After all the forex trading hype seen on the internet, you might be wondering “Is forex trading legit?” The international foreign exchange or forex market is most certainly legitimate and remains the largest financial market in the world.
Although forex trading is a legitimate business, some of the online forex brokers, auto trading systems and account managers advertised online are not. Since forex trading scams remain a reality, it makes sense to learn how to avoid them.
Forex trading scams come in various forms which can include essentially worthless trading robots and signal services. Some fraudulent and unregulated forex brokers may attempt to trick you into trading through them in an attempt to steal funds from your trading account because they operate in a shady jurisdiction where you have no legal recourse.
Since trading scams sometimes happen in the forex market, read on to find out how you can avoid them and find the best legit forex brokers so you can start making money trading the forex market. changes.
What is forex ?
The forex or foreign exchange market is a global, decentralized and largely unregulated market for trading currencies for speculative or trading purposes.
This global market operates over-the-counter via a network of financial institutions which are generally located in the main monetary centres. The forex market operates 24 hours a day, from 5:00 p.m. Sunday to 5:00 p.m. Friday, New York time (ET).
How does Forex trading work?
A forex transaction involves an exchange of one currency for another. Currencies are not quoted at an absolute value or price in the foreign exchange market. Instead, they trade against another currency at a quoted exchange rate or exchange rate.
As a result, currencies trade in pairs. An example currency pair could be USD/JPY. This shortcut shows the US dollar quoted against the Japanese yen which have the three-letter International Organization for Standardization (ISO) codes USD and JPY respectively.
Although large corporations, hedge funds, and high net worth individuals typically transact FX through their relationship banks, retail forex traders who trade in smaller amounts typically use a trading platform to operate through online brokers.
Forex trading is simple in theory. In practice, however, it can take years to develop the skills, discipline and knowledge to trade Forex profitably.
Who is involved in the Forex market
A variety of companies and individuals operate in the huge forex market. Some of the most important groups to which these market players belong are listed below.
Commercial and investment banks
Banks are the main players in the foreign exchange market. Their roles include employing professional forex traders to create markets in a range of currency pairs and to trade on an exclusive basis for profit. They also employ sales staff to assist customers with foreign exchange transactions for speculative or commercial purposes.
The central banks of the countries participate in the foreign exchange market. They do this primarily to maintain an orderly market in their respective national currencies, as well as to protect and adjust their foreign exchange reserves.
Investment managers and hedge funds
Funds generally aim to make a profit by investing in a variety of financial instruments which may include foreign currencies and foreign assets. Some hedge funds also actively speculate on exchange rate movements.
International businesses often need to exchange currencies for business purposes. For example, these purposes could include payment for foreign goods and services; convert export earnings into their local currency; and pay the wages, salaries and rents of their foreign subsidiaries.
Online Forex Brokers
These financial intermediaries offer margin-based forex trading services via the Internet to retail traders. They usually support one or more online trading platforms to act as an interface between their clients and the forex market.
Individual Retail Merchants
While high net worth individuals have traditionally been able to access the forex market through banks and the futures market, retail traders have only had easy access to currency trading since the advent of online forex brokers. Most retail traders operate speculatively.
How the Forex Market is Regulated
Despite the enormous size of the massive forex market, it is one of the few predominantly unregulated financial markets. The foreign exchange market does not have an international regulatory organization or agency that oversees the wholesale interbank forex trading activity that operates globally.
This relatively unregulated environment offers certain advantages to professional forex traders since they can use strategies that are prevented by regulations in other markets.
Who Regulates Forex
While the interbank foreign exchange market remains unregulated, retail forex traders can generally benefit from regulatory protection against fraud and brokers who break the rules. This regulation is done by official agencies usually located in more sophisticated jurisdictions that have laws to regulate the behavior of online retail forex brokers. A sampling of some of the major forex broker regulators appears in the list below.
- United States: The National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC) jointly regulate online retail forex brokers in the United States. .
- UK: The Financial Conduct Authority (FCA) is the regulator of the UK financial services industry.
- Australia: The Australian Securities and Investments Commission (ASIC) regulates the financial markets and the services industry in Australia.
- European Union: Each EU member country must regulate its local financial markets in accordance with the EU Markets in Financial Instruments Directive II (MiFID II) which sets out the standards of conduct that financial firms must follow within the EU. EU. The MiFID II “passport” concept also allows forex brokers regulated in one EU country to offer services in another EU country.
How Forex is Regulated
Since the wholesale interbank market remains unregulated, the majority of forex regulators focus on overseeing financial firms that deal with retail customers like online forex brokers.
As detailed in the previous section, various official regulatory agencies exist in well-developed countries that oversee retail forex market operations in their respective countries. These agencies typically compile lists of duly licensed forex firms, pursue cases of fraud, and discipline firms that violate their rules.
In general, if an online forex broker has been in business for years and is registered and has always remained in good standing with a major regulatory body like the CFTC, NFA, FCA or ASIC, this suggests that the broker is probably legit. Using one of these brokers should provide you with both official fraud protection and legal recourse in the event of a dispute.
Forex Scams Do Exist
While many online forex brokers are perfectly legitimate, some forex scams unfortunately do exist. For example, forex scammers may provide unrealistic return guarantees, or they may pretend to be an online broker but refuse to return your funds deposited with them.
Beware of Advisors and Managed Accounts
Some companies sell so-called Expert Advisors (EAs) that work automatically in the MetaTrader 4 or 5 trading platforms from MetaQuotes. These EAs can vary in performance, so be sure to thoroughly research any EA if you are considering buying one.
Also, unethical people may offer to manage forex accounts for you. Although some forex account managers are legit, beware of any account manager who demands the ability to withdraw money from your trading account. They should only be able to execute transactions on your account and receive reasonable compensation for doing so.
Reputable brokers are crucial
One of the ways retail forex traders can get scammed is by depositing funds with an unreliable forex broker. A broker may have an attractive website, but if it does not operate under the strict supervision of a major regulatory body, the safety of your deposited funds cannot be guaranteed. Make sure you only entrust your money to a reputable online forex broker.
Best Legit Forex Brokers
To protect your deposited funds from fraud, you want to find an online broker that is subject to a major regulatory authority and has a decent reputation with its customers. Benzinga has simplified this process by providing the following table comparing legit online forex brokers you could open an account with.
Claim exclusive offers
CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and is based in St. Vincent and the Grenadines.
Frequently Asked Questions
How do you know if a forex trader is legit?
If you intend to have a forex trader transact your trading account for you, you can ask them for a verified and audited history that demonstrates their profitability. Many legit traders will post their track record on myfxbookfor example.
Generally, yes. Forex trading has much more in common with strategic gambling than investing.
In general, forex trading involves speculating on the movements of a financial market, which is not a pyramid scheme.