by Farnsfield Research on March 13, 2013

With the explosion in the popularity of foreign exchange (forex) trading came an increase in the number of scammers hoping to profit from those trading in this market. Don’t let yourself become a victim. The Commodity Futures Trading Commission (CFTC) has released guidelines for spotting and avoiding such scams; the following article is based upon these tips.

As discussed in some of my other forex blog posts. currency trading can take place on a regulated exchange using forex-based futures or options contracts. When this is the case, forex trading is subject to the same guidelines and rules as any other exchange-traded product. However, forex can also take place over the counter between a network of dealers and forex firms.

This unregulated realm is not subject to as close of scrutiny and can foster fraudulent companies. Much of what goes into spotting them comes down to using common sense and your understanding of trading and the risks it entails. Nevertheless, it is helpful to see these spelled out.

1. If a forex trading company makes claims that seem too good to be true, they probably are. This includes profit guarantees or extremely high or consistent performance claims. For instance, you should be wary of companies that “guarantee” you will make a certain percentage or dollar amount each month. Other warning signals are promises of profits regardless of the market environment and outlandish performance records.

2. Disregard for the other side of the trading coin—risk—is another warning sign. Financial risk and losses are an inherent part of trading. The markets are a zero-sum game—for every winner, there is a loser. It is unrealistic to assume you will always come out on the winning side.

This is especially true in currency trading because it involves high leverage. Leverage can enhance profit-potential, but it also increases risk.

A company based in reality will recognize this and prominently display risk disclosure statements. A “company” that is only concerned about making off with your money may downplay risk or blow off risk disclosure statements as mere government formalities.

So hold onto your money if the company you are considering makes claims to recover losses or guarantees loss limits. This is likely a fraudulent claim made in hopes of giving you a false sense of reassurance, encouraging you to entrust your hard-earned dollars to the scammer.

3. Don’t trade on margin unless you have a thorough understanding of what this means. Trading on margin increases your forex buying power substantially, but it also increases your risk.

4. Avoid firms that claim you can trade in the “interbank market” or that they will trade on this market for you. The interbank market refers to financial transactions between a network of banks and large corporations—in other words, it is not geared toward individual trading.

5. CFTC recommends wariness when it comes to sending or transferring cash online, via mail or otherwise. The Internet has opened up a whole other realm of trading, but it has also made it easy for currency trading scammers to reach a wide pool of victims and electronic transactions are an easy way of securing cash … that is often untraceable or hard to get back if you are a victim of a scam, especially one from overseas.

6. Some phony currency firms will target individuals of certain minorities, notably people from Russia, China and India, with television or radio “infomercials.” The job opportunities these offer are often just ploys.

7. Obtain a company’s performance record and background information. While forex firms are not required to give up their performance record, unwillingness to do so can be a red flag. But keep in mind that receiving this info does not put the firm in the clear – these can be forged, too.

And conduct a thorough investigation of the company’s background as well as its head. Also, be sure to get this information in written form. If you’re not completely convinced the company you’re dealing with is legitimate, do not invest with it.

For more tips on spotting forex scams and who to contact regarding fraud, click here .

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