fbpx

Top 5 Forex Scams

Share to Linkedin Share to Twitter Share to Facebook Share to Print More
Benzinga Money is a reader-supported publication. We may earn a commission when you click on links in this article. Learn more.

Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com or IG.

“Loss” is a short but fearsome word. The Napoleon among the nouns. And it is almost always negative. This is why, as Eric Weiner argues, we do not experience a loss —  we suffer a loss. The event comes onto us suddenly, and then we have to live it out gradually.

Although occasional losses in investing are a part of the process, losses due to scams can be devastating. This article outlines some of the most common forex scams — how they work and how to detect them.

Scam #1: PAMM Scam

Percentage allocation management module (PAMM) is a practice that allows attaching your account to a different one to reproduce the performance — or in simpler terms, copy the trades.

This is a legit practice that works through a limited power of attorney, yet it is often abused. There are many services with artificially inflated or fake results. In the worst scenario, a PAMM owner can be the unregulated offshore broker itself. Through a broker’s access to the software, it is easy enough to manipulate the showcase account and lure investors.

Once enough money is following the fake account, all that remains is to crash the account or outright steal the client’s money.

Extra consideration: If you think you will quickly stop the account and request a withdrawal if things go south, you are still not safe. When the perfect scam happens, a broker extends the trading session in order not to honor the withdrawal requests before planned losses occur.

Scam #2: Expert Advisor Scam (Robot Scam)

Expert Advisor (EA) is a trading algorithm designed to automatically buy or sell on the forex market. Although there are legit automated systems out there, EA scams are among the most popular ones due to their subtlety.

The main problem with an EA is that it is hard to verify the results, as backtesting is not as reliable as forward testing. Sellers often promise high, unrealistic returns —  while the system might work for a time, if it is not self-optimizing (usually not), eventually it will fail due to changing market conditions.

In the “perfect scam” scenario, the EA seller will direct you to open an account with a market maker broker (a broker that trades against your positions) or even a shady offshore broker for a fee, so when the EA eventually fails, you will use your trading account as well.

Scam #3: Signal Scam

This one is like the EA scam but with your participation. You will receive signals —  direct instructions on when to buy or sell that will supposedly create profits. Perpetrators will often claim outrageous success rates and high returns. In turn, you will need to pay the membership fees or deposit your money through affiliate links to certain brokers (usually offshore and unregulated). Often those brokers will be the market makers whose main interest is for you to lose the money.

This can be particularly devastating to gullible investors who will deposit the money to the offshore broker and allow the “broker-agent” to trade that money, promising high returns. After a short good period (with fake results), an investor will be asked to deposit even more money. This cycle repeats until the investor requests a significant profit withdrawal. At that point the agent disappears, the offshore broker stops responding, and your money is gone.

Scam #4: Broker Scam

There are 3 main types of manipulation that a broker can do to conceal their exposure, disrupt your trading or outright steal your money. Keep in mind this includes the Market Maker type of broker —  which is in direct conflict of interest with your trading. (When you win, they lose money.)

  • Price manipulation: While not as prevalent as it used to be, brokers still manipulate prices to push the clients out of their positions. In that scenario, the broker artificially manipulates the price so that a short-term spike, which sometimes lasts seconds, pushes your order to the stop loss.

This manipulation is evident when comparing different price feeds:

Price manipulation on the Gold chart; source: forextrader.live (used with permission)

  • Routing manipulation: While a broker might claim to be a straight-through processing (STP) or electronic communication network (ECN) broker, they might decide to not route them to the market liquidity provider but to a market maker, or keep them “in house“ on the B-book.

This manipulation prevents your actions to influence the market price, essentially cutting you off from the real market.

  • Operational disruption: This includes anything that prevents you from conducting regular trading operations —  execution delay, slippage, requotes or random disconnections. This is sometimes done by the broker to play mental games on traders. Emotional traders are more likely to commit mistakes, thus giving their money to the brokers that kept their traders on the B-book.

Scam #5: Education Program Scam

Caveat emptor! Let the buyer beware!

