Are you new to trading? Beware of this!

The popularity of forex trading has been growing at a meteoric pace in recent years. However, along with it, the risk of falling victim to some of the widespread fraudulent practices as an inexperienced trader is also increasing. In fact, the number of such scams is growing as fast as the number of traders and companies offering services for traders.  

Forex trading is often quite controversial among investors and traders. This is mainly due to the large disparity between consistently profitable and losing traders. As a result, many people are under the impression that forex trading itself (or the companies that offer it) is some form of fraud. Of course, traders who can make money in forex trading over the long term are proof that this is not the case. At the same time, however, this environment does attract a large number of scammers.

Forex: easy earnings for everyone?

They are betting primarily on the fact that forex is often presented (most often by these scammers) as an easy way to earn money that is available to everyone. In a way, this view is also played up by the very companies and brokers that provide traders with the opportunity to trade forex. The amount of money a trader needs to open an account has dropped to a bare minimum, and in extreme cases a few hundreds dollars will be enough.

But at the same time, inexperienced traders are being bombarded from all sides with videos and social media posts about how traders can make millions of dollars literally in a matter of days. Young potential investors in particular often have a hard time distinguishing between a real trader who is able to make a living in forex and an "influencer" trying to impress by presenting a flashy lifestyle. 

The combination of small initial capital and high profits never go together. The various strategies and signals sold by these influencers then force traders to make meaningless trades, and losing money is practically guaranteed.

Copy trading: past earnings are no guarantee of success

Copy trading, also known as social trading, has recently been riding a wave of success and interest from inexperienced traders. At first glance, it is a simple way to make money without the trader having to spend time learning and building a strategy. However, even here, there is no easy path to consistently high earnings.

The number of platforms and companies offering this way of investing/trading today is growing rapidly, but it is important to remember that in most cases it is an unregulated environment. In this environment, a signal provider or trader whose trades can be copied may promise anything, even boast a great trading history with an awesome success rate, but the reality may be vastly different. In the end, it ends up that too many signals for copy trades are generated, leading to unnecessary overtrading. Thus, the signal provider earns a lot in fees, but the trader ends up with zero in his account. 

One of the "tricks" of strategy providers is trading on an account with a very small balance. If they get into losses, they dilute their positions, i.e. they buy more and more contracts, even though the market is going in the opposite direction. If they no longer have enough capital in their account, they simply refill it. Sooner or later, the market will turn around so that they can exit with at least zero profit/loss, while the trader's account has long been at zero.

Brokerage firms: regulation is necessary

It may seem that there are not as many fraudulent brokerage companies on the market today as there were when forex started to spread to retail traders. However, there are still quite a few of them on the market and new fraudulent firms are still being created because they simply find it profitable to do so.

The first thing that every trader needs to do before opening an account with a brokerage company is to check the basic information about the company. What country it is based in, what regulator it falls under, what type of broker it is, etc. If the company is based in Cyprus, the Bahamas or a similar offshore destination, you need to be careful.

Fraudsters do not choose countries where the financial market is heavily regulated. So, if a company's address is in one of the countries mentioned and 20 other companies have the same address along with it, something will not be right. When a company claims to fall under an EU or UK regulator, it's a good idea to verify this information. It is also possible to find a direct list of suspicious companies that every trader should avoid on the regulator's website, so it is a good idea to start there.

Market Maker: hands off!

The type of broker that was very common in the past, the market maker, is generally not recommended as suitable for any trader. This is because, unlike ECN or STP brokers, these brokers do not provide the trader with direct access to the market, but operate through a so-called dealing desk.

This means that they are responsible for setting the prices at which the trader then trades. This creates a large scope for conflicts of interest, as these brokers often act as a counterparty to the trader and thus have no interest in the trader making a profit. The result is often very significant slippages to the client's disadvantage in execution, unjustified spread widening, etc. It also often happens that such a broker cancels the account of a long-term profitable trader without giving any reason, or restricts withdrawals from the trading account.

Traders should also be aware of companies that offer binary options trading. These trades have virtually nothing to do with real options and are essentially bets on a certain outcome (e.g. a stock rising to a certain price at a certain time). In binary options, the trader is always at a disadvantage in terms of risk/reward. If the trader risks 100% of his deposit on each trade, but the potential profit is only 80%, he has no chance of making a profit in the long run.

Prop Trading: watch out for the "account managers"

The expansion and growth in popularity of forex among retail traders has certainly contributed to the popularity of modern prop trading. Within this business, FTMO has been a long-standing leader and benchmark of stability and quality, but increasingly it is proving to be more of an exception. As was the case with the spread of forex awareness, modern prop trading has become a great haven for various fraudulent firms looking to cash in on people looking to make big money. In this case, they are helped by the fact that they do not need investment capital from traders. They can simply advertise their "services" as helping people who want to make big money for literally nothing.

Various individuals or groups/companies offer their services to inexperienced clients in the form of Account Management, or they try to convince them that they will help them through the Evaluation process. In this case, however, the saying that it's too good to be true clearly applies. After all, these are overwhelmingly anonymous accounts and social media profiles from which you can expect virtually no serious action.

The lure for unwary traders in this case is usually fake trading account statements that promise traders quick profits. At first glance, they look like the accounts of professional traders, but the reality is unfortunately different. Such an "account manager" takes management fees and profit shares from trusting traders (i.e. the client gets at best a minimum of their profits). Moreover, there is virtually no contractual relationship between the custodian and the client, so accountability for results is minimal. In the pursuit of profits, these managers have no problem with overtrading and opening unnecessarily large positions. Most of the time, the result is that the client very soon loses his money and his account with the prop trading firm. 

In the forex market, numerous pitfalls and scammers pose risks to traders. Prior to engaging in trading, novice traders should thoroughly research who they are trading with and the trading process. Though time-consuming, investing time upfront in doing research, is the best strategy to safeguard against avoidable financial losses. Trade safely!