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Trading Scams — The Cancer of Trust.
Avoiding and Understanding Risks While Maximizing Our Chances of Survival. A Must Read Before Entering the World of Trading.
The Foreign Exchange market is a decentralized place where traders exchange currencies for different reasons namely speculation and hedging. A portion of the traders are called retail traders and they are the ones who are not tied with a financial institution, like you and I, people with some extra funds that they are willing to risk. Unfortunately, we must move through a labyrinth of misinformation and dishonesty before we see trading as 1 + 1 = 2.
In this article, we discuss the main scams and how to avoid them before moving on to the best practices and how to preserve long-term capital growth. Starting out, I have neglected many of the below and I would have been so much better off had I respected those rules.
I have just published a new book after the success of my previous one “New Technical Indicatorsin Python”. It features a more complete description and addition of structured trading strategies with a Github page dedicated to the continuously updated code. If you feel that this interests you, feel free to visit the below link, or if you prefer to buy the PDF version, you could contact me on Linkedin.
The Non-Exhaustive List of Scams
A scam is a fraudulent attempt to steal your money without giving you something in return of equal money. For example, I come to you asking you for $1 USD in exchange of giving it back 2$ next week only to realise a seven days later that I have vanished with your Dollar. Scams come in many shapes and forms which are discussed below. These should form a basic barrier before deciding to trade.
Important Disclaimer : There is a huge number of honest and talented people in the trading industry which are role models. The below is just a warning from other people who are less honest. Consider the below as warning points that you should think about before following or trusting a manager with your money.
The Guaranteed Returns Scam
Nothing is guaranteed in life and especially not in finance. Trading and investing is a complex game in a highly complex and chaotic environment. Even risk-free securities are not really risk-free, they are just virtually and theoretically risk-free. Remember, this is a place where Oil futures prices went negative for a while, therefore, even when you buy at $0.00, you should not be sure that the asset’s price will go up. This is an outstretched example but it should illustrate the wilderness that is financial markets.
The guaranteed returns scam is used to access other people’s funds easily by selling them dreams. Basically, someone will contact you stating that he has a guaranteed win strategy and wants you to invest your own funds so that you become rich just like the ones that have already invested with him. What you should know here is that the truth is very far from all of this. There is no strategy, there are no returns, and above all, there is no integrity. To detect this kind of specimens, look out for the following:
They generally do not have a profile picture and their job record says Forex Trader since 2001.
They post the same comment everywhere with a link to their blog.
They promise you either to double your money or to give you 1% increase per day. Both are impossible and if they were possible, you would be a billionnaire in a very short time.
They insist. A LOT.
Rocket scientists with as many PhD’s as Taylor Swift’s ex-boyfriends cannot reach the accuracies claimed by these people who have magically chosen you to invest your money with them. Think about that before falling into their trap.
The Signals Scam
This is where you have to pay a subscription to receive random signals that will have a track record very different from the one you have given prior to your subscription. It starts with the scammer posting fake track records and false profit statements that a 5 year old can photoshop. Then when people start subscribing to this signal provider, suddenly, the market becomes too random to be predicted and the results go south.
The Profiles that Publish Profit/Gain Statement on Social Media
Who among us has not scrolled on LinkedIn or Twitter and seen meaningless screenshots of trading results with generally immature captions like “easy day” or “subscribe for only 4$ / month to become rich”? Check the below image as an example that I have seen two days ago:
By the way, the profile that posted the above screenshot did not know the meaning of an equity curve when asked by one of the commenters and he claimed to be a fund manager at a fund strangely having his name but no where to be found on the internet.
It is extremely easy to fake a profitable MetaTrader profit and loss statements. There are two ways:
Simply photoshopping and aligning the good numbers.
Opening a demo account where the spreads are 0.1, then buying for a few minutes and closing out with an easy profit as soon as the price slightly moves above the buying price.
The second choice is so easy that it is ridiculous. I have managed to get 25 profitable trades in a row. This is of course not possible with real life account due to many factors especially the high costs. The below is an example of such practices
To detect this kind of scams, look at the opening and closing times of the trades, also look for the lack of diversity between the trades to get a clue on the fake statement.
“Your hard-earned money deserves to stay in your pocket or in a valid investment that you deem worthy.”
Your Broker, The Back-Stabbing Friend
Here is a simple way of putting it. Most brokers are using a shady technique called B-Booking. This is where they bet against you. The quick definition is:
A-Booking: These are brokers that send your orders to the market. They make money based on commissions or spreads. They do not care whether you win or lose. In other words, they are honest brokers.
B-Booking: These are brokers that keep your orders internally. They trade against you and control everything thus, they make a lot of money betting against you. Your orders never even reach the market.
