Many people have the question, is forex legit or a scam? When considering the high potential for returns of forex, you can’t blame them for having doubts about Forex trading.
The forex market is as legit as it gets and it trades foreign currencies. However, there are risks, and making continuous profits can be extremely difficult if you don’t have the right knowledge and enough experience. On top of all, there are many scammers out there that you need to be aware of.
In this article, we dig deep into the topic to show how forex trading works and why it’s legit and the forex scams that you need to avoid.
Table of Contents
How does Forex Trading work?
As one of the biggest financial markets in the world, the Forex market provides traders with ample opportunities to make profitable trades. While there are a good number of opportunities available, to be a good forex trader, first, you need to understand how it works.
Forex is a trading method that involves an exchange of two foreign currencies. The two currencies selected are traded on a quoted exchange rate, not in an absolute value or price in the forex market. The quoted rate here is relative to the other currency which is selected.
Because of this, forex trading takes place as a pair of currencies and there are many currency pairs that you can choose from. USD, EUR, JPY, GBP, and CHF are the currencies that make up the major forex pairs. Within them, the EUR/USD pair is the most traded, with more than 20% of all forex trades under their name.
Same as forex traders, large companies, financial institutes, and hedge funds also take part in forex trading. But unlike retail traders who use trading platforms, large-scale companies and traders tend to use their relationship banks to make their forex transactions.
Forex trading might seem simple on paper, but when you look deep into the topic, you will see there is much more that doesn’t meet the eye.
One of the first things new traders seem to face when stepping into the forex field is wondering if is forex legit. To answer that, first, you need to understand who is involved in forex and whether they are regulated or not.
Who is involved in forex?
The forex market is among the biggest financial markets in the world. Thus, there are a large number of parties that operate in the forex market. Understanding each party and their role in the forex market can help you make better trade decisions. Let’s take a look at the participants of the forex market.
Commercial and Investment Banks
Investment and commercial banks play a major role in the forex market. These banks create forex markets with a range of forex pairs with the help of professional traders that they employ. They also aid the trading process and make trades on a proprietary basis for profit.
Hiring sales staff to aid clients with their forex transactions is also something that commercial and investment banks tend to do. This helps to ensure customer satisfaction and the quality of service at the highest level possible.
Central banks of the country also play a large role in defining the state of the forex market. The interest rate policies and open market policies of central banks have a heavy influence on the currency rates of the forex market.
They also take actions to stabilize the market while increasing the competitiveness of the economy of their country. Currency interventions like appreciating or depreciating a currency are also handled by the central bank. Most of these strategies help bring down inflation and act as an indicator for forex traders to make trades.
Investment Managers and Hedge Funds
After the banks, Investment Managers and Hedge Funds are the other most important players in the forex market. Furthermore, they aim to make profits by investing in a variety of financial instruments, including foreign currencies and assets.
Investment managers mostly tend to trade currencies for large accounts, endowments, and foundations. When going into global markets, they will have to buy and sell currencies to trade foreign securities. They also make currencies to trade foreign securities, and some hedge funds make speculative forex trades as their main objective.
International companies that tend to use forex transactions for commercial purposes fall into this category. Moreover, while paying for goods and services with forex currencies, they convert export proceeds to their local currency.
Risks associated with foreign currency translations are a common occurrence. To tackle this, companies trade forex to hedge this risk. This tactic also adds a level of security to offshore investments carried out by the same company.
When compared with other players, the amount traded by individual retail traders is very low in the forex market. But in recent times, forex trading has seen an increase in popularity within the individual trader community.
While large-scale firms use banks and the futures market, retail traders use online forex brokers to access the forex market. Most of the forex trades that individual retail traders take part in happen speculatively.
Online forex brokers
Online forex brokers are the financial intermediaries that allow individual forex traders to perform their trades. These enable their clients to open trade by buying a forex pair and closing the trade by selling the pair.
Most forex brokers offer various types of trading platforms to their clients so that they can have a much easier time in their trading activities. There are many forex brokers available in the market currently, and each comes with its benefits and drawbacks.
How is the Forex Market Regulated?
The best way to identify if forex is legit is by checking the regulation status of the forex market.
Even though forex is one of the biggest financial markets in existence, it also is one of the most unregulated financial markets. The main reason for this is the lack of an international regulatory organization or agency that oversees the interbank forex process.
However, being predominately unregulated doesn’t necessarily mean that forex is a scam. The unregulated nature can even be beneficial for traders allowing them to use strategies that are not allowed in regulated environments.
