How to Avoid Forex Scams

The foreign exchange (Forex) market has become more and more popular over the past decade and is gaining traction as an alternative investment strategy among serious investors.  Hand trading the Forex market with any amount of success typically takes years of experience and a deep understanding of the market.  In lieu of hand trading, many investors buy or lease expert advisors, which are programs that automatically place trades for them based on algorithms or "secret strategies".  Some of these expert advisors work well, but the majority of them are little more than scams.  This article contains advice and lessons learned from years of experience with expert advisors and the Forex market.

I have been trading on the Forex market for years and have even helped design a few expert advisors myself. Nothing pains me more than seeing people who are new to the Forex market get suckered into expert advisor scams by the multitude of unscrupulous individuals who knowingly advertise and sell bad products.  If you do a quick search on the internet for ‘Forex expert advisor', you will find hundreds if not thousands of web sites claiming to have the newest, best and most successful expert advisor that everyone should buy.  They all have wonderful accounts from "previous customers" who now make thousands of dollars a week by doing absolutely nothing but letting their program place trades for them.

Some of the expert advisors out there actually work, but most of them do not.  Or if they do work, they only work for a short period of time or the profits are not nearly what the program promised.  How is someone to tell the difference?  The following are a few bits of advice and lessons learned that I hope will keep you from falling victim to scam websites and expert advisors that simply do not work.

1.    The smell test: If it seems too good to be true, it is too good to be true.

There is a relationship between risk and return. As a general rule, more risk is required to achieve a greater return. In an equity market, using the S&P 500 as a representation, an investor can expect to earn 9% annually. That same investor faces a standard deviation (a measure of risk) on that return of 15% and could lose upwards of 40% of their investment. To put it simplify, even in the equity markets an investor risks a 40% loss to earn 9% annually so if trading software advertises 1000% returns in months, there is almost always an extremely high level of risk associated with that return.

2.    Track Records

Many reputable and less than reputable trading software providers offer track records or screenshots of accounts. While this may enhance the credibility of the methods or programs it is difficult to discern whether the documents have been doctored. If possible, investors should request a copy of those records and should test the software on demo accounts against that record.

3.    CTAs and CPOs

Commodity Trading Advisors (CTA) and Commodity Pool Operators (CPO) offer investors the ability to invest in Forex market space without being a trader themselves. Like mutual funds or a managed investment accounts, an investor's funds can be pooled with others or be invested separately under the guidance of a manager.

While CTA and CPO opportunities are heavily regulated, I would still suggest investing the minimum amount that the fund will allow for some trial period. This will ensure that investors understand the fluctuations and other characteristics of the investment and that the fund is reputable. We would also recommend thorough research of the fund or opportunity through the SEC, the NFA, the CFTC or any other international accrediting or regulating organization.

4.    "Wanted: Forex traders!" is nothing more than "Wanted: Idiot with Money!"

Stay away from advertisements asking for new investors to join their team. Never setup joint accounts and do not put funds into an investment account with someone or into any fund that is not registered. This is an easy system by which the joint party can liquidate your account and leave you with nothing.

5.    Single Page Websites

If a software provider displays one very long page as their website with paragraph after paragraph of success stories, a couple video testimonials, a picture of fancy cars and a big house, or they have an annoying pop-up with a fake chat interface…Run!  These are nothing more than scams. The programs may work for a short period of time, but will eventually crash.  A common method used is to find a medium length trend in a market, such as an upwards trend that may last for a couple months, and then create a simple program that operates on a couple of proven indicators, but that ultimately buys more often than it sells, to make it more likely that the program will show a profit over a month or two of "testing".  Then to make the profits greater, the leverage is raised to 100:1 or greater.  This makes the temporary profits look great, but as soon as the upwards trend is over or the program places a couple of bad trades in a row, the entire account it wiped out.

6.    Reviews of expert advisors

Be very careful when finding and reading reviews of expert advisors.  The companies that sell the programs will often go to great lengths to place wonderful reviews of their product all over the internet, hoping that you will believe them and buy their product.  There are even people who make a living by getting paid to post glowing reviews of products all over the internet.  Forums are often a place to find reliable reviews of an expert advisor, but be wary even of these because anyone can sign up on a forum and post reviews, including the people who are trying to scam you.  There are also lots of websites that claim to review expert advisors.  Be wary of these as well, because some of them are simply there to advertise specific companies and programs.

Before investing in the Forex market, do your research and read up on the subject.  Always test out a program on a demo account before you purchase it and never invest money that you are not willing to lose.  Remember, there is not a single expert advisor out there that will make a profit without at least some amount of risk.

Some good websites for learning about the Forex market are:

Babypips

FXCM

AIS Trading