Is Forex Trading A Scam

If you're considering forex trading equally a way of making money, read this.

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Yes—forex trading is a legitimate style of making money.

Just, it's non easy, and there are many forex trading systems that are non legitimate —scams—that should exist avoided.

And unfortunately, many newcomers to forex trading have unrealistic expectations about how information technology works and how profitable it can be. Without proper guidance or mentorship, forex trading can be hard!

In this article, we'll look at an honest introduction to forex trading—the forex market, how forex trading works, whether it can be profitable, and what to look for to avoid forex scams.

Contents

What is the forex market?
Who's involved in the forex market?
How forex trading works
- Currency pairs
- Pips
- Spreads
- Lots
- Leverage
- Drawdowns
The benefits of trading forex
Is forex trading profitable?
How much tin can you brand trading forex?
Beware of forex scams
Choosing a forex broker
Conclusion

What is the forex market?

Recollect dorsum to the last time that you traveled to a foreign state.

Chances are, you exchanged some of your own country's currency for the foreign country's currency during that trip.

Or, remember nearly the last fourth dimension yous bought a TV or other device from your local store.

Depending on where you live, at that place's a good chance that some, or most, of the device was manufactured—or parts sourced from—overseas.

These are ii everyday examples of the need for foreign currency exchange—forex.

Forex transactions happen all the time—there'due south 24/seven weekday trading in forex—we need it for travel, for ownership and selling goods (and services) between countries, for cantankerous-state financial investments, or simply for speculation.

The forex market is central to the mode that international economies operate and the way in which goods and services flow around the world.

The forex market is too the largest and almost liquid fiscal market in the world, with an estimated daily trading volume of more than USD 6 trillion in 2019, effectually 30% higher than it was in 2016¹.

And different nearly stock markets, the forex marketplace is decentralized—there isn't a single physical location for buying and selling currencies.

Rather, currencies are bought and sold directly between different parties, across a diverseness of channels.

Given its non-centralized, direct form of trading between parties, the forex market place is often referred to as an over-the-counter (OTC) marketplace.

Who'southward involved in the forex marketplace?

The major players in the forex market are, from largest to smallest (in volume):

Banks (including key banks)—the interbank market
Professional investors—investment funds (including hedge funds) and commercial companies
Retail investors—via forex brokers

If you're reading this commodity, you're virtually likely a retail investor—this is a fast-growing part of the forex marketplace and trades through brokers. But it accounts for only effectually 5% of total forex trading^2a.

The majority of forex trading occurs in a handful of global financial hubs—the Britain, the United states, Hong Kong, Singapore, and Nippon. These business relationship for nearly eighty% of total forex action^2b, dominated past the U.k..

How forex trading works

Forex trading is a complex business organization with lots of terminology—what follows are some of the essential elements of what makes up forex trading.

Currency pairs

Forex trading occurs in currency pairs.

Think back, again, to when you exchanged some of your country's currency for a foreign currency while traveling.

Permit'southward say you went to a currency substitution bureau to do this. Yous would have given the teller—sold—some of your country's currency and received—bought—an amount of the foreign currency based on the exchange rate at the time.

This simple process underpins all currency trading—y'all sell i currency and buy another—e'er working in pairs.

And although in that location are hundreds of different countries in the world—hence dozens of different currencies—most currency trading occurs with just seven major currency pairs.

These are:

United States Dollar (USD) vs Euro (EUR)
United States Dollar (USD) vs Japanese Yen (JPY)
United States Dollar (USD) vs Great British Pound (GBP)
U.s. Dollar (USD) vs Australian Dollar (AUD)
The states Dollar (USD) vs Canadian Dollar (CAD)
Usa Dollar (USD) vs Swiss Franc (CHF)
The states Dollar (USD) vs New Zealand Dollar (NZD)

Practise yous notice annihilation?

All the major currency pairs involve the US Dollar (USD)—this is by far the most traded currency in the world.

There are several reasons for this, only mostly it's due to the historical role that the USD has played in various global economies and markets since World War II.

Besides, each currency has a 3-letter abridgement—like "USD" for the US Dollar. These abbreviations are widely accepted codes used to reference currencies.

The offset two letters of each code usually (but not always) refer to the country (or region) of the currency and the tertiary letter usually refers to the currency itself.

In, GBP, for example, the first two letters—GB—refer to Peachy United kingdom, the region of the currency. The concluding letter—P—refers to pounds, the name of the currency.

Using these codes, currency pairs are expressed in side by side sequences.

For instance, USD-EUR represents a United states Dollar-Euro currency pair.

The ordering of this sequence is important—the kickoff currency of the pair is chosen the base currency and the second currency is called the quote currency.

The base of operations currency is always the currency that's bought and the quote currency is ever the currency that's sold. Then, the price of a forex pair is expressed every bit how much one unit of the base of operations currency is worth in the quote currency.

Consider, for instance, a quote of USD-AUD = one.33231. Here, USD is the base currency and AUD is the quote currency, hence you can buy 1 USD by selling 1.33231 AUD using this quote.