Your broker is not your friend. The broker’s job is to make money on commissions and on bid ask spreads and since the FX market is known to be commission-free, almost all the profits come from the bid-ask spread, but also one more thing; your broker bets against you because when you take one position, your broker is taking the other one and therefore, will do everything for you to lose. This is sadly the case for the majority of brokers.
Although technically not a scam, but a broker that provides you with research even though he is rooting against you, is a giant red flag. Do not trust anyone but your judgement. Also, Notice the irony when a B-Book broker is giving you free trading signals.
The Free Trading Scam
Have you ever seen those big flashy ads with 0% commissions and fees? They generally have two flashy buy and sell buttons as well to make you think you are all set to trade risk-free and fee-free. Well, this is another deception made by shady unregulated brokers.
Understand this phrase: An unregulated broker is a scammer and you will not get your money back if you create an account with them. Therefore, anything based outside of compliance protected zones such as the United States and Australia is a major no-no. Even if by miracle, you manage to get your money back from them, there will be enormous costs and banking problems such as delays.
Generally, good respectable brokers are regulated by government entities such as the SEC in the United States and the FSA in the United Kingdom as well as being A-Booking brokers.
One more thing; I am not really referring to Robinhood when I say free trading. Robinhood is advertising a commission-free (but you still have to pay bid-ask spreads) trading which is of course a little misleading. However, some brokers will not even mention their huge spreads hidden behind the commission-free trading.
The Holy Grail Strategy
Many aspiring traders get scammed because they are trying to find someone who offers them a infaillible money management where they use some sort of perfect strategy.
Let us get one thing clear; financial markets are random-like chaotic environment. This mean that there is no one strategy that is able to capture such complexity. Every time you see one of those holy grail strategies, you have to disregard them. No one will put this hypothetically perfect strategy online for everyone to use. Personally, if I had one, I will use it myself and never tell anyone about it.
I would also not brag about it on social media as that kind of behavior is destroying our society. I have once seen a post of a guy selling a robo-trader with the following comment:
“I was told it is good but have not tested it, anyway, selling it for $300”
You read that right, he was told. He is selling something he has absolutely no idea about. The robo-trader had an image with the word Accuracy 98% taking up most of the space.
To be profitable in trading, you can do it with 30% hit ratio or what they call accuracy. However, let me show you something. What if I told you that 90–98% accuracy is possible? How would that sound considering all the crusade I have led above against this kind of stupid statements?
Well, if I do a simple back-test of an average strategy but tweak the risk parameter so that it takes profit at a fraction of the stop I place? In other word, I use a risk-reward ratio of say 0.01. This will give me a whopping accuracy of above 90% but I will still lose money because the magnitude of the rare losses will outweigh the frequent small gains. This is like picking up pennies in front of a streamroller, only, you have no way to escape the tracks.
And voila, the above is an equity curve on a contrarian strategy that has an accuracy of 92.29%. We do seem in a hurry to lose money fast, no?
Some scammers like to send emails to appear professional. On multiple occasions, I have received mails with professional signatures stating that they have chosen me to be one of the first investors in their robo-advisor that has solved the mystery of the FX market. All I had to do is wire them money. Simple, right?
And be careful of the “This man made $1,000,000 trading FX overnight” advertisements. They are really taking you for a fool?
Instagram Traders, The Picture Billionaires
Have you ever thought that if they did have a trading strategy that is that accurate, why would they spend their time trying to sell it when they can just put it to use and make themselves rich? The short answer is that they are trying to scam you into believing that it works and they will provide all sort of “proofs” and “reliable” track records to get to your money.
Now, what about the ones that always pose next to a Lamborghini or a Ferrari and imply that it was their trading that made them this amount of money?
I used to know a guy who was extremely unlucky with his trading and spent years with zero to negative return. One time, I was checking his Instagram profile and could not recognize him. The number of fancy cars and fancy places that were implied to be his was enormous. When I asked him where did that come from? He said, nowhere, they were cars in the streets he came across with and just posed next to them. Now, I know that some guys need to satisfy their egos to show superiority and impresse people, but this is called deceiving people.
One last thing about instagram. Each time I publish a post even unrelated to trading, I get comments such as “I owe it to Mr. X for making me $65,000 in Bitcoin, here is his profile link”.
How to avoid the Noise?
Trading has the potential to be a valuable source of income as long as we are careful. Here is how to avoid scams:
Trust that you are the only one who is in charge of making you money. No one will be willing to do that for you.
Understand that the FX market is too complicated for someone to offer you the holy grail.
Know the limitations of gains and losses and practice good risk management. This means, never risk more than what you expect to gain on a trade.
Make sure that everyone parading around saying he got rich from trading is overcompensating for something by lying.
At the end, you can extract a lot of potential from trading and investing but only by being patient, rigorous, disciplined, and diversified.