8 Forex Trading Traps You Must Avoid
In a previous blog, we talked about how to spot and avoid a potential Forex scam so you don’t end up losing money needlessly. Scams, however, are more prevalent in certain activities and aspects of currency trading.
If you know where scammers are most likely to set a trap, you’ll be more diligent and watchful of your every move. So, where and how do these fraudulent acts tend to occur?
8 Types of Forex Scams to Watch Out For
Forex scams can be categorised as an investment scheme, perpetrated by scam Forex brokers, or carried out by another fraudulent trader.
1. Forex mutual fund (PAMM) Scams
PAMM or Percentage Allocation Management Module is a great way to generate passive income from Forex. You hand over your money to a fund manager who will invest it along with a pool of funds entrusted to them.
The returns are calculated based on your investment against the total amount of money pooled. The fund manager earns via the charges they set on the total profit. For example, they can charge 10% of the profit as payment for their services. They can also add their own investment in the pooled fund for additional earnings.
So where does the scam happen?
- Scam brokers will claim their fund managers are qualified and experienced even when they're not.
- They show you historical data and numbers of massive or inflated returns, usually exceeding market norms.
- They set management fees that far exceed what a majority of PAMM fund managers offer. Some of them don't even offer options to opt-out or information on penalties for early exits.
Nothing could be enticing to investors than high returns, which is why many fall victim to investment scams.
In January this year, many professionals from Malaysia and overseas were lured into a trap laced with a promise of up to 50% returns. The offenders were arrested, but there's no word if invested funds were returned.
In the last quarter of 2020, a scammer was also arrested in Singapore. As he promised high returns of up to 8% per month, victims invested more than USD1 million in his so-called foreign exchange investment.
If something sounds too good to be true, think twice. It might be a trap!
2. Signal seller scams
A trader who sends out trade ideas such as entry prices, stop-loss, and target levels is called a signal seller. In social and copy trading, a signal provider plays a vital role.
But avoid signal sellers who:
- Claim they can make you rich
- Say they can identify the best currency pair to buy or sell
- Provide unverified results
- Sell signals at extremely high subscription fees
- Sell signals only if you sign up with an affiliated broker
3. Robot scams
Automated trading systems let you trade based on preprogrammed software. It uses technical signals and other algorithms to enter and exit trades with little to no human intervention.
Sounds good, right?
However, Forex robots are likely to be a scam if it:
- Guarantees 100% profit or extremely high returns.
- Comes with an unrealistic marketing message.
- Given away for free or only for a small amount of fee.
- Said to be capable of developing strategies by itself.
- Claims to be a play-and-forget solution that can be used in the long term.
Keep these in mind and you should be able to protect yourself against robot scams.
4. Phony trading investments
Be wary of Forex funds that guarantee high returns on your initial investment or brokers who promise something too good to be true. Scammers can pitch a carefully crafted marketing message that could fool you into giving your money to them only to never see it again.
Take, for example, GoldFX Investment, an investment company in Cambodia that promised investors a monthly return of 5% to 10% through foreign currency trades. Given that it has more than 30,000 clients, there's no doubt of how attractive its offers are.
Unfortunately, the company abruptly closed in April of this year, following claims that three of its foreign former board members embezzled $20 million. GoldFX Investment is reported to at least have $27 million tied up to it. If $20 million of that is gone, how will investors recover their money?
5. Multi-level marketing (MLM) Forex scams
Some MLM businesses centred around currency trading will ask members to pay a monthly subscription fee to receive signals or educational materials. Each member is then encouraged to recruit more members in exchange for tiered commissions or incentives.
Because this scheme is focused on hauling in new members or investors rather than trading, a business could collapse or incur huge losses if recruitment hits zero.
A good example of this is Emas Fintech, a company that trades between virtual currencies and promises a daily profit of between 2% and 4% and a monthly profit of 30%. In addition, investors can earn commissions of up to 70% of the trading profit, depending on the investment package they invest in.
However, experts say that this enticing offer is just a fabrication since brokers can't guarantee high profits, especially when all transactions are conducted online.
Forex trading has also been used in Ponzi schemes. In fact, early this year, the alleged mastermind of the Forex-3D Ponzi scheme was arrested in Bangkok after being on the run for a year. Apiruk Kothi claimed he ran three Forex firms in Dubai, Hong Kong, and Singapore and has more than 60,000 clients. He could not provide supporting evidence, however.
6. Point-spread manipulation
This happens when spreads are manipulated. Because a spread is essentially a transaction's commission, some brokers play with the point spreads. If the figures are dramatically different from what most brokers offer, which is usually seven pips or more, you should be suspicious.
7. Price manipulation scams
In addition to point-spread manipulation, some Forex brokers scam investors through negative slippage and stop hunting. The former is where entry and exit orders are filled at undesirable prices, while the latter is where a broker takes out the stop-loss applied by the trader before the correct prices are streamed. This can result in lost trades.
8. Copy trading/social trading scams
Scams can happen in copy or social trading if the copied or followed trader fails to supply verified results or current trading data. Replicating a trade blindly can result in losses. This is where you carefully examine the trader you'll follow.
If you follow a trader on social media, you need to be extra careful as well. Jonathan Reuben, an accountant, lost £17,000 to an alleged fraudster, Gurvin Singh, who made people believed he got rich quickly through Forex trading. Initially, Reuben saw his profit increased, most likely because Singh was trying to sell his schemes. After a few months, his funds plummeted and what remained can't be withdrawn. Singh later vanished.
From the list of Forex scams above, one thing becomes clear -- due diligence is key. As long as you don't invest blindly in the Forex market and you read the fine print each and every time, you can protect yourself against these Forex traps and avoid losing money.
So make it a point to look into a broker's background and the legitimacy of the financial services provided. If you engage in copy trading or social trading, check the validity of the data presented. Lastly, always read the fine print.
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