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Types of Forex Scams and How You Can Avoid Them

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Last Updated: Sep 29, 2022 @ 11:46 pm

When you first start telling family and friends that you are going to be trading forex, you can expect at least one person to warn you, “Don’t! Forex is a scam!”

Forex is not a scam, just as the stock market is not a scam. But there are forex scams, just as there are stock scams.

Thankfully, it is not too difficult to stay safe and avoid forex scams. You just need to know what types of scams exist, and what red flags can alert you.

In this post, we will be going over both. We will start out by talking about the red flags.

Forex Scam Red Flags

The reason we are listing forex scam red flags all in one place upfront rather than individually with each of the different types of scams is because on the whole, once you have learned to recognize red flags for one type of scam, you have learned to recognize them for all types of scams.

Here they are:

  1. Promises: No one can promise you a particular result with any forex product. There are no guarantees in forex trading. Risk is inherent in every trade you place. Past results do not guarantee future returns. Anyone who fails to disclose this is trying to scam you.
  2. Unrealistic numbers: If you see a signal or robot service claiming returns like a 98% win ratio, you should walk the other way. That is not going to happen no matter how badly you might want it to.
  3. No proof: You should be able to view verified past results for a signal service, etc. If the person offering the service refuses to show you any documentation of past performance, you have zero reasons to think that they can produce any sort of reliable results. Again, past results do not guarantee future results, but they are at least evidence that something can work.
  4. Highly charged sales language. Nobody should give you a hard sell on investing. Language should be optimistic but cautious. You should never be told “Invest NOW while this opportunity lasts!!! DO NOT MISS YOUR CHANCE!” You can always start investing tomorrow. If anything, a reputable provider will always encourage you to be cautious.
  5. Offers you didn’t ask for. If some random person on Telegram starts bugging you about a forex service or product, it is probably a scam. If a random offer shows up in your inbox, it is probably a scam. If you respond to these pushy sales tactics, they are only going to get pushier.
  6. Luxury imagery. If you are on Instagram and see a service that promotes everything with images of yachts and sports cars, that is not a good sign. This is an appeal to your emotions, an attempt to hook you in with dreams.
  7. Lack of regulation (for brokers). You should only trade with regulated forex brokers. Those brokers need to meet regulatory requirements to maintain their licenses. If a broker is not regulated or a regulator has taken action against them, you should go elsewhere.
  8. Inconsistent information and/or a lack of transparency. Carefully read through the information on any forex broker’s website before opening an account, paying particular attention to the terms and conditions. If you spot a lot of inconsistencies, or if there are some questions that simply are left unanswered, that could be a sign that you are not dealing with a trustworthy company.
  9. Poor customer service or no customer service. If customer support is inaccessible or blatantly unhelpful, that might mean that you are looking at a scam. Even if you are not, do you really want to be dealing with such a bad team when you need help with something?
  10. Bad reviews (or no reviews). Try and find feedback from customers before investing in a service. Social media sites and forums are good places to look. If you see bad reviews, that is a sign of a scam. No reviews might indicate a scam, but it could also just mean you are looking at a new service.
  11. Unrealistic reviews. Overwhelmingly positive feedback is not always a good sign either. If the reviews you read are unrealistic about returns, it could be that they are fake.

Types of Forex Scams to Watch Out For

Now that we have talked about common red flags, we can discuss specific types of forex scams you might encounter.

1. Broker scams

Forex broker scams used to be a lot more common than they are now. But they do still exist.

Sometimes, scam brokers operate as unregulated brokers under their own names. Other times, they use names that are the same as or similar to those of existing, safe, regulated brokers (i.e. phishing scams).

Before you work with any broker, always 1-look them up to see if they are regulated, and 2-make sure the website URL and contact information you have is a match.

2. Signal scams

Legitimate signal services exist to help traders to identify potential trade setups. While there are many reputable signal sellers out there, there are also some scammers.

A signal scammer may make promises that they cannot keep. They might, for example, guarantee that you can expect certain returns even though there’s no way to actually guarantee the future performance of any system.

In other situations, they might not guarantee anything but might simply fail to deliver viable signals at all.

3. Robot scams

Trading robots are programs that place trades on your behalf, fully automating the trading process.

Just as there are scammy signal services out there, there are also scams for trading robots.