The internet is swarming with various courses and training programs. Although there are quality materials out there, occasionally you will find overpriced courses offering repacked free courses.

While technically not illegal, this is highly unethical behavior that gives a bad reputation to the financial education industry.

How to Spot and Avoid Forex Scams

Most (if not all) forex scams can be avoided with precautions and common sense. A rule of thumb is to follow the money.

Two questions to ask in any situation:

  • What am I giving money to (for any product or service)?
  • Where is my money going (for any deposit)?

The following table shows how routing the potential victims toward unregulated brokers is the culprit in the majority of popular scams.

Scam typeWhat raises suspicionConfirmed by
 PAMMHigh returns
Perfect track record in a short period of time 
Offshore broker with a poor reputation
 EAHigh returns
Lack of forward testing
Offshore broker with a poor reputation
 SignalHigh returns
Affiliate links
Offshore broker with a poor reputation

Just like “All roads lead to Rome,” in the forex world all roads eventually lead to the broker. This is why broker research is of the highest importance. Yet, even a reputable broker might not save you from being overcharged for education —  so before purchasing such a product, familiarize yourself with the free basic education or check out our guide on the best forex trading courses.

For learning more on crypto, check out the top 5 Bitcoin and crypto scams.

Forex Broker Regulations

As forex grew in popularity over the years, regulatory bodies of the largest markets stepped in to establish the legal framework. This only allows companies with vetted business practices to conduct their business in those markets.

Brokers are required to submit to various regulations —  minimum capital requirements, client funds segregation, funds insurance, retail leverage limitations and others. The most used regulatory agencies in the world are Commodity Futures Trading Commission (CTFC) and National Futures Association NFA (U.S.), CySEC (Cyprus), FCA (U.K.), ASIC (Australia) and BaFin (Germany).

Best and Trusted Forex Brokers

Using a regulated, trustworthy broker is necessary with any financial instruments but especially when trading forex. In the list below you can find our comparison of the best forex brokers.

Account Minimum
$100
Pairs Offered
80+
Get started securely through FOREX.com’s website
Account Minimum
$100
Pairs Offered
80+
1 Minute Review

FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.

Best For
  • MetaTrader 4 users
  • Beginner forex traders
  • Active forex traders
Pros
  • Impressive, easy-to-navigate platform
  • Wide range of education and research tools
  • Access to over 80 currencies to buy and sell
  • Leverage available up to 50:1
Cons
  • Cannot buy and sell other securities (like stocks and bonds)
Best For
Forex Execution
Overall Rating
Get started securely through IG Group’s website
Best For
Forex Execution
N/A
1 Minute Review

IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.  

Best For
  • New forex traders who are still learning the ropes
  • Traders who prefer a simple, clean interface
  • Forex traders who trade primarily on a tablet
Pros
  • Easy-to-navigate platform is easy for beginners to master
  • Mobile and tablet platforms offer full functionality of the desktop version
  • Margin rates are easy to understand and affordable
  • Access to over 80 currency pairs
Cons
  • U.S. traders can currently only trade forex
  • Customer service options are lacking
  • No 2-factor authentication on mobile
Account Minimum
$50 USD
Pairs Offered
55
get started securely through CedarFX’s website
Account Minimum
$50 USD
Pairs Offered
55
1 Minute Review

Billing itself as the world’s 1st eco-friendly broker, CedarFX makes it easy to trade and give back to the planet. You can choose a 0% Commission Account or an Eco Account — or open multiple accounts to meet all your needs. 

CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back.

Best For
  • Forex investors
  • Investors interested in 0% commission or eco conscious trading
  • Investors looking for 24/7 customer service
Pros
  • Allows users to offset their carbon footprint
  • 0% commission investing
  • Offers demo account access
  • 24/7 customer service available through live chat
  • Eco Account Option (10 trees planted for each lot traded)
  • Fast deposits/withdrawls with Bitcoin
Cons
  • Limited number of educational resources for new investors
Account Minimum
$50 USD
Pairs Offered
47
Get started securely through eToro’s website
Account Minimum
$50 USD
Pairs Offered
47
1 Minute Review

Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).

eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.

