokers widen their spreads.  

(Note: During highvolatility periodssuch as stock market corrections or crashes, brokers widen spreads, raise margin requirements and hike option volatility premiums.)  

Most new traders don’t know how the market works. In fact, most forex trader educators don’t have real market experience and don’t truly know how the game works, either. Most websites ― in one way or another ― copy someone else’s content. 

Not us, mind you.  

We’ve got more than a decade of real trading experience.  

Returning to Joe’s example, henew to scalping and confused why spreads are widening. Joe’s used to making money with tight spreads. The widening of spreads causes him to lose money. 

Joe blames his broker for his losses and writes an ‘anonymous’ negative review. Just when he was starting to make money, the broker played around with the spreads!   

New forex traders who can’t comprehend when spreads move, and attract overnight costs (i.e. rollover interest), might get annoyed when their account balances tick lower. If you search for this topic on Google, you will find hundreds of statements such as, ‘I think my broker is taking a few pips from my account every day.’  

If only he/she knew about rollover interest 

It’s human nature to expect good service.  

You’re satisfied when you receive it. But unless the service exceeds your expectations, you likely won’t leave a great review. On the flip side, people love writing negative reviews. There are hundreds of negative reviews about poor broker connectivity on the internet. But consider that it might not be the broker’s connection ― the person writing the review might have had poor internet when they made a particular trade 

You should do demos to see if you like a particular broker before you play with real money. 

Make your own mind up.  

That said, if you find lots of similar positive/negative reviews, it could indicate a legitimate compliment or problem. Of course, most people don’t plan to leave a negative review. But some do. Many ‘dodgy’ brokers want to destroy their competition. They write negative reviews on other brokers’ platforms to make them look bad.  

It’s certainly a strange world we live in!  

Suspicious activity 

Have you ever wondered why depositing money into a forex account is a breezebut withdrawing it is difficult?  

Most forex brokers make it simple to deposit capital.  

But it’s a headache to withdraw capital 

Most brokers give you one free withdrawal every month. If you want to withdraw any more times, it will cost you a couple of dollars 

That’s fair.  

Unfortunately, while this should happen throughout the industrysome brokers charge excessive fees for withdrawing money.  

It gets worse…  

Some forex brokers make your life extremely difficult when withdrawing capital. They might keep your money for more than 45 days, while giving you plenty of excuses after processing your transfer.  

A few business days (3-5 days) is enough time to get your money.  

Pay attention to suspicious activity 

Unfortunately, while the industry is getting better, some forex brokers are known for over-promising and under-deliveringWhen something goes wrong, you might be left looking for answersSo ensure your broker replies to your questions early on in the relationship, even the simple ones 

Poor support 

There’s nothing worse than when something goes wrong, and you can’t sort out the problem. Most new traders don’t have any customer service expectations when they start. And if they do, poor support can be tough to judgeif you haven’t done any business with your broker.  

But that will quickly change…  

When you are learning how the broker’s platform works, you will likely have plenty of questions. If your broker can’t answer your simple questions, how can you expect them to offer good service when something major goes wrong?  

Take support seriously.  

You should know that many forex brokers do a fabulous job. They provide excellent real-time chat systems for you to make enquiries. But if your broker offers cheaper commissions or more favourable terms, they might have poor customer service.  

The rule of thumb: If you have trouble finding answers to your questionsthere’s a good chance you have a bad forex broker.  

Poor technology 

One more scam is poor technology.  

Let’s say your computer and internet are both reliableOne day you’re trading and the platform suddenly freezes 

What do you do?  

You are unable to manage the trades you own. 

When your connection ‘resumes’, your forex trade might be stopped out’ for a loss. Now, while this example is made up, it happens from time to time with good and bad brokers. But if it happens frequently, you should consider finding a new broker.   

Suspicious bonuses  

The ultimate forex scam is juicy bonuses. 

Many traders have been enticed into signing up with forex brokers and/or overtrading because of bonuses 

Bonuses, such as additional capital, free gifts or depositing funds, are offered when signing up with some brokers.  

Another common bonus is where you sign up for a commission model. If you spend a certain amount on commission, you will receive advanced trading software.  

Bonuses are frequent throughout the industry. However, regulators are cracking down on them because they encourage reckless behaviour. The most well-known scam is sign-up bonuses. Upon registration and deposit, you would be offered additional capital  say 20% of your deposit. But you can’t withdraw the funds ― you can only trade with them.   

What happens next? 

Most new traders lose their bonus ― plus their own capital.  

But who cares…?  

There’s a new sucker born every day!  

Your ‘Start With Forex’ takeaway 

Most new forex traders are only concerned with price.  

It’s a big mistake.  

If you’re only concerned with price, you will likely get ripped off. Put differently, you get what you pay for in the forex business.  

Now, if you don’t know what you’re looking for, it’s challenging to know the scams of sly brokers. That’s because legit brokers offer bonuses too. If you’re going to research forex brokers, don’t focus on just one review. You need to compare multiple reviews.  

I like brokers who don’t charge excessive withdrawal fees or make it hard for you to get your money. I also like brokers who are regulated and segregate client funds. At the same time, I understand why some people use unregulated brokers. If you’re using an unregulated broker, I urge you to do your research and try them out before trading with real money.  

Hopefully, you understand the importance of using a reputable broker. If you want a head start, you can look at our list of recommended forex brokers. I suggest signing up to a few and playing around with them to see who you like.  

In the next forex lesson, we’ll answer the question: What’s the best forex platform ― MetaTrader or cTrader? Forex traders often get confused whether they should use MT4, MT5 or cTrader. If you’re ready to discover the best forex platformclick here 

To your trading success, 
Start With Forex  

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Quiz

Lesson Fourteen: How Do Forex Scams Work?

The first thing you should do when looking for the right forex broker is:

Correct! Wrong!

Not all brokers______ client funds, putting them in separate accounts from their own:.

Correct! Wrong!

Fear of these has caused lots of brokers to improve themselves:

Correct! Wrong!

Forex brokers can be likened to this as they should be with you for a long time:

Correct! Wrong!

The ultimate forex scam:

Correct! Wrong!