Forex Trading can be a very risky investment, but can you make money doing it?
In recent years Forex Trading has gained an almost cult following online, the question remains, can you make money in forex trading? And more importantly, should you risk your money trading on the Forex Market?
Can I Make Money Trading Forex?
No, you can not make money trading Forex. That is, if you are asking the question. The answer for most people will be a resounding no. This is because it takes years of training and education to embark on such a risky endeavor and even the most experienced traders can get hit very hard and end up losing their pants.
If you’ve searched the internet for ways to make money quickly in the financial markets, you’ve probably seen some ads for forex trading platforms. Some of these services offer truly insanely high returns. Can their claims of 100, 200, or even 300 percent in one-year claims be true? Can you really double your money overnight? Definitely not.
The more important question is, how likely is it that you will make any profit at all?
We’re going to explain what the forex market is, how it works, and how you can make it work for you. We’ll also look at some of today’s most common forex scams, and point out the warning signs that you may be dealing with someone who doesn’t have your best interests at heart.
What is Forex?
Forex is short for “foreign exchange”, which means using money in one currency to purchase money in another currency. This may be familiar for any international travelers, whether you’re traveling between the US and Canada or between the UK and continental Europe you will require a different currency to be able to get by. But can you make money while buying and selling foreign currency? And if so, how?
The Basics Behind Foreign Currency Trading
There are two reasons a person or organization might want to invest in foreign currencies.
Using Foreign Exchange as a Hedge
This isn’t a common concern for individuals, but many corporations and most governments hold some of their assets in the form of foreign currency. This is especially common in countries like Russia, which has a volatile currency – and therefore holds more US dollars in reserve than any other country. In this way, the Russian government is guaranteeing that they have a way to pay their bills if the Russian Ruble suddenly takes an unexpected nosedive.
For most people, this is something that will never affect them. The average person barely has enough savings in their own currency, and setting up a separate savings account in a foreign currency would be a useless ordeal. However, for governments and large corporations keeping Forex is essential for the upkeep of their businesses.
Speculating on Foreign Exchange Rates
When most people talk about trading on the forex market, they’re talking about trading foreign currency as a speculative investment, similar to investing in the stock market. This can be profitable because currencies are constantly being exchanged at different rates.
For example, suppose today’s exchange rate for US dollars to British pounds was 2:1. An American investor could spend $1,000 to purchase £500. Then the US investor would wait until the exchange rate becomes more favorable to him. Suppose in a month the rate becomes 2.5:1. The US investors would then sell the £500 for $1250, earning a cool 25 percent profit (minus any exchange fees).
Many institutional investors already do this. Major finance companies like Goldman Sachs and Merrill Lynch have entire branches that specialize in forex trading. And many brokers will offer forex trading services to individual investors.
Here’s where the trouble starts. Foreign exchange is what economists call a negative-sum game. Unlike the stock market, which trends upwards over time, exchange rates are constantly in flux, and central banks have a strong incentive to keep them from moving too far in any one direction. Because of this, every forex trade has a winner and a loser. Worse, both parties end up paying exchange fees.
So how do banks make money this way?
They do it with teams of highly-paid analysts who are constantly working on short-term trades that are based on current economic conditions. As an individual, you don’t have these resources. Rest assured, the big institutional investors are smarter and better informed than you are, meaning that they’ll enjoy the majority of “wins” in the system, leaving smaller investors as the “losers”.
This isn’t to say you can’t make money in foreign exchange trades. It just means that it’s an uphill climb for a person with a day job to put in enough work in their off time to understand the market. As long as you’re comfortable with the risks and willing to do your homework, it can be worthwhile. Just make sure to limit your investments, and not to invest more than you’re willing to lose.
Common Forex Scams (And How to Avoid Them)
Another risk that individual investors face is the proliferation of online forex trading scams. There are so many of these scams that in 2008 the U.S. Commodity Futures Trading Commission (CFTC) established a dedicated task force to address the issue. Since then, despite the best efforts of authorities the world over, these scams have continued to proliferate.
