Identifying & Avoiding Forex Broker Scams
Forex broker scams are much more common than you would think. The primary reason behind this startling development is the number of regulatory inconsistencies across the globe. A large number of forex brokers still remain unregulated and they pose the highest degree of risk for investors.
Even the ones that are fully regulated are not subjected to consistent laws. For example, a forex broker that is authorized and regulated in Europe is subjected to very different rules compared to one located in Africa. These inconsistencies allow fraudsters to set up scams and cheat investors. Identifying and avoiding risky brokers along with scam platforms is extremely important for investors. This is essential given these scams have already caused significant financial damage to investors.
So, what steps do investors need to follow in order to avoid these scams? The most important thing is to sort the reputable trading platforms from the dodgy ones. To accomplish this, investors must analyze various aspects of a forex broker. Read on to uncover tips related to the identification of forex broker scams. In addition, learn how to avoid these scams altogether and safeguard your assets.
Trading in foreign exchange is hard enough by itself. Investors need to understand the nuances of the market before they are in a position to realize returns. If you are not careful and choose a broker that deploys unethical or illegal practices, then it may become even harder to realize a profit.
The first step is to ensure that you are fully aware of the way a trading platform works. This information can be obtained by gathering ample information about the broker. You could read up about them on their website, however, you need to be cautious about the information supplied by websites because almost all brands tend to hide the negative attributes of their businesses.
Another way is to read up on broker reviews. There are multiple review and comparison websites that are available on the internet. You could make use of these websites to compare the features offered by the trading platforms and to understand the drawbacks of their platform.
At the same time, you could also read reviews of the brands that have been posted by expert writers. These reviews often provide you with an idea about the broker’s business and whether they are a scam job. In case you are not able to figure this out from the expert reviews, another alternative is to read the reviews that have been posted by other investors. Still, you need to be cautious because many investors try to cover up their own faulty strategies by blaming the trading platform.
Identifying The Real Scammers
The fact that some users post inaccurate reviews of forex brokers does not imply that there are no scammers out there. In fact, there are plenty of brands that deliberately adopt strategies that could result in losses for investors. A few such strategies are mentioned in the points below.
- Some forex platforms tend to increase their commissions at their own behest. This results in losses for the investors because they end up paying a higher fee for trade execution. Forex brokers must be clear about the commissions that they are charging, and all related fees should be explicitly outlined on their website.
- Another strategy that could cause losses is that brands tend to hide the terms and conditions associated with their platform. For example, some brokers do not reveal that investors are charged a fee to withdraw their earnings. Such hidden fees can eat into your profits. Certain trading platforms also limit the withdrawal methods arbitrarily. This could cause problems in terms of investors not being able to withdraw their own funds.
- In addition, there are several brands that move the quoted rates so that stop orders are triggered. This strategy could result in significant losses for traders because they end up with trade executions that vary widely from other market participants. Investors need to be extremely cautious to ensure the selected broker does not move the quoted rates arbitrarily.
- Some trading platforms also misuse client funds. These brokers do not keep your investments in separate, segregated accounts. Such a strategy could prove to be extremely dangerous for you because the company might use your money for other operational purposes or hiding losses. You should always opt for a brand that keeps client accounts segregated from company funds
- Finally, another strategy that certain brands deploy is that they do not allow you to withdraw bonuses. These trading platforms announce extensive bonuses and other promotions in order to attract new customers. However, once the customer has received a bonus, they are not able to withdraw their funds immediately but instead are forced to meet conditions that could end up wiping out their capital. Therefore, investors need to be extremely careful when brands try to lure in business with the promise of lucrative bonuses.
The above strategies are designed to ensure that brokers can maximize their own profits at the expense of their customers. The better brands operating in the market do not engage in any of the above strategies. In addition, the top companies also ensure that they are fully transparent when it comes to client communication.
The Importance Of Communication
The hallmark of a good broker is that all terms and conditions are fairly clear and transparently listed. Your forex broker must answer all your queries in a timely and convincing manner.
For example, if you are conducting research about a company and visit their website, you might have some questions related to their platform. You could ask these questions using their online chat service. If the customer support representative answers all your queries in a crisp and accurate manner, then it helps with building trust. On the other hand, if the company is trying to mislead you or is hiding specific information, then you need to avoid it.
