A forex scam can be described as any trading scheme used to defraud individual traders by convincing them that they can expect to profit by trading in the foreign exchange market. These scams might include the churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, improperly managed "managed accounts," false advertising, ponzi schemes and even outright fraud. It also refers to any retail broker who indicates that trading foreign exchange is a reasonably safe and profitable method of investment.
The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.
The news agency CNN quotes an official of the National Futures Association as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million, mostly in managed accounts. CNN also has quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"
The highly technical nature of retail forex industry, the OTC nature of the market, and the loose regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory authorities, can find it very difficult to prove that market manipulation has occurred since there is no central currency market, but rather a number of more or less interconnected marketplaces provided by interbank market makers.
The foreign exchange market is a sub zero sum game, which means that any gain that one trader makes is a loss for another trader and both are giving money to the broker. It also means that the average return for all traders is less than 0%, even though there is high risk in this market. There are many experienced, well-capitalized professional traders (e.g., working for banks) who can devote their attention full time to trading in this market. An inexperienced retail trader will have a significant information disadvantage compared to these traders.
Retail speculators are almost always undercapitalized, and as such are subject to the problem of gambler's ruin. In a fair game (e.g. one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Any speculator who plays this strategy (i.e., gambling without skill) is effectively playing against the market as a whole, which has nearly infinite capital, and he will almost certainly go bankrupt. Any speculator — particularly undercapitalized traders who do not have any informational advantages — needs to understand the reason why he thinks he can "beat the market" in such a difficult trading environment.
U.S. Commodity Futures Trading Commission Warnings
Stay Away From Opportunities That Sound Too Good to Be True
Avoid Any Company that Predicts or Guarantees Large Profits
Stay Away From Companies That Promise Little or No Financial Risk
Don't Trade on Margin Unless You Understand What It Means
Question Firms That Claim To Trade in the "Interbank Market"
Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise
Currency Scams Often Target Members of Ethnic Minorities
Be Sure You Get the Company's Performance Track Record
Don't Deal With Anyone Who Won't Give You Their Background