Best For
  • International Forex/CFD Traders
  • New cryptocurrency traders looking for an easy-to-use platform
  • Traders who want to buy and sell cryptocurrencies on-the-go
Pros
  • Simple platform that is easy to master
  • CopyTrader feature that allows new traders to copy the same strategies used by professionals
  • Virtual dummy account that gives you $100,000 to practice trades
Cons
  • U.S. traders currently limited to cryptocurrencies
  • Only 15 major coins available to trade
Account Minimum
$100 USD (or equivalent)
Pairs Offered
69
Get started securely through HYCM’s website
Account Minimum
$100 USD (or equivalent)
Pairs Offered
69
1 Minute Review

HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.

HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service. 

Best For
  • Investors who want a customizable fee schedule
  • Traders comfortable using the MetaTrader platform
  • Islamic traders who need swap-free accounts that don’t build interest
Pros
  • Wide range of currency pairs available
  • Excellent selection of educational tools
  • $0 deposit and withdrawal fees
Cons
  • Not currently available to traders based in the U.S.
Account Minimum
100 EURO
Pairs Offered
50+
Get started securely through AvaTrade’s website
Account Minimum
100 EURO
Pairs Offered
50+
1 Minute Review

A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.

Best For
  • Beginners
  • Advanced traders
  • Traders looking for a well-diversified portfolio
Pros
  • Controlled by regulatory agencies of multiple countries
  • Choice offered in terms of trading platforms
  • Support available in 14 languages and trading platforms in 20 languages
  • Practice/demo account available for trying out
  • Breadth of trading assets
Cons
  • Does not accept customers from the U.S. as it isn’t regulated in the U.S.
  • Transferring funds to the account may take up to five days; withdrawals could take up to 10 days

Forex is Here to Stay

Few things have changed the world as much as globalization. The direct effect of it is improving quality of life due to lower costs because of specialized production.

And, that is impossible without foreign exchange markets —  as goods cannot change hands without currencies changing hands. This makes forex one of the largest, most lucrative markets in the world.

Yet, this attracts scammers as well. The psychology of greed is well documented, and scammers know what to do to attract interest. So, next time you spot an offer you cannot refuse,  ask yourself some of the questions raised in this article. It might end up being just like a pot of gold at the end of the rainbow —  a nice idea, but still just an illusion.

Frequently Asked Questions

Is forex a pyramid scheme?

1
Is forex a pyramid scheme?
asked
1

Forex is not a pyramid scheme. Yet, it is a negative zero-sum game. The money that you win will come from someone. However, due to the market structure —  foreign exchange is an absolute necessity to facilitate international trade.

answered

Are forex traders legit?

1
Are forex traders legit?
asked
1

While some traders are legit, others are not. There are various reasons why traders would lie about their success —  from vanity to monetary gain. Whenever something sounds too good to be true, be aware if you’re being sold a product or a service.

On the other hand, there are legit traders who built fortunes in the forex market. More often than not, these prefer to stay out of the spotlight.

answered

Get a Forex Pro on Your Side

FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets plus spot metals with low pricing and fast, quality execution on every trade. 

You can also tap into:

  • EUR/USD as low as 0.2 with fixed $5 commissions per 100,000
  • Powerful, purpose-built currency trading platforms
  • Monthly cash rebates of up to $9 per million dollars traded with FOREX.com’s Active Trader Program

Learn more about FOREX.com’s low pricing and how you can get started trading with FOREX.com.

Looking for a Highly Rated Forex Signals Provider?

ForexSignals.com offers a highly rated platform with mentors who have 80 years of combined experience in the trading pits. They’ll help you decode real-time daily live streams using market analysis, trade signals and more. ForexSignals.com doesn’t stop there. You can access hundreds of educational videos and workshops and even individualized private sessions with mentors. Never trade alone! Join ForexSignals.com now.