Warning Signs of Forex Fraud - Part 1

Posted by Phoebe Millano

If you are contacted by a company that claims to specialize in Forex and asks you to give funds for those purposes, you should be very careful.

Watch for the warning signs listed below, and take the following precautions before placing your funds into any Forex or currency trading related activity.

1. Stay Away From Opportunities That Sound Too Good to Be True

Get-rich-quick schemes, including those involving Forex, tend to be frauds.

Always remember that there is no such thing as a "free lunch." Be especially cautious if you have acquired a large sum of cash recently and are looking for a safe investment vehicle.

In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. Getting your money back once it is gone can be difficult or impossible.

2. Avoid Any Company that Predicts or Guarantees Large Profits

Be extremely wary of companies that guarantee profits, or that tout extremely high performance. In many cases, those claims are false.

The following are examples of statements that either are or most likely are fraudulent:

  • "Whether the market moves up or down, Forex will make you a lot of money."
  • "Make $1000 per week, every week"
  • "We are out-performing 90% of domestic investments."
  • "The main advantage of the forex markets is that there is no bear market."
  • "We guarantee you will make at least a 30-40% rate of return within two months."

3. Stay Away From Companies That Promise Little or No Financial Risk

Be suspicious of companies that downplay risks or state that written risk disclosure statements are routine formalities imposed by the government.

The Forex market is volatile and contains substantial risks for unsophisticated customers. The currency futures and options markets are not the place to put any funds that you cannot afford to lose.

For example, retirement funds should not be used for Forex trading. You can lose most or all of those funds very quickly trading foreign currency futures or options contracts. Therefore, beware of companies that make the following types of statements:

  • "With a $10,000 deposit, the maximum you can lose is $200 to $250 per day."
  • "We promise to recover any losses you have."
  • "Your investment is secure."

4. Don't Trade on Margin Unless You Understand What It Means

Margin trading can make you responsible for losses that greatly exceed the dollar amount you deposited.

Many Forex traders ask customers to give them money, which they sometimes refer to as "margin," often sums in the range of $1,000 to $5,000. However, those amounts, which are relatively small in the Forex markets, actually control far larger dollar amounts of trading, a fact that often is poorly explained to customers.

Don't trade on margin unless you fully understand what you are doing and are prepared to accept losses that exceed the margin amounts you paid.

To learn more about protecting yourself from Forex scams, read part two of this article Warning Signs of Forex Fraud - Part 2.