It’s important to distinguish the forex market from forex scams and pyramid schemes. The former is a real market, and the latter is defrauding people.
Is forex a pyramid scheme?
The forex market is the biggest financial market in the world with trillions of dollars traded every day by large corporations and investors. Thanks to the internet and computer technology, forex can be accessed by everyday people via a forex broker online.
If you’re asking “Is forex a pyramid scheme?” then the answer is no. But pyramid schemes have been invented around forex - just like they have around the stock market and real estate and just about any other legitimate type of investment.
Forex scams come in many forms but we will explain the four main types of forex scam so that you are best prepared to avoid them. What you need to think is that every journey towards forex starts with people asking themselves “Can you get rich trading forex?”. Most people will find the best forex broker, open a forex trading account, and start practising trading. Unfortunately, a small group of people will try to take the easy route to get rich quick with forex and end up being scammed.
How to tell a forex scam
There is a rule in life that you will do to apply when considering a forex investment. “If it seems too good to be true, it probably is.”
The one common denominator across all forex scams is that they guarantee abnormally large returns. Large returns can be made in the forex market but there is always risk involved. So if somebody promises very big upside with little or no downside, then it is probably a scam.
You can think about it this way….
If somebody had such a fool proof way of trading forex, why would they ever share it? They would keep it to themselves and get rich trading forex. And let’s just say there was some very generous trader, who decided in a massive act of generosity to share this guaranteed trading method - everybody would have heard about it and be doing it.
How to protect against a forex scam
If you’re very new to investing, you might find it hard to distinguish between what is a realistic risk: reward ratio for a forex trading strategy and an unrealistic one. One of the best ways you can protect yourself is only deal with a regulated broker or regulated trader. This is not a full proof strategy because there have been examples of regulated companies acting as a pyramid scheme or Ponzi scheme like Bernie Madoff - but they are much less frequent.
FlowBank offers forex trading as a fully registered Swiss bank under FINMA, the regulatory authority in Switzerland.
You can spot a real forex company because they will be regulated in a respected financial centre such as Switzerland (FINMA) or the United Kingdom (FCA).
Main types of forex scam
New ways are being invented all the time of how to defraud people in forex scams and other money scams. But there are four main types in the forex market: Pyramid schemes, ponzi schemes, forex robot scams and forex signal scams.
1. Forex Pyramid Scheme
Pyramid schemes earn money by recruiting new paying members of the scheme. The owner of the forex pyramid scheme does not make money by trading forex by rather from the fees that new forex investors pay to join the scheme. It is called a pyramid because this second layer of recruits to the scheme will then hire even more new recruits for a third layer of investors. The higher up the pyramid you are, the more money you make when new investors join. Pyramid schemes are a crime and whoever starts them will typically go to jail if caught.
2. Forex Ponzi scheme
Ponzi schemes are basically fake investment management companies. Instead of people paying a fee like in a Pyramid scheme, people will invest their money into the scheme. The owner of the scheme will entice investors to invest with a forex guru of some kind, typically a called a ‘forex money manager’.
There are many real forex money managers who trade a pool of clients money and charge a fee and a percentage of the profits for doing so. However, the distinction in a Ponzi scheme is that there is no investment. The schemer will pay out early investors not from any return on investment - but from the money invested by later investors. If there are always new investors, the scheme can continue. The most famous example is that of Bernie Madoff.
3. Forex robot scam
A forex robot is a computer algorithm programmed to place trades in the forex market. The most popular forex robot trading platform is Metatrader, where the robots are called EAs (short for Electronic Advisors). Again, there are legitimate forex robots that make money as well as forex robots that were made with the best intentions by their creators but that just do not make money.
Where the forex robot becomes a scam is where it is known by the creator that the robot does not make money, yet they sell it anyway promising big profits to buyers. The most common way this is done is through a process known as ‘curve-fitting’. With the power of computers, it is easy enough to find a trading system with entry and exit ideas that made hypothetical money in the past. But this is just fitting the robot to what happened in the past. Patterns repeat over time, but the past never perfectly repeats itself so these curve-fitted robots inevitably fail.
4. Forex signal scams
Forex signals services are a subscription to receive buy and sell alerts in the forex market. The basis for this scam is almost identical to the forex robot scam, except instead of paying a one-off fee to buy the robot, signal services offer subscription service to receive the buy and sell alerts. Like with robots, there are real forex signal services that provide a useful service but normally they require some discretion from the buyer. Trading signal services are best used as a guide to possible trading opportunities. Again, why would the signal provider sell the service when they could take the signals themselves?
Ways to avoid a forex pyramid scheme
- Always ask for proof of results by verified trading statements. The person selling you the potential scam must prove they have the results they are promising. A well known website for verifying trading results is myfxbook.com
- Don’t give away personal information or financial details to strangers over the internet or over the phone, no matter how convincing the person might seem. Remember it is their job to try to deceive you.
- Check online forums and listings of registered investment companies and registered investment managers. Typically these will be available from the regulator of the stock market in your country.
- Take your time and do your research to find a real investment manager or good forex signal service or profitable forex robot
- Learn to trade yourself, this takes time and energy and success is not guaranteed but it is the surest way to avoid being scammed.
Remember if it seems too good to be true, it probably is.