Four Things That Can Help Reduce Your Risk of Forex Fraud

Off-exchange foreign currency trading, also called forex, is very risky. Beyond the general volatility between currency prices that any trader could face, fraud is prevalent in the market. In 2010, the then Chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler, deemed forex the largest area of retail fraud the CFTC oversaw. As technology has evolved, so have scams. Promoters once lured investors with the right to "control" a large amount of foreign currency with an initial payment of only a fraction of the cost. Today's fraudsters often steal investors' money using promises of fool-proof automated trading systems or "robots," claiming that their systems can earn you vast wealth even while you sleep.

The Basics

Off-exchange foreign currency trading is the buying or selling of currency in pairs such as the euro and the dollar (EUR/USD) or the British pound and Japanese yen (GBP/JPY). Profits or losses accumulate as the exchange rate fluctuates between the two currencies. Individual traders usually don't see the foreign currency at all. Instead, they typically close out their commitments and calculate gains or losses based on price changes in that currency relative to another currency, over time.

Players

Individual traders comprise a very small part of the forex market. Because of the potential volatility in the price of foreign currency, losses can occur very rapidly, wiping out an investor's down payment in short order.

Fraud Close Up

Forex scams attract customers with sophisticated online offers. These advertisements may peddle high-return, low-risk investment opportunities in foreign currency trading, or even highly paid currency-trading employment opportunities. Often, the victim's money is never actually placed in the market through a legitimate dealer, but simply diverted for the personal benefit of the con artists.

Some fraudsters may also try to convince you that they can trade your money on the interbank market. The interbank market is not an exchange, but a group of agreements made only between major money center banks in the world. It is not open to individual investors. Still cons will try to convince you that they have special access or other opportunities that most traders don't. This is a fraud.

Minimizing Risk

If you are tempted to trade, make sure you understand these products and take measures to protect yourself. The following are key tips to help you avoid some pitfalls:

  • Run a check on companies or websites that ask you to open an account to trade, that sell advice, or that sell "can't lose" trading software.
  • Be skeptical when promoters of foreign currency trading claim that their services or account management will earn high profits with minimal risks or that employment as a currency trader will make you wealthy quickly.
  • Do not use credit cards, mortgage your home, cash in your savings, or deplete your IRA to trade. You can quickly lose most or all of your money in this volatile market.
  • Keep in mind that you trade on margin; you are responsible for losses that greatly exceed the dollar amount you deposited.