In recent years, investors have witnessed increased number of investment opportunities and offerings. While the complexity and success of these investment products vary, technological innovation has made the Forex market one of the fastest growth areas. Many of the leading Forex brokers reported up to 500% rise in the number of new retail customers. However, the growth of the Forex market has been accompanied by a sharp rise in foreign currency trading scams. 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, letís 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 Kís 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 Kís Forex trading operation. Short while after Wís second investment, the Securities and Exchange Commission filed a complaint against K and his firm for engaging in a scheme to defraud investors. Kís firmís assets were frozen, including the $900,000 invested by W. A receiver was appointed to distribute the remaining assets of Kís firm to defrauded investors. The assets were distributed on pro-rata basis with no legal preference given to any of the victims. Since Kís firmís assets were not enough to satisfy all of the defrauded investorís 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 ďguaranteesĒ 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 them 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 firmís 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 firmís 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 firmís platform. In addition to various fees imposed on traders using the firmís platform, the Forex firm makes money as an introducing broker. Each time the novice trader trades through the firmís system, a good part of the spread charged by the broker is shared and goes into the firmís coffers. After few months, the novice trader loses all of her capital and leaves. The Forex firm, having made money during the novice traderís 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 want 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 perspective investorís 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. Investorís who are careful and diligent are likely to avoid the perils of this market, and will profit from the growth and opportunities of foreign currency trading.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest / trade in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading.
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