How to Identify Trading Forex Scams & MLMs

At Addition Financial, we're big believers in investment and we love it when our members take steps to save for retirement or go into business for themselves. It's exciting!

What we don't love is when scammers go after our members and try to take advantage of them. Forex scams are something we've been hearing about lately. There's more than one kind and we understand why they're appealing – but they're also risky and should be avoided. With some help from financial experts, we've put together this guide to help a would-be Forex trader understand and recognize Forex trading scams and Forex MLMs.

What is Forex?

Since a lot of people aren't familiar with Forex, let's start by explaining what it is. Forex is short for Foreign Exchange. It's an open and unregulated marketplace where companies and individuals can trade one foreign currency against another.

If you have ever traveled internationally, then you've had the experience of exchanging dollars for another currency such as pounds, Euros or pesos. The exchange rate may be favorable, which means that you're getting more relative worth for your dollar by exchanging it. It may also be unfavorable, which happens when the dollar is worth less than the currency being exchanged.

Currencies are represented by three-letter abbreviations. For example:

  • US dollar – USD
  • Canadian dollar – CAD
  • British pound – GBP
  • Japanese Yen – JPY

The Forex market is open five days a week and trades happen exclusively over the counter, meaning that there is no centralized exchange and all transactions happen via computer. There's nothing wrong with trading on Forex. It's a legitimate investment strategy and can be a lucrative one.

Are There Different Types of Forex Trades?

Part of being able to recognize a Forex trading scam is understanding what legitimate trades look like. There are three basic types:

  1. Spot deals are bilateral transactions. They occur when one person promises to pay an agreed-upon exchange rate to the other person. They're expressed by putting two three-letter abbreviations together, so USD/JPY would be an exchange of US dollars for Japanese Yen.
  2. Forwards and futures are speculative and thus riskier than spot deals. Forwards are bought and sold OTC and the parties involved determine the terms of the agreement. Futures have a standard settlement date and size, which is determined by a public commodities market like the Chicago Mercantile Exchange.
  3. Hedges allow the parties, usually corporations, to "hedge" an exchange based on what they think will happen with exchange rates. A favorable exchange can increase their profits when selling products abroad; an unfavorable change will do the reverse.

These are simplified explanations. Forex trades can be complex and we don't have room here to get into all the nuances. If you're interested in Forex trading, the most important thing you can do is educate yourself before you dive in.

Legit Investment Opportunity or Financial Scam?

Examples of Forex Scams

We want to make sure you can recognize a trading Forex scam when you see one, so here are some examples we've collected with help from a couple of experts.

1. Signal Seller Scam

The first is called a signal seller scam. Ann Martin, the Director of Operations at CreditDonkey, explained it like this.

"These involve offering the services of a third party to help you earn passive income through Forex trading. The third party may be a robot, a broker, or an organization that provides trade signals. While they promise a rich payoff, they may actually intend to lift your money."

Signal sellers are usually retail firms claiming to have years of experience with Forex trading and the ability to identify and recommend the most favorable times to trade currencies. They'll often have glowing testimonials and make promises that are too good to be true. 

The thing that can make it difficult to spot a signal seller scam is that some signal sellers are legitimate. The scammer may simply collect money from a few marks and then vanish with it. Some who are in it for the long haul may actually recommend trades from time to time but their goal is to abscond with your money.

2. Forex Broker Scam

The next trading Forex scam you should know about is the Forex broker scam. Jake Hill, the CEO of DebtHammer, told us:

"The biggest scam here is related to unregulated brokers who will try to limit the profits of their investors."

One warning sign to look for is when a Forex broker is offering a trade with a wider-than-normal spread on an exchange. For example, if you're trading Euros for US Dollars, the normal spread would be two or three pips. A pip is the smallest price change in a currency and is equivalent to the last decimal place in the rate. If you see a Forex broker offering a 7-pip spread, be wary. It's likely that the difference will be eaten up by commissions.

As we noted above, you should also be wary if a Forex broker makes promises that are too good to be true or if they put limitations on withdrawals. You should always have access to your money. If you decide to do Forex trades with legitimate Forex brokers or brokerage firms, you should be able to find them on the BASIC website.

3. Forex Robot Scam

The use of trading robots, i.e. automated trades, has become increasingly common everywhere and Forex is no exception. While many robot trading systems are tested and verified, some are not and you'll need to make sure that you choose one that works.

A valid trading system should undergo testing of its parameters and optimization codes. If these are not tested, the system will generate random codes and any trades performed with your money will be the equivalent of gambling.

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Forex MLMs

You probably already know about multi-level marketing companies or MLMs. They've been around for decades and include well-known companies such as Mary Kay, Tupperware, and Thrive. People who join sell products but make most of their money by recruiting new people to their teams.

The first thing you need to know is that a legitimate trade includes only you, your money, the commodity being traded and (sometimes) a broker. A trustworthy broker will never ask you to try to get your friends to invest. 

It's also important to be aware that someone who touts the fact that they earn passive income while aggressively pushing you to buy into their scheme to make you rich is probably not getting rich themselves. If they were rich, they wouldn't be working so hard to get your money. 

Here are some of the warning signs that you're being recruited into a Forex MLM:

  • The person selling to you is making big promises or guarantees. They may tell you that they've figured out Forex and have a system that works. The truth is that nobody has figured out Forex. People do sometimes earn big profits with Forex trading but they also lose a lot of money. It's a risk like any other investment.
  • You're required to buy a product to get "the secret" to Forex trading. It might be a book, a set of videos or even a package of trading signals.
  • The person who recruited you tells you that it's your job to recruit other people into the organization with the promise that you'll earn commission when you do (basically, a Forex pyramid scheme).
  • There may be additional pressure to buy more products or signals.

The thing to keep in mind with a Forex fraud MLM (or any MLM) is that the person who recruits you is earning money by recruiting you. They don't want you to get rich. They're hoping that your money will help them recoup the money they lost by getting into the scheme in the first place.

We want to be clear that this doesn't necessarily mean that a person who tries to recruit you into a Forex MLM is malicious. Somebody is but it's usually the person at the top of the scam, not a low-level person who believed the hype.

Tips for Avoiding Forex Scams

Here are a few quick tips to help you evaluate Forex investment opportunities and avoid being taken in by a scam:

  • Start out with skepticism. Instead of believing what you're told, gather information and then verify it. 
  • Never let anybody pressure you into doing a quick trade or deal. While it's true that currency rates may change, you need to be comfortable with the trade before you hand over your money.
  • If something sounds too good to be true, it probably is. Nobody can guarantee a profit on a Forex trade.
  • Any Forex product that promises to teach you how to make money or asks you to sell to other people is an MLM and should be avoided.

The main thing to remember is that it's always a good idea to educate and inform yourself before you dive into any investment opportunity.

Trading on Forex can be a legitimate way to make money but it's important to understand that Forex scams exist and to understand how to recognize and avoid them. The information and tips we've included here will help you avoid scams and Forex MLMs.

Do you need advice on investing your money? Our MEMBERS investment program can help!

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.