Here are four of the most common scams.
Signal sellers are people who claim to be market analysts. They offer to send you lists of currency trades along with direction, entry price, stop loss, and target levels. In theory, this sounds attractive. Why not gain the same sort of insights that power the big banks’ profit machines?
Because a lot of them are scams.
We’re not saying every signal seller is a con artist. But there are a couple of things you’ll want to look at before you trust one.
First, beware of signal sellers who work for free, but require you to use a particular broker. These signal sellers earn a kickback from the broker every time you make a trade. As a result, they’re not concerned with how good their advice is, they’re just concerned with how many trades they can convince you to make. An honest signal seller will charge a flat fee for their advice, and won’t care who your broker is.
Secondly, verify your signal seller’s advice. Many reputable foreign exchange brokers offer the option to perform free “practice” trades with fake money. Take your signal seller’s trade advice for a virtual test drive. If it turns out at the end of a month that you would have turned a profit, you’ve found an honest – and competent – signal seller.
“Robots”, in this context, means computer software that executes trades automatically, even while you sleep. The attraction here is obvious. “You mean I can make money while I’m in bed? Shut up and take my money!” As usual, if it sounds too good to be true, it probably is.
Much like the case of signal sellers, not all robots are scams. Major banks use computer software to automatically make billions of dollars in trades every day. But many of these robots are either not as good as advertised or are outright scams. Here are a few things to look out for.
Beware of unrealistic claims. We’ve seen forex robots that claim to earn a 300 percent profit in under a year. There’s not an investment on planet Earth that can earn that kind of return. Look for realistic numbers, not fantasies.
Find out what broker the robot trades through. Many unregistered forex brokers offer robots. Ensure that your robot’s broker is regulated before you send them a single penny. Here’s a list of regulated forex brokers throughout the world, along with a list of known fraudsters.
Not all brokers deal with regulated trades. As a matter of fact, the majority of forex trades are spot trades, and those types of trades are completely unregulated. So how do you know if your broker is reliable?
The best way is to work with a broker who’s already authorized to perform stock trades. In the US, they would be regulated by the SEC and FINRA. In the UK, they would be regulated by FCA. These brokers are most likely to be honest because although their forex trades are unregulated they don’t want to risk losing their stock broker’s license over accusations of improper behavior.
Phony Funds and Ponzi Schemes
Another common foreign exchange scam is the phony fund. Basically, these are online funds that don’t really exist. You send them your money, and you never hear from them again. If you call them, they’ve never heard of you.
How do you avoid these types of scams? Simply avoid funds that are based in high-risk countries. The biggest offenders are Belize, Vanuatu, and Estonia. These countries are notorious for turning a blind eye to this kind of scam, so criminals feel comfortable operating inside their borders. These scams are rare in the US, UK, and Canada because anyone who blatantly stole people’s money like that would quickly end up in prison.
A related scam is the Ponzi scheme, where the “fund” skims money off the top and pays off anyone who wants to cash out with payments from new investors. There are two warning signs that a fund is running a Ponzi scheme.
First, they promise unrealistic rates of return. Ponzi scammers lure in new investors by promising ludicrous return rates, counting on their unrealistic promises to continue drawing in more money.
Second, they don’t want you to withdraw your money. If you want to withdraw part of your investment and your fund says anything other than “Check or wire transfer?”, you’re probably dealing with a Ponzi scheme.
What Can I Do if I’ve Been Scammed?
If you’ve been swindled by a forex scammer, it’s not too late. While you may need to go to court if you’ve paid them by cash or check – good luck suing a con artist in Belize – credit card and bank transfer payments are more common, since they allow easy transfer of funds from country to country. In this case, you can simply have your bank or credit card company issue a chargeback to recover your money. This can be a complex, time-consuming, and intimidating process for the average person. MoneyBackHero has been getting people’s money back for years. Contact us for a free consultation. We recover your money or you owe us nothing. It’s that simple.