Is Forex Trading a Scam?

Forex is not a scam, but there are plenty of scams associated with forex. Regulators have significantly caught up to the scammers over the years, making them increasingly rare.

Scams are a big problem faced by everyone in the forex industry. As with any new industry, there are plenty of people out there looking to take advantage of newcomers.

Forex itself is a legitimate endeavor. Forex trading is a real business that can be profitable, but it must be treated as such.

It is not a get rich overnight business, no matter what you may read elsewhere. However, it is possible to have a profitable legitimate forex business. Like any other real business, though, there is no free lunch.

Defining a Scam

A scam or fraud is an intentional deception in order to take unsuspecting money from a person. In this sense, scams are rare and are becoming increasingly so. There is a distinct difference between a poorly run brokerage and a fraudulent one. Even a poorly ran brokerage can run for a long time before something takes them out of the game.

Why Do People Believe It to Be a Scam?

Forex trading became available to retail traders in 1999. The first handful of years was wrought with overnight brokers that seem to shut up shop without notice. The common denominator was that these brokers were based and non-regulated countries. While some did take place the United States, the majority seem to happen overseas where all it took to set up a brokerage was a few thousand dollars in fees.

Since 2007, the occurrence of shops vanishing with clients funds has become very rare. Over the last few years, Forex brokers mainly have been acquired by others, or the shops of the shutdown have been futures brokers whose clients were also able to trade Forex futures but not spot Forex such as MF Global.

Due to the Swiss National Bank removal of the Swiss peg to the Euro, two brokerages went under. One broker in New Zealand and Alpari's UK division due to losses exceeding excess capital.

How to Avoid Being Scammed?

The first advice we could give you is to check where the brokerage is headquartered. Regulations have increased greatly in the last 5 to 10 years, and it has, rightfully so, become increasingly expensive to do business in highly regulated countries like the United States or the United Kingdom.

Outside of location, you can do diligence based on how willing the broker is to talk about execution and their books. In other words, you can ask them how long they've been in business and how many countries they are regulated in. The more the better.

The simple act of finding out who you should call if you feel that you've been scammed (before investing with a brokerage) can save you a lot of potential heartache down the road. If you can't find someone to call because the brokerage is located in a non-regulated jurisdiction, it's best to find alternatives who are regulated.

What to Do If You Feel You're Being Scammed?

Depending on your location, you should speak to your governing authority.

Most of the regulations that have passed have come from requests of clients at brokerages that have failed or if it clients feel they have been cheated. Therefore, you can have a role in cleaning up the FX market continually.

Source: The Balance

Binary options are a scam

A scam is a dishonest representation, meant to trick someone. What makes binary options a scam is that it presents itself as an investment method, while it is nothing short of gambling with bad odds.

The simplicity of binary options is part of its attraction.

Binary means “two” and refers to the fact that you only have to make a single decision about one of two outcomes. You decide on whether you think a certain asset will rise or fall in the future.

The size of the movement does not matter. If you are wrong, you lose the money you have “invested”.

If you are right, you will get a pay out of between 65%-85% of the “invested amount”. Note this is already unfair as you stand to lose 100%, but you can never win 100%.

Some brokers will give you a small percentage – 5% to 15% – back, in case you lose, but they compensate this by giving you less when you win.

You can bet on almost any asset: stocks (for example Shell), indexes (for example the Dow Jones), commodities (for example gold, oil), or currency pairs (for example Ringgit and Dollar).

Here is the tricky part: the duration of the binary option is extremely short. It typically ranges from 60 seconds to 24 hours.

For such short time periods, assets move in essentially random directions and cannot be predicted. The short duration makes any investment technique worthless.

Binary option brokers will tell you “the trend is your friend”, but to call movements of a few second or minutes ‘trends’ is a grave misuse of the term. If you do spot a trend, it is only because the human mind is trained to see patterns and trends, even if they aren’t really there.

Similar to how people see “trends” at the roulette table, while it is completely random what happens: roulette balls have no memory and don’t care what happened the previous roll.

This means you are not investing, but gambling. It is just that you have worse payout ratios than if you were to go to the casino and gamble red or black on the roulette table.

Predicting what the stock is going to do in the next ten minutes is impossible, even for companies about which an abundance of information is available, such as Apple or Facebook.

Random, unrelated events, such as interest announcements, large buyers / sellers, bad weather, a terrorist attack or a flash-crash could temporarily influence the stock price.

But more often, there is no attributable reason at all for short term stock movements. This makes binary options gambling with unfair chances. The broker will always win at the end, just like at the casino.

As short-term fluctuations in stock prices are random and irrational, you have 50% chance of being right. Let’s say you “invest” RM100 and are wrong, you lose RM100. If you “invest” RM 100 and are right, you will get RM75 (a payout percentage of 75% is common).

This means on average you will lose RM12.5 per trade: (lose RM100 + win RM75) / 2 trades. Betting red or black on the roulette table is a better deal (through you will still lose on average), as the payout is 100% and the chance that you win is 18/38= 47% (due to the occurrence of the 0 and 00).

As you have to accept the 75% payout, it means you would need to be right in 57% of your gambles, instead of 50%, in order to break even. In order to win money, you need to be right even more often! This is because 57% x RM 75 (you win) – 43% x RM 100 (you lose) equals zero Ringgit.

But there is no knowledge that can help you to improve your win rate to 57%. After multiple gambles, you will always gravitate toward the 50% average and lose money.

It is easy to see how all the human weaknesses – greed, jealousy, overconfidence in your own trading ability and knowledge plus the underestimation of risk – come into play when you see the unwanted ads for binary options pop up on your screen.

They scream at you: “no knowledge required!”, “Make money from your own home”, “Start earning thousands of ringgits in a few hours”. Then, the fake testimonies from paid actors start to play. It’s the latest ‘get rich quick’ scheme. It’s too good to be true, literally.

You don’t need to be Einstein to realise this is a scam. If it would work as advertised, everybody would do it. Regrettably, it is always the financially illiterate people that end up being the victim and become even poorer as a result, while the brokers are the only ones who profit.

No serious investor, such as Warren Buffet, would ever consider binary options. No financial investor worth his or her salt would advise it.

Short term stock movements are “noise” that can only be filtered out by holding a stock for an extended period of time – not even months, but years.

As Warren Buffet said in his Chairman letter of 1988: “Our favorite holding period is forever.”


Source : The Star