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A previous post on MDJ had looked at forex trading. This week, we will touch upon some of the scams prevalent in the forex market.

The Predator and the Prey

As mentioned in the scams of the modern world post, greed and gullibility shown by the prey is essential for a con to take place. Typically, most forex predators follow the sales tactics of legitimate forex firms (e.g. phone calls, emails, newsletters, brochures, websites, etc.). The bait is usually in the form of an “exciting opportunity” or “scheme reserved for elite members” using one of the channels mentioned above.

The scammer may purchase a mailing list from a legitimate business or concentrate on traders who have previously responded to get started on the con. Once the trader shows interest, the fraudulent firm has stellar sales people on its payroll who know how to close the deal (read: swindle). An underlying theme to most of these scams is the short life of the offer, i.e., there may be an urgency to the scheme on display.

High-yield Investment Programs

High-yield investment programs thrive by promising a high return for traders who are willing to part with their money temporarily (on the surface). These programs are Ponzi schemes where the investment from the second investor is used to pay dividend/interest to the first investor and so on. The scheme inevitably collapses when the fund management runs out of prey or a few of the earlier investors want to redeem their principal at the same time. At such a time, the scammer will disappear with the funds on hand.

Signal Selling

Another typical scam is the signal service offered by a fraudulent investment firm, asset manager or independent trader. The prey is enticed by the offer of a signal service that will issue recommendations on the right trades to make at opportune times. The service seller may claim to have extensive experience and even have references and testimonies.

References may be obtained by actually offering a profit to a few of the initial investors who would then be willing to say a few nice words about the company’s service. Testimonies displayed on the firm’s website may be statements made by these references or entirely fabricated. Evidently, the seller will charge a periodic fee for their service. The con can take two forms once the money starts flowing in: some cons end when the defrauder collects the fees from traders and vanishes, while other cons may involve providing a few profitable signals to gain trust and then disappear with the accumulated fee amounts.

Trading Systems

Another method used to swindle forex traders involves offering trading systems or software that can conduct automatic trades. In theory, for a fee, a trader can purchase the magic software and then sit back and watch as the robot does the trading to bring in the benefits. However, the reality is that most of these software packages are not built on any solid foundation; the system may generate random buy and sell signals. The gullible trader may live with the assumption that they will make money but the con is soon revealed when the trades do not generate the profits that they were promised to.

Are you a forex trader? Have you fallen prey to one of the scams mentioned above? Are there other forex scams that a trader should be aware of?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.  You can read his other articles here.