Pips

In the quote we've only looked at, there are several decimal places in the toll. To help make things easier when talking near movements in currency prices, forex traders oft talk in terms of pips.

A pip is an acronym for "per centum in signal". It is a market convention for a small toll movement in the forex marketplace.

Based on the convention, a pip is the 4th decimal identify in a currency price quote.

And then, in our quote example, if the USD-AUD price moved from 1.332 three 1 to 1.332 iv 1, then the price is said to accept changed by ane pip.

This is a lot easier than saying, for instance, "the price inverse by 0.0001 AUD".

One affair to note is that you may often hear "pips" beingness used interchangeably with "basis points"—although they are similar, they are non the same thing.

Basis points refer to 1/100th of i%—a percent returns concept—whereas pips are based on marketplace convention and is a price concept.

Spreads

And so far, we've been talking in terms of a unmarried currency cost quote.

In the forex markets, as in any marketplace, the balance between supply and demand determines the price at which trading really occurs.

Hence, at any time there's a buy price and a sell price quoted for a currency pair. The difference between these prices is called the spread.

The purchase price volition e'er be higher than the sell price.

This makes sense—if it were the other way around, you lot could buy a currency (at a lower cost) and immediately sell it (at a higher toll) and make an instant turn a profit. This obviously isn't feasible since "free profits" can't be sustained in fiscal markets.

The spread is, therefore, a price to trading—all else equal, past buying and selling a currency instantaneously, you'll exist paying the spread as a toll.

Lots

Currency trading can be a lilliputian abstract compared with, say, share trading.

With shares, it'southward like shooting fish in a barrel to identify the number of shares that you lot're ownership or selling in a given trade. With currency, information technology'southward less obvious.

Then, every bit a way of standardizing trading volumes in forex markets, currency trading occurs in batches called lots.

A standard lot is 100,000 units of the base currency.

So, i standard lot of USD-AUD refers to 100,000 US dollars worth of currency.

Leverage

Leverage in forex trading allows you to trade on larger amounts than you really need to provide capital for.

For instance, if your broker allows you to leverage v:ane, then you just need to deposit $20 of capital letter in social club to trade on $100 worth of capital (since $100=5x$twenty).

Why does this affair?

Leverage allows y'all to magnify your potential gains in forex trading.

Simply leverage can exist risky, every bit information technology also magnifies your losses.

To illustrate, consider again our v:1 leverage example. Your capital is $xx but you tin can trade on $100.

Let's say that you enter a successful trade on the whole $100 and make a profit of i%. Hence, you've made $i on your $100 of leveraged capital (100x$1/$100=1%).

Merely your actual capital is merely $twenty, so your $one profit translates to a 5% gain on your bodily majuscule (100x$1/$20=5%).

In this simple case, your v:1 leverage has magnified a one% trading gain to a 5% gain on your uppercase—this is how leverage works.

Just information technology can work the other way effectually as well, magnifying trading losses.

If you had lost $1 instead of gaining $i, then you would have had a 5% loss on your $20 capital—y'all would have magnified your 1% trading loss into a 5% loss on your uppercase.

While leverage has its obvious appeal, equally it tin magnify losses too equally gains information technology should be managed carefully.

Excessive leverage, especially for novice traders, can lead to very large losses on capital. A trading loss of only 10%, for instance, in a x:i leveraged account would wipe out your entire capital!

One more thing to be aware of when using leverage is that you may be subject to margin calls—if y'all're accumulating losses on your trading, and so your banker volition ask you to deposit more capital in your account to replenish the losses on your leveraged capital.

These margin calls can come at whatsoever time, depending on your cumulative losses, and can sometimes take you by surprise.

If you lot don't meet them—if you don't deposit the required margin height-up equally instructed by your broker—the broker volition sell downward your open positions to meet the margins. This tin can pb to devastating results, as it often occurs at the worst possible fourth dimension, ie. when market prices are downward, exacerbating your losses.

It'south therefore of import to exist aware of your broker's margin requirements if you're using leverage—many novice traders neglect to do this and wipe out their trading accounts with poorly managed leveraged positions.

Drawdowns

This is a dreaded give-and-take in trading—drawdowns—which is the term used to describe cumulative losses.

More specifically, drawdowns draw any amount of cumulative loss to your capital that occurs, whether the individual trading losses occur sequentially or not.

It's measured as the difference between a relative elevation in your upper-case letter balance and a relative trough.

To illustrate, let's say that you start with $100 of uppercase and take a good trading period, so your majuscule builds to $120.

You and so hit a bad patch, and over a two-week flow you have both winning days and losing days, just by and large losing days. Your capital goes up on winning days and downwardly on losing days, merely information technology ends upwards being overall downwards over the two-week catamenia.

If you end up with, say, $90 by the end of the two week flow, and so your drawdown is measured as 25% (since your relative peak was $120, and your cumulative loss was $30 [$120-$90=$30], which is a 25% cumulative loss over the period [100*$thirty/$120]=25%).

Drawdowns matter!

Equally you become more experienced in your trading, your drawdowns will be 1 of the strongest indicators of your trading success.

