Is forex a pyramid scheme?
The forex market is the biggest and most actively traded financial market in the world, with trillions of dollars traded every day by large corporations as well as private investors. However, it’s important to be aware of forex scams that can target new and experienced traders alike. Thanks to the technological advances over the last two decades or so, forex trading is now accessible to everyday people via a number of different online forex brokers. All of this is perfectly normal and above-board, so the answer to the above question is “no”.
However, pyramid schemes have been created around forex trading, just like fraudulent practices occur in the stock and real estate markets. In fact, just about any kind of legitimate investment is a target for bad actors.
Forex scams come in many forms, but everyone should know about the four main types of swindles in order to be prepared to avoid them. Simple greed plays a pretty significant role in foreign exchange and indeed trading generally; almost every journey towards forex starts with people asking themselves: “Can you get rich trading forex?”. Most people will start by educating themselves, finding the best forex broker for their needs, opening a forex trading account, and making small trades. Unfortunately, a small group of people become convinced that they’ve found a secret, easy route to quick riches and end up being scammed by those preying on the eager and gullible.
How to recognise a forex scam
There is a rule in life that you will do well to apply when considering any investment, whether in forex, a small business, or any other arena: “If it seems too good to be true, it probably is.”
The one common denominator across all investment scams is that almost every one of them promises abnormally large returns. It is, of course, possible to make impressive profits by trading in the forex market, but the price for potentially doing so is to accept significant risks. So, if somebody talks about very big upside with little or no commensurate downside, it’s probably best not to listen to them any further.
A little common sense should immediately set alarm bells a’ringing. If anybody had such a foolproof way of trading forex, why would they ever share it? Proprietary trading models that produce steady, if unspectacular, returns are kept carefully under wraps by their owners, after all. Even if there was some very generous trader who decided to share their guaranteed trading method with the world in a massive act of either madness or magnanimity – everybody would be doing the same thing, immediately diluting such a mythical system’s effectiveness.
How to protect yourself against forex scams
If you’re very green at investing, you might find it hard to distinguish between a realistic risk-to-reward ratio in a forex trading strategy and one that’s simply implausible. Even if you lack experience, one of the best ways to protect yourself against far-fetched promises is to only deal with a regulated entity. This does not make you bullet-proof against fraudsters; after all, there have been examples of regulated companies acting as a pyramid or Ponzi schemes, Bernie Madoff’s investment firm being the most famous. Still, outright frauds are much less common, and you should have a greater degree of legal recourse if you do get unlucky.
Figuring out exactly how this works can be a bit of a chore, at least the first time. In the United States, for instance, several different authorities all police the forex markets in different capacities: the SEC (Securities and Exchange Commission), FINRA (Financial Industry Regulatory Authority), CFTC (Commodity Futures Trading Commission), and NFA (National Futures Association) all play a role.
In terms of online forex brokers, trustworthy ones tend to be incorporated in a respected financial centre such as Switzerland (FINMA) or the United Kingdom (FCA).
Main types of forex scams
You can almost admire fraudsters for their ingenuity: new ways are being invented all the time, as well as novel variations on the theme of defrauding people in forex scams and other confidence tricks. Even so, in the forex market, three common patterns of fraud are seen again and again: pyramid schemes, Ponzi schemes, forex robot, and fored signal scams.
One – Forex pyramid schemes
If some seemingly miraculous system for earning money from forex involves you as an investor being expected to recruit new, fee-paying members for the organisation, you’re most likely faced with a pyramid scheme. The operator of a forex pyramid scheme does not make money by actually trading forex, but rather pockets the fees that new forex investors shell out to join their supposedly winning system. These are also shared with those who are most successful at engaging new suckers.
The word “pyramid” is used because each successive layer of victims is expected to add even more new recruits. The earlier you join, the higher up the pyramid you are, and the more money you make as long as new investors join. As soon as the “base” of the pyramid is no longer wider than the rest of the structure, though, the whole thing collapses. Pyramid schemes are a crime, and whoever starts them will typically go to jail if caught.
Two – Forex Ponzi schemes
Ponzi schemes are basically fake investment management companies. Instead of paying a membership fee like in a pyramid scheme, people believe that they’re placing their money in a legitimate, if wildly successful, investment fund. The owner of the firm often entices new investors with a forex guru of some kind, typically called a “forex money manager” or something equally innocuous, but with a track record that’s pretty much out of this world. The past and putative future returns seem to justify paying abnormally high fees.
Now, there are indeed many real, honest forex money managers who trade a pool of clients’ money and charge fees, as well as a percentage of profits, for doing so. However, in a Ponzi scheme, clients’ capital is not necessarily ever invested. The schemer pays out early investors’ withdrawals not from any returns made in the forex market but from the money invested by new entrants. As long as there are new investors getting hooked, the scheme can continue. When people start to demand their capital back, though, it turns out to have been unsustainable all along. The most famous example of a Ponzi scheme is that perpetrated by Bernie Madoff, though the term dates back to Charles Ponzi and the 1920s.
Three – Forex robot scams
A forex “robot” is a computer algorithm programmed to place trades in the forex market based on defined trade setups – a set of conditions that indicate the opportunity for a profitable trade. The most popular forex robot trading platform is Metatrader, in which the robots are called EAs (short for Electronic Advisors). Again, there are legitimate forex robots that consistently make money (as well as forex robots that were made with their creators’ best intentions but which don’t perform all that well).
A forex robot becomes a scam when it is known by the creator that the algorithm doesn’t work, yet they sell it anyway under the promise of generating huge profits for buyers. The most common way this is done is through a process known as “curve-fitting”. With the power of computers, it is easy enough to find a trading system based on ideas that have made (hypothetical) money in the past. But amounts to nothing more than optimising the robot to pass back-testing when applied to historical data. Patterns do repeat over time, but poorly conceived curve-fitted robots inevitably fail because they’re not capable of any real technical analysis.
Four – Forex signal scams
Forex signals services are subscriptions to receive buy and sell alerts about emerging opportunities in the forex market. Again, most are legitimate and provide a useful service. The basis for these scams is almost identical to the forex robot scam. However, instead of paying a one-off fee to purchase the robot, signal services ask for recurring payments to receive their buy and sell recommendations. Of course, these turn out to be worthless.
All forex signal services require some degree of discretion from the buyer. Trading signal services are best used as a guide to possible trading opportunities, not magical crystal balls. Again, why would a signal provider that has stumbled on a foolproof system sell their tips as a service when they could utilise the signals themselves and make a ton of money?
Ways to avoid a forex scam
- Always ask for proof, in the form of verified trading statements, that the person selling you the potential scam can support the results they are promising. A well-known website for verifying trading results is www.myfxbook.com
- Don’t give away personal information or financial details to strangers over the internet or over the phone, no matter how convincing they might seem. If they ask you for your identity, they should be able to prove theirs first!
- Check online forums and listings of registered investment companies and registered investment managers. Typically, these will be available from the stock market regulator in your country.
- Consider making use of a real investment manager with all the necessary credentials. Their fees may be relatively high, but the peace of mind they provide is worth it.
- Alternatively, learn to trade yourself and do thorough research before engaging in any trade. This takes time and energy, and success is not guaranteed, but it is the surest way to avoid being scammed.
While it can be said that “greed is good”, a rational approach to all investment decisions is better. Whenever you’re presented with outlandish claims, remember that the word “incredible” means “stupendous” but also “difficult to believe”.