So, how is forex regulated?
Most of the forex regulators turn towards regulating online forex brokers since the interbank market remains unregulated. Forex regulators typically check the legitimacy of the forex brokers within their county and give them their approval.
If a forex broker has regulatory assurance from major financial regulators and has a good service record for years, that is a reliable forex broker.
Brokers can receive regulations from official financial agencies with strong jurisdictions under their belt. When a forex broker gets regulated by one or many authoritative financial agencies, traders will have the benefit of enjoying regulatory protection from fraud brokers.
Let’s see some of the major forex broker regulators of some of the countries.
- Commodities and Futures Trading Commission (CFTC)
- Financial Industry Regulatory Authority (FINRA)
- Securities Investor Protection Corporation (SIPC)
- UK Financial Services Authority (FSA UK)
- The Financial Conduct Authority (FCA)
- Financial Services Compensation Fund (FSCS)
- Swiss Bankers Association (SBA)
- Swiss National Bank (SNB)
- Swiss Federal Department of Finance (SFDF)
- Canadian Investor Protection Fund (CIPF)
- Investment Industry Regulatory Organization of Canada (IIROC)
- Australian Securities and Investments Commission (ASIC)
- Markets in Financial Instruments Directive II (MiFID II) (this is valid for forex brokers that are regulated in one EU country and offer services in another EU country)
In the field of forex trading, the chances of traders running into forex scams are getting high with each passing day. There are many types of scams available that can hurt the traders’ finances. In the quest to figure out whether forex is legit, understanding the scams can help a lot. So you can spot a scam right away.
Below are some of the most common forex scams that take place in the forex market.
Forex Broker scams
Scams that forex brokers pull off are the most devastating of them all. Brokers can do personal data scams, price manipulations, unsegregated accounts, fake leverage, promotions, rewards, and bonuses. To avoid this scam, choose a highly regulated forex broker with a good reputation.
Forex Advisors and managed account scams
Beware of expert advisors and forex account managers. These can easily siphon your forex account and bring an end to your trading career. So make sure to do research and background checks on advisors and account managers to check their credibility before hiring them.
This type of scam occurs when a broker places an order from their own account, knowing a client is going to be placing a big order.
These happen when a trader tries to create the impression of interest in the position by manipulating the market by placing a large order the trader doesn’t plan to execute.
Signal selling scams
Some traders and firms promise to suggest the most favorable time to trade by identifying buy or sell signals for a price and don’t deliver as promised or to the level as they promise.
Forex bot scams.
False promises about automating the trading procedure with the use of a forex trading program.
How to spot a forex scam?
Most of the time, forex trading scams offer the most unimaginably profitable deals. They promise massive gains in a short period of time with super high leverages and rewards with little risk.
If you ever come across a deal like this, do thorough research as there is a high chance that it is a scam.
Also, always take steps to ensure your financial stability and security. If a forex broker or any related party is not regulated, it is not a good idea to invest your money there. In addition, keep in mind to never allow other people to have access to your money.
How to choose a legit broker?
Your forex broker plays a huge role in your trading activities. Finding a legit broker is a must.
Legit brokers are, most of the time, highly regulated and highly rated. Checking whether a broker has regulations or not is the best way to identify a trustworthy forex broker.
If you ever come across a broker with great deals, fees, and features that are not regulated, stay away from it.
Even regulated brokers can cause you issues at times because not all regulators offer the same level of financial security. The regulators change from one country to another, and so with them their rules. So to assure protection for your money, find a forex broker that has the right regulatory requirements.
The good news is there are a lot of properly regulated brokers out there like IconFX that you can select to do your traders with.
Warning: When selecting a broker, always be sure to do thorough research on your own.
Yes. Forex trading is a legitimate way of trading that takes place in the biggest financial market in the world.
While some scammers are doing illegal activities within the forex market, forex trading itself is not a scam. Trading with a regulated broker is as safe as any other way of trading.
While brokers stealing funds from traders is a possibility, you won’t have to worry about it if you choose a regulated broker.
Since the day of its inception, people have always questioned, is forex legit?
To give you a short answer to this, yes, forex is a legitimate way of trading that involves foreign currencies. Trading with a secure and regulated broker can help traders to reach their goals much more easily.
But we can’t say for certain that you won’t face any risks. In addition to the market volatility risk, traders also have the potential to face forex scams that are there to trick traders into bad situations.
So our advice is to educate yourself about the security, regulations, and scams that are available within the forex market. That way, you will be able to understand the answer to the age-old question, is forex legit?