And if you ever plan to trade forex on behalf of others, 1 of the starting time things that potential investors will want to await at is your drawdown history—if your drawdowns are managed carefully (i.e. never likewise large), they'll have confidence that you can manage their coin safely.

The benefits of trading forex

We've already mentioned that the forex markets are the largest and most liquid in the world, and this is ane of the primal benefits of trading in the forex markets—no matter what timezone you lot're in, you can find a fourth dimension to trade forex.

The high liquidity in forex markets—at least in the major currency pairs—translates to lower spread costs. Hence, a trading program in forex mostly costs less, all else equal, compared with other markets.

At that place also tends to exist higher amounts of leverage available in forex trading—this is a take a chance as well as a do good, every bit we've discussed, and should be managed with circumspection. But for carefully run a risk-managed trading, more than leverage means that less capital is required for your desired level of market exposure.

Go on in mind, however, that the corporeality of leverage you can actually utilise volition depend on where you lot (or your broker) are located, the type of instruments that you lot're trading, and the specific restrictions applied past your banker.

And, of form, the leverage that you choose to use volition also depend on your personal level of risk tolerance.

Overall, the forex market offers many benefits for traders compared with other markets, and this is one of the reasons why forex trading has gained popularity with retail investors over recent years.

And y'all can get-go with as little as $100.

Just the forex markets tin be quite restrictive for some traders—in that location are but a handful of major currency pairs, for example, compared with the hundreds (or thousands) of liquid stocks bachelor for trading.

Volatility in forex markets besides tends to be lower than other markets, such as stocks or crypto, which can reduce the number of trading opportunities in forex.

But ultimately the choice of which markets you wish to trade in—forex or otherwise—will depend on your individual adventure preferences and your favored trading manner.

Is forex trading assisting?

This is the "one thousand thousand dollar question" for a lot of aspiring forex traders—can you actually make money trading forex?

The simple answer is—yes, perhaps.

There are enough of consistently assisting forex traders—we'll hear from a few of them later in this article—only at that place are likewise many forex traders who don't make money, and they're probably the vast majority.

Past some estimates, only around 5% of forex traders successfully make consistent profits.

But it can be done—forex trading can exist profitable—if y'all're patient, have realistic expectations, and use the right approach.

How much can yous brand trading forex?

This is mayhap the next biggest "million dollar question" for aspiring forex traders and is a natural follow-upwardly to questions about profitability.

It's also a big source of misconception amongst novice traders—all sorts of promises are made about how much yous can make trading forex (see, for example, the word about scams that follows).

Are in that location forex traders who brand huge returns, increasing their capital letter many times over in a curt period of time? Yeah, some do. Sometimes.

But they are rare, and there may exist a off-white caste of luck involved.

The reality is that most successful traders make small, consistent gains rather than outsized returns. Information technology may not sound very exciting, but it counts.

And small consequent gains tin can exist very meaningful when reinvested over time, cheers to the power of compounding.

So what sort of gains are we talking about?

Let's look at what three actual, successful traders say:

Siam Kidd, a successful trader and educator, had a corking trading record over the 4 years from 2013 to 2016, increasing his capital past nearly x times during that period (bold all his profits were reinvested). This translates to effectually 5% average compounded returns per calendar month.
Tony Sycamore, a professional trader with over 20 years of financial markets experience, made 25% in 2008—this translates to just under ii% compounded returns per month.
Steve Patterson, a tiptop proprietary trader with nearly forty years of financial markets experience, says that every bit a dominion of thumb if you make ten% per month as a trader, consistently over time, then you're a "rockstar" and in that location'll be people wanting to "throw money at you!".

So, according to experienced trading experts, across forex and other markets, a trader who averages 2-5% profits per month consistently over time is a very good trader.

If a trader averages more than that, then they're a rockstar—ane of a rare breed of outstanding traders who will be highly sought-later on for their trading skills.

And if you lot're told otherwise—that you can easily double, triple, or quadruple your money in a few months, for case—then yous're beingness sold either a fantasy or a very risky proposition.

To illustrate, consider the following example of unrealistic profits: If someone tells you lot, for instance, that you can brand 25% per month consistently, yr after yr as a trader, is this realistic?

Let's look at information technology. If you commencement with, say, $ten,000 capital and make 25% per month, reinvesting all of your profits each month, and so your capital letter will accrue to over $30 meg after only 3 years—this is non realistic!

Don't be fooled by claims of outsized gains in forex trading—even if it's possible over curt periods of time, information technology'southward simply non sustainable.

Beware of forex scams

Promises of outsized profits aren't the just affair to exist enlightened of as an aspiring forex trader.

If you're new to forex trading, it'southward like shooting fish in a barrel to be confused with the terminology—and expectations—of how forex trading works.

And it's easy to fall victim to unscrupulous operators in the forex trading globe

Unfortunately, forex scams grow.

Forex scams are usually presented as trading systems (or education courses) that typically hope fabulous—unrealistic—results.

You lot may be tempted past slick advertising or faux claims, possibly with free