Another key aspect of communication is the ability to get your queries answered at any given point of time. The best forex trading platforms ensure that they provide customer support around the clock. In fact, there are several companies that offer customer support in a wide range of languages, thereby making it much easier for investors to communicate with them.
You need to remember that communication is key given that it will help you to a great extent in case any issues or potential disputes unfold. The financial services provider that you are choosing must be helpful and transparent.
Checking With The Authorities
Visiting the website and reading reviews are not the only ways to verify the credentials of a company. You could also check their authenticity via certain official websites.
For example, the Financial Industry Regulatory Authority (FINRA) offers a service known as BrokerCheck. This service allows you to read up about a financial services provider and understand its key offerings. You simply need to run a search using the company’s name. Once you have entered the name of the broker, you can explore the following information:
- Name of the Broker
- Physical Address
- Number of Disclosures
- Years of Experience
- Examinations Conducted
- State Licenses
- Regulation History
- Miscellaneous Information
The above information could help you arrive at a decision related to the trading platform. You could also run more than one search and compare the regulatory history of one broker against others. This will give you a better idea about the company’s credentials.
In case you are still unable to make the decision, then you could also check whether there are any outstanding legal actions against a particular brand. This will help you avoid scams and ensure that your funds are protected.
Reading The Fine Print
It is critical to read the fine print of the documents provided by a financial services provider. Before registering on a trading platform, you should have a clear understanding of the workings of the company. This includes issues such as deposits and withdrawals, the fees and commissions charged, the time taken to execute orders, and the contingency plans.
You should have clarity regarding the dispute resolution mechanisms that are adopted by the trading platform. Several financial services providers also choose to tie up with third-party organizations that help investors during the dispute resolution process. The existence of such tie-ups can indicate that the brand is not a complete scam.
Another good strategy is to test out the trading platform using a demo account. Almost all forex brokers offer demo accounts to their users. These accounts allow you to trade virtual currencies in order to develop an understanding of the platform.
Alternatively, you could create a full account with the company and test it out for a month using a small investment amount. This would allow you to get a real-life experience of trading on the platform, while also ensuring that the risks are minimized.
If you face any kind of issues with the broker during that month, it is advisable that you avoid the trading platform.
Avoiding Brokers That Are Engaged In Tactics Such As Churning
Several brokers adopt tactics that help them maximize their own profits. One such strategy that you need to keep an eye out for is called “churning”. According to the US Securities and Exchange Commission (SEC), churning is defined as excessive trading of securities by a broker designed to generate commissions for itself.
Under this tactic, financial services providers execute a large number of trades only to generate commissions. Companies that are engaged in churning can be sanctioned using fines, suspension, reprimands, dismissal, or disbarment. Brands that opt to make use of such tactics should be avoided at all costs.
At the same time, investors should be certain that the broker is indeed engaged in churning tactics. There may be a possibility that the financial services provider is genuinely attempting to maximize your profits. If there are a large number of transactions taking place in your account, then you should try to dig into the reasons behind it.
Of course, if you are the one who is giving them the instructions to carry out the trades, then the act cannot be deemed churning.
What To Do If You Are Stuck
If you follow all of the above tips, then you are likely to avoid a scam. However, there is a possibility that you still end up in a scam despite being extremely cautious. In such a case, your options become fairly limited.
One way out is to report the financial services provider to FINRA. There is a possibility that the authorities may be able to help you out. This could happen if you present a genuine case and you have sufficient evidence related to the broker’s wrongdoing. However, in the absence of evidence, it may become very hard for you to get out of the scam.
If you do not take all the necessary precautions, then you have an even greater chance of being stuck in a scam. For instance, if you sign documents without reading the fine print, then you will have to take the blame for it. In this case, the authorities may also not be able to help you out. The only option would be to accept your losses. In such a case, you could choose to expose the company by posting an online review, although that might be just a small consolation.
There are some key characteristics of scam forex brokers that you need to constantly monitor. If you conduct exhaustive research, then you will be more capable of identifying scams. At the same time, it is crucial to ensure that you treat user reviews that tend to blame the financial services provider for their own trading shortcomings with a grain of salt.
Also, you should read the fine print when it comes to terms and conditions. Similarly, you need to ensure that you don’t register with a trading platform that adopts illegal strategies such as churning. If you follow all of the above tips, you are more likely to avoid scammers outright. This in turn will help protect your capital and maximize your investing potential.