Forex trading is legitimate. Just like you can trade the shares of companies, you can also trade the currencies of countries. The Forex market, the world’s largest market of its kind, is the place where this occurs.
This market is largely a speculative one that is conducted over a network of computers between banks, hedge funds, pension schemes, and individual retail traders.
Some market participants invent ways to circumvent regulations put in place to monitor this market’s activities to dupe undiscerning clients. Before we discuss those ways, the next section explains how Forex trading is done.
How Forex Trading is done
Forex trading entails the buying and selling of currencies. Its transactions are two-way: as you buy a currency so do you sell another.
This is so because Forex traders sell currencies whose exchange rates they think will fall in relation to other currencies. Therefore, for every Forex transaction, there is a base currency and a counter/quote currency.
Consider the Forex quote, EUR/USD = 1.3700. This indicates that you will need 1 euro to buy 1.37 dollars. Also, here, the EUR, the first listed currency of the pair, is the base currency, while the USD is the counter/quote currency.
Understanding Forex Scams
The widespread availability of retail Forex trading has also come with the association of the business, in some quarters, with scams. Many retail brokers have emerged and disappeared, carting away with millions.
The fraudulent tactics employed by most of those scam brokers and other fraudsters were somewhat similar. And anybody who is cautious enough can easily protect themselves from them.
For instance, you should use only brokers that are licensed by well-recognised regulatory watchdogs. You might also want to stay away from off-shore Forex brokers for the same reason.
Thus, no matter where you are resident, ensuring that the broker you use is registered with a standard regulatory authority such as the U.S’s Commodity Futures Trading Commission (CFTC) or the U.K’s Financial Conduct Authority (FCA) should be a goal.
Moreover, as a rule of thumb, a reasonable trader would avoid any broker that underestimates the risk inherent in Forex trading. Those brokers are the ones that often taunt the business as an easy path to riches.
Consequently, they make aspiring traders lose all caution and follow their bloated promises of humongous returns. Eventually, they milk them of their hard-earned financial resources.
A legitimate broker should make its traders understand the risk they would be taking on, with full disclosures made on its trading platforms.
Finding Out Scam Brokerage Firms
As already established, Forex trading is not a scam. It is a legitimate business that anyone, depending on their risk tolerance level and preferences, can engage in. While it is not a get-rich-quick enterprise, it still makes a fine opportunity to make real bucks.
However, you will have to protect yourself against scams. And you can do so by taking specific precautions such as:
- Checking if the brokerage company is located in a jurisdiction where an adequate regulatory framework is established and enforced. Checking for how long it has been in business could also help.
- For example, a broker operating in the United States and registered with the Commodity Futures Trading Commission (CFTC) can be adjudged more reliable than off-shore brokers.
- That singular provision is very important. First, the chances are low, if not non-existent, that a broker adequately registered with the CFTC will be a scam.
- Having the foreknowledge about the regulatory status of the broker will also ensure that you have an idea of the amount of risk you are taking on and where to go if the broker wants to pull up any funny trick.
Thus, importantly, the key disqualifying factor for any broker making nebulous claims is to check for its regulatory status and the specific regulatory watchdog it is registered with. This will save you a lot of headaches along the way.
Then, after, you should also assess the trading conditions it offers. Is its platform user-friendly? How frequently do you run into technical glitches when you use it? How easy is it to deposit and withdraw?
There are fraudulent brokers that perpetrate their fraud by making withdrawals impossible for their clients. As a result, you should be on the lookout for those.
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