Is forex trading legal?
The short answer is yes. Forex trading is legal in most countries.
If your country has restrictions on trading forex, you can set up an account in an overseas jurisdiction with an unregulated forex broker. (Preferably with the highest available leverage on offer.)
The real question here is: Do you have measures in place to protect your capital from your forex broker? Also, what are the common forex broker scams? Importantly, how do you avoid them?
Finding the right forex broker can be a tough job.
Is Forex Trading Legal? Lack of regulations
The first thing to do is check whether your broker is regulated. If not, and your broker goes bankrupt, will you get your money back?
I like knowing that my money’s segregated (held in another account) from my forex broker. Not all brokers segregate client funds, mind you. 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, withdraw your capital.
Unregulated brokers, such as those registered in tax–free jurisdictions, used to get away with murder…
These days, with increased competition in regulated countries, forex traders are more aware of the common scams and problems.
Market regulators are starting to crack down on scams and frauds to protect forex traders as well. Saying that, lots of forex brokers are improving of their own accord. They fear losing their licences or getting big fines and losing clients as a result.
Unregulated forex broker risks
Unregulated forex brokers tend to offer better leverage for their clients.
At the same time, they often don’t segregate client funds and have higher withdrawal fees…
It’s a catch-22.
Since these forex brokers also offer lower trading costs, they tend to have poor technology and customer service as a result. Here, potentially, you have no right to complain about any wrongdoing as well. So you probably won’t be able to formally dispute the claim either. In this worst-case scenario, if the broker claims they did nothing wrong, you could potentially lose your money.
Lots of forex traders still like to use unregulated brokers though…
Remember, forex trading is illegal in some countries, so some traders have no other choice. In other cases, forex traders prefer trading in tax–free jurisdictions where they pay no tax. Unregulated forex brokers are also attractive because they offer higher leverage and lower trading costs.
If you want to use an unregulated forex broker, please do your homework.
If you’re new to forex trading, we recommend using a regulated forex broker, if you can. The only downside of using regulated forex brokers is the potential leverage restrictions and capital requirements. On the plus side, when you trade with regulated brokers, the formal dispute processes are taken seriously. So if anything goes wrong, you know that you will be treated professionally.
Is Forex Trading Legal? False reviews
When shopping around 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.
Here’s the real story…
You should consider your forex broker as a potential business partner.
If you were looking for a business partner, would you just trust one or two reviews?
Of course not.
You would shop around, meet people, and see if you fit well together.
It’s the same thing in forex.
You need to build trust with your broker.
I recommend reviewing and trialling a few forex brokers to see which one suits you the best…
Remember, forex brokers are business partners who you will be with for a long time.
Is Forex Trading Legal? 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 consider why most negative reviews exist.
A bad experience.
I’m certainly guilty of leaving terrible restaurant reviews in the past.
In this case, when most traders lose money, they tend to blame someone else for their mistakes!
For example, 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.
(Pro tip: During high–volatility periods, such as stock market corrections or crashes, brokers widen spreads, raise margin requirements, and hike option volatility premiums.)
Joe’s new to scalping and confused why the spreads are widening. He’s used to trading with tight spreads, when his strategy works. The widening of spreads causes him to lose money.
Joe blames his broker for his losses and writes an ‘anonymous’ negative review.
This is common practice for forex brokers.
You should make your own mind up by trading with a forex broker for a bit. Test out a few brokers and decide which broker you like the best.
Is Forex Trading Legal? Suspicious activity
Question: Have you ever wondered why depositing money into a forex account is a breeze, but withdrawing it is difficult?
This is a common theme in the forex industry.
Most forex brokers make it really simple to deposit capital.
But it’s a headache to withdraw capital.
Most forex brokers give you one free withdrawal every month. If you want to withdraw any more times, it will cost you a couple of dollars.
Unfortunately, while this should happen throughout the industry, some 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.
Is Forex Trading Legal? 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. If they do, poor support can be tough to judge for novice traders.
Here’s the catch…
When you are learning how the broker’s platform works, you will likely have plenty of questions.
The trick is: If your broker can’t answer your simple questions, how can you expect them to offer good service when something major goes wrong?
I recommend doing business with a forex broker that takes customer service 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 questions, there’s a good chance you have a bad forex broker.
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: Is Forex Trading Legal?
Most new forex traders are only concerned with low commissions.
It’s a big mistake.
If you’re only concerned with low commissions, you will likely get ripped off in other ways. Put differently, you get what you pay for in the forex business.
You need to consider other things, such as execution, customer service, etc.
If you’re going to research forex brokers, don’t focus on just one review as well.
You need to compare multiple reviews.
I like brokers that don’t charge excessive withdrawal fees or make it hard for you to get your money. I also like brokers that are regulated and segregate client funds. At the same time, I understand why some people use unregulated brokers. There’s a lot of advantages. If you’re using an unregulated broker, I urge you to do your research and try them out before trading with real money.
In the next forex lesson, we’ll answer the question: What’s the best forex platform ― MetaTrader or cTrader? Forex traders often get confused as to whether they should use MT4, MT5 or cTrader. If you’re ready to discover the best forex platform, click here.
To your trading success,
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