may be traded legally on an exchange or board of trade that has
been approved by the CFTC. Even where currency trading does not
occur on a commission-approved exchange or board of trade, it
can be conducted legally. In such a case, generally speaking, one or
both parties to the trade must be (or must be a regulated affiliate
of) a bank, insurance company, registered securities broker-dealer,
futures commission merchant or other financial institution, or an
individual or entity with a high net worth.
Where Forex firms do not fall into these categories of regulated
entities and engage in foreign currency futures and options
transactions with or for retail customers who do not have a high
net worth, the CFTC has jurisdiction over those firms and their
transactions.
If you are solicited by a company that claims to trade foreign
currencies and asks you to commit funds for those purposes, you
should be very careful. Watch for the warning signs listed in the
following sections, and take the recommended precautions before
placing your funds with any currency trading company.
The Firm Promises a Free Lunch
Remember, there’s no such thing. If a scheme promises quick riches
with little effort, then be aware because it might be a fraud.
Investing has always attracted a criminal element that can ensnare
the unsuspecting or the naïve. This is especially true of inexperienced
people who have just received a windfall—from a retirement
or the sale of a home—and are eager to invest it somewhere. Some
telltale signs are firms that “guarantee” profits or a high return.
They’ll use lines like, “Whether the market moves up or down, in
the currency market you will make a profit,” or, “The main advantage
of the Forex markets is that there is no bear market.”
Remember, the investment pros on Wall Street are thrilled to beat
the markets by one or two percentage points—and even that
achievement is relatively rare and even they suffer down years.
Anyone who does not acknowledge this reality should not be handling
your money and you should never believe any firm that says,
“With a $10,000 deposit, the maximum you can lose is $200 to
$250 per day.”
The Trader Uses Terminology You Don’t Fully Understand
Do you remember the commercials that used to appear on television?
“It’s five o’clock. Do you know what your child is doing?”
An investor should be thinking, “Do I know what my money is
doing?” If you don’t, then you are far more likely to lose it. This
does not mean that you are necessarily being cheated. Many legitimate
investing strategies can put you at greater risk, but you must
be aware of it and be ready to accept the chance of greater losses. A
perfect example is margin trading. Currency traders may ask for
money from investors to trade on “margin.” As we explain else-
where in this book, margin allows a mere $1,000 to $5,000 to control
vastly larger sums on the Forex markets. It increases the size of
the reward but also increases the size of the pain if the market goes
against you. Consequently, an investor may give a relatively small
amount to a trader and find himself or herself facing far greater
losses. This goes for any other trading strategy or vocabulary. If
your trader is using terminology that you don’t fully grasp, then
you should not be risking your money.
The Firm Claims To Trade in the “Interbank Market”
Some firms or companies will say that they have access to the
“interbank market” and can therefore trade at better prices on
your behalf. This is a sign of possible fraud and you should remember
our first warning sign—someone is offering you a free lunch.
The interbank market is dominated by large institutions—banks,
corporations, and financial powerhouses. Anyone who claims to
have that kind of access should be closely questioned.
The Firm is Using the Hard Sell via the Internet
The Internet, as we have noted, has greatly increased the individual’s
ability to access financial information and trade relatively
quickly and at low prices. The downside of this is that it has also
made it easier (and cheaper) to use fraudulent and misleading
pitches to reach investors and take their money from them. Be careful
of a hard sell that is followed with pressure to transfer funds
quickly over the Internet. In many cases, sending money can be as
easy as clicking a button, but getting it back can be almost impossible.
Be especially aware of firms that do not conspicuously list their
addresses. If they are not located in the U.S., then your money
could be sent to a foreign firm, and it may be virtually impossible
to recover.
The Firm is Vague and Little Information is Available
The good news is that a certain measure of due diligence can protect
you from most scams. If you are considering sending your money
to a firm, get as much information about the firm as possible—
especially about their track record with other clients. If the firm is
vague or is unwilling to send you this information, this should be
your first warning sign. However, even if they do send you a packet
of information that appears professional, be careful that it is not fraudulent.
Another way to ensure that a firm is legitimate is to do background
checks on the people running it. A simple Internet search
can yield enormous amounts of information. Use this to confirm
that the firm’s statements are true. Do not rely on what the company
tells or promises you. Above all, if you feel any suspicion
about the firm, trust it. There are plenty of legitimate Forex firms
that will give you the trading opportunities you seek.
Read More: Avoiding Fraud and Safe Yourself In Trading World
