How to Avoid a Forex Scam
Investigate before handing your money to a forex ‘wolf’ in sheep´s clothing
Brand new forex traders who decide to open a live forex account with a broker face the dilemma of finding a genuine source. Albeit less daunting, the experienced traders face this dilemma as well when they try to change brokers. There are many articles out there about fraudulent brokers and scams regarding forex products and brokers, but in reality, it is not all bad. There might be a handful of cheaters, but the vast majority of brokers are just businesses looking to do fair business with you. It is the same as a grocery store who buys the fruit and vegetables at a cheaper and sells them to you higher to make some profit… the brokers get quotes from their liquidity providers and offer them to you that extra pip higher. Nonetheless, we should always do our homework and investigate the broker we are about to open an account with before we throw our hard-earned cash away.
Read broker reviews – Before you decide to take a broker into consideration for the trial process, you should read some reviews to consider their candidacy. There are many forex review pages out there, such as forexpeacearmy.com, forexlive.com etc. On our site, we have our own review section (see the end of this article). You should read reviews written by normal traders as well as reviews conducted by companies and firms, which will give you a more professional opinion, as sometimes an ordinary trader review was submitted after s/he has lost the account due to their own trading mistakes. These emotional reviews are not objective and often alter the reality and unfairly display the broker as a scam. Still, the total number of reviews will give you a more balanced opinion about the broker. Then, you take into consideration 3-4 brokers with the highest rating for the trial process. When I decided to go ‘live’ a decade ago I spent a whole month reading reviews before deciding to start with Oanda, Alpari UK, and Dukascopy.
Talk to people – Apart from reading reviews you should talk live to people as well. In many forex sites, you can find blogs and forex forums with traders exchanging opinions on brokers as well as live trading. Talk to your fellow traders in the trader’s community… carry out some background work on the brokers you are planning to try out. People tend to be more objective when you speak to them directly. You can check their LinkedIn profiles of the top brokers as well. If their recommendations come from reputable sources within the online forex industry then that´s another plus in your checklist. If the recommendations are unreliable or if the top executives don´t have a LinkedIn account then you should be wary of that broker.
Check the regulation – How can anyone not check the license in which the broker operates under. In the UK, the main regulatory bodies for online trading are the FSA and FCA, in US the forex regulators are FSA, NFA and CTFC, and in Germany the main forex regulator body is BAFiN. You can find the list of regulatory bodies in Europe in our article “Forex regulation in Europe”. The brokers who operate under a licence from the toughest regulators take pride in that and display it on their main web page. If you can´t find the license on the broker web page you can ask the broker who regulates them and ask for it. Then you can check the regulator´s web page and check this is real, as well as view the broker comments. The forex regulators in the UK, Switzerland, US and Germany have set aside the toughest standards so if the broker is regulated with them the chances of them being a forex broker scam decreases dramatically. Not always, but often cheaters don´t have a licence or are based in small, exotic countries.
Try before you buy – When you want to buy cheese you try a small slice before actually buying it… so why not try out the brokers. After you made a list of brokers who fulfill your criteria, you should make time to do this step. When I started in this business I tried Dukascopy, Alpari UK, FXCM, and Oanda because they ranked the highest on my forex broker checklist. I tried them with a demo account for about two weeks and then opened minimum balance accounts. I placed trades during different times during day and during news to see their trade execution process and the slippage. I also tried different strategies to see if they allowed all types of trading like short-term trading and scalping, I made a few withdrawals and deposits to see how fast they processed them, communicated several times with their customer support service to see how helpful they were, etc. After this, I chose two brokers in which to do business. So, try the brokers with a demo and a minimal live account before you decide to go all in.
Be intuitive – Last but not least, trust your intuition. If your experience with a broker didn´t feel right then you might as well skip them even though they are registered in the a good country. Not all the brokers in the first world are 100% professional and not all brokers from third-world countries are scams. So, does it look too good to be true? For example, is the broker promising you 200% bonus after you deposit $50,000 with them? Established names in the forex industry don´t try to lure clients with big bonus schemes. There are many honest brokers with some nice bonus/reward schemes but there are a few others whose schemes are just ridiculous. Allow your common sense a fair chunk of the decision making process when you try to pick a forex broker.
The online retail forex industry has evolved a lot since its beginnings with much more regulation now than 15-20 years ago when it started, so the bucket shops are very scarce. I conducted as many checkups as possible when I opened my first live account about a decade ago, although the information about the brokers was very limited at that time. Nowadays, it is easier to investigate the brokers because there are so many websites to help the traders as well as forums. So, if you fall, victim to a forex scam, you can only really blame yourself. Having said that, some people do fall victim to broker scams, so in the coming weeks we will come up with an article about how to act and what steps to take if that happens.
See our in-depth forex brokers reviews.