Forex trading is a highly lucrative and exciting field of trading. However, the internet is now rife with unscrupulous people trying to separate you from your money. Here are some of the red flags that you should be aware of.
Anybody in the market that offers guaranteed profits should come across as a huge red flag. Markets are random and precarious. To sell the idea that any organization can guarantee a profit in an unpredictable marketplace is sure to be a scam. Regulators around the world have been raising concerns about this issue for a very long time now.
The only real way to make any profits in Forex trading is to have a well-defined trading strategy. This needs to go hand in hand with a risk management strategy. Instead of promising guaranteed returns, a trader should be offering these strategies to you. If you come across such scams or have been a victim, make sure that you report forex scams on the appropriate platforms. There are mechanisms that can help you recover the money you have lost.
One of the other things you should look out for is the historical performance. Invest through a managed fund only if it has been around for at least three years. You will be able to see the month-to-month performance of the fund. If you are satisfied with the returns and they match your expectations, you can start by investing a small amount. If an organization is reluctant to give you a detailed audited performance report, you can be sure that there is something amiss.
Returns of More Than 100%
If there is a platform or a fund that offers you returns of over 100% a year, that should send alarm bells ringing. Hedge funds themselves trade at around 7% a year, so returns of over 100% are nearly impossible, apart from a very few exceptions. If they are showing you the possibility of very high returns, they must be taking on very high amounts of risk to achieve those goals.
To get on top of this, you need to understand the concepts of Sharpe ratios and VaRs. The Sharpe ratio is the amount of risk that the account will take on to perform at the promised rates. A Sharpe ratio that is below 3 should be avoided at all times. VaR is the value of the amount of risk. You should also note that while deciding which trader to place your investments with. All of these historical figures should be made available to you on demand.
Alert Signals for Trading
Trading signals are sent over SMS, Telegram, and other instant messaging apps. Many platforms offer these services for free, and you will be inundated with such messages all day. They also provide you with a false sense of a very low spread. Traders are always looking for the tightest spread so that the cost of trading remains low. At the same time, you will be lured because the trading research is being done for you.
However, many organizations that send you these buy-sell signals are trying to entice you to make a trade that will go against you. This is why you always need to do your research and avoid companies that try to pressure you into adopting their trading strategy.
Factors to Monitor
Consider two things for investment management opportunities or managed account services/funds – their past track record and the regulations they fall under. The things that you need to look out for are as follows.
- The length of service
- Documented processes
- Associations with other legitimate organizations
The FCA regularly updates and publishes a warning list of traders and companies. When selecting a trader, you should always check this list. If you end up losing money to a trader on the FCA list, you will also lose the investor protection offered. This protection is known as the Financial Services Compensation Scheme or the FSCS.
Firms Advertising on Social Media
In 2020, nearly £30 million was stolen from crypto and forex investors. Financial services advertising on Instagram and other social media platforms are entirely unregulated. And you should avoid companies that do so. Look out for companies that seem to have a fake façade. If they don’t have a physical address or audited results, it should be a warning sign to you. As for the online reviews, always take them with a pinch of salt when it comes to financial services.
These are some factors that you should be wary of when selecting a service provider. Stay safe and happy trading!