Once again, unrealistic promises are a common red flag. If you see something like, “Our robot trades for you; you win 98% of the time!”, you should run the other way.

4. Managed account scams

While robots are one approach to hands-off trading, they are not the only ones. Another option is to allow a human being to manage your account for you.

If you have someone manage your account, you pay them a commission for doing so. In return, they execute trades for you using their knowledge and experience in the forex market.

Some managed account services are well worth it. They allow you to grow your account without a lot of effort. In fact, you can work on creating and testing your own trading method while the account manager helps build up your funds.

But here is the thing—when you pay someone to manage your forex account, you give them access to that account and the funds within it. That puts you in a vulnerable position.

A scammer pretending to be an account manager can then simply withdraw your money and run.

So, it is very important to conduct research on any managed account service you are thinking of using. Be absolutely sure that you are choosing someone who is skilled and reputable.

5. Ponzi scheme scams

One type of scam that has become widespread in recent times is the classic Ponzi scheme.

If you fall subject to this type of scam, you will be lured in by a supposed forex money manager, who will encourage you to send them your hard-earned cash.

You will do so, assuming they are a real forex money manager, and that they are investing your money along with that of other clients as part of a pool.

You will then actually receive returns on your “investment”—at least initially. So, you will think all is well and will continue investing.

Unfortunately for you, what is going on is not at all what you think—there is no investment pool.

Instead, the money you are receiving as a “return” actually is made up of contributions by other investors.

The money they are receiving in part consists of your contributions.

So long as new people keep paying into the “investment pool,” there is always more money to payout.

But you can see how quickly there will be a problem if there is a shortage of fresh blood.

At that point, the entire scam collapses, and the scammer makes a run for it.

6. Pyramid scheme scams

Last but not least, perhaps the most prominent and visible scams in forex at the time of this writing are pyramid schemes.

Forex pyramid schemes work similarly to forex Ponzi schemes.

Basically, you know all those random people on Facebook and Telegram who are constantly trying to get you to “learn how to trade forex” and such? They are usually victims of forex pyramid schemes.

If you fall victim to a forex pyramid scheme, it will work something like this. Someone will tell you about a forex training course or a forex investment pool and encourage you to join.

You will sign up, and contribute your money in some way—either by paying into a pool or paying fees.

You will then be told that it is now your job to recruit new members, just as you were recruited.

In some cases, you may even lose your membership if you are unable to meet your recruitment quota.

The new members you recruit pay into the system and are told to recruit more people, and so on.

A pyramid scheme can overlap with a Ponzi scheme, but it does not always have to take that form.

Again, it could be something as simple as a training program. In such a situation, there is no “investing” anyone claims to be doing with your money—you are just paying membership dues.

But the person who offers the course does not make a living trading. Their sole occupation is teaching, and your membership dues and those of your recruits are how they survive.

Now, that in itself does not make something a scam. Some people legitimately teach better than they trade, but still are knowledgeable and effective coaches.

But pressuring members to recruit or lose their membership is, at best, a shady and unfriendly way of conducting a business.

At worst, it could mean the coach does not have a clue what they are doing. Why? Because they have a constant need for a steady influx of new customers, which suggests that people quit their program quickly and stop paying their dues.

So, in such a situation, you are almost certainly looking at a scam. Someone who does not know how to trade forex has set up a system to collect dues from people they claim they will be able to teach—but will not be able to.

A variant of the above is a system that uses a carrot instead of a stick.

Instead of axing members who fail to meet a recruitment quota, the program could reward them for their recruitment with affiliate commissions. The more they recruit, the more they earn.

That may not sound as bad, but in its way, it still is.

You join expecting to get rich trading fore, and you never do. Instead, you find yourself motivated to spend all your time recruiting.

You make money, but not a lot. Your hard work is instead helping someone else get rich.

How Can You Find Reputable Forex Services?

You know what to avoid now when looking at forex services. But how do you find services that are worth using?

The answer is to conduct thorough research on any broker, signal service, managed account, or other tool or service you plan to use.

If you are new to the whole forex industry, but you’d like to see what forex is all about, we have a good offer for you. Get this $50 bonus from XM no deposit bonus. You can start trading without investment and more importantly with a reputable broker such as XM.

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