One of the major detriments that has discouraged potential investors from trading in the forex market is its susceptibility to fraud. Many traders have suffered huge losses of money as a result of broker dishonesty and lack of full disclosure among other reasons. The false promise of great margins and big profits at little or no risk has lured many traders into making rush decisions that turn out to be extremely destructive in the future.
The word ‘forex’ is a combination of the two words ‘foreign’ and ‘exchange’. When joined together, these two words communicate the process of giving one currency for another particularly with a view of making profit. This commercial transaction of currencies usually takes place based on the prevailing exchange rate.
The challenge for traders is to be able to master the ever-changing nature of this rate. This involves understanding the right entry and exit point for the asset in question at any given time. Advanced and experienced traders are thus able to override rate instability and make successful trades despite the volatility of the forex market.
The Loopholes that facilitate Forex Fraud
New market entrants are however the most targeted when it comes to trading scammers. This is because of the wide gap that exists between their deep hunger to make profits and their shallow knowledge of the mechanisms and operations of the market. The following are the major reasons that make the them vulnerable to trading shams:
Inadequate Market Regulation
Effective regulation in the forex market has been a recurrent concern among all market stakeholders for a very long time. Although a lot of progress has been made as far as regulation is concerned, there are still grey areas that provide fertile ground for fraudsters for example the lack of a central exchange that is regulated.
The market also depends on the brokers to submit themselves for registration with self-regulatory organisations. This strategy is not likely to succeed particularly among brokers who are in themselves perpetrators of market fraud.
Over-the-counter trading is perhaps the most popular transaction technique in the forex market. It is basically defined as an informal exchange that takes place between two parties over a dealer network. It provides only one buying and selling price as opposed to on exchange trading which gives a variety of options.
Its lack of regulation, however provides a higher probability for counter-party defaulting especially where forward contracts are concerned.
Its High Leverage Nature
High margin ratios attract inexperienced traders who may be looking to make fast and huge amounts of profit by placing their money on the same not understanding the zero-sum nature of the forex market. This makes them vulnerable to the usual market fluctuations which may bring with them untold losses when not handled carefully.
Lack of Adequate and Consistent Information
Huge franchises such as hedge funds and banks are often the only entities that look to hire professionally qualified forex traders because they can afford them. The larger market is actually composed of self-taught traders attempting to make successful trades on a constant basis.
These self-taught traders are usually constantly searching for authentic sources of information with a hope of matching the results of the professional forex merchants. Their search for knowledge makes them exposed to scammers who may present them with counterfeit information which may eventually lead them into making poor investment decisions.
Forms of Forex Scams
The following are the various ways through which forex fraudsters attempt to take advantage of traders:
This is usually a ploy to try and exploit inexperienced traders by masquerading some false information to look like a professional forecast.
Fraudsters may use robots in order to conduct transactions that are void of any human involvement. It is thus important for traders to verify the processes that are behind the creation of such machines. This is because the procedures required when coming up with such gadgets for example independent testing are extremely vital in ensuring quality is adhered to.
Investment Management Funds
This is usually a situation where an extremely high return is promised for a very small investment into a forex fund. The proof of initial investors getting the promised returns usually leads inexperienced traders to put their money into the pyramid scheme which eventually closes down as soon as the number of investors begin to decrease.
It is of utmost importance for traders to understand the various dangers that exist in the market in as far as fraud is concerned. This is the only way for one to be able to differentiate between the opportunities offered by the market and the snares being circulated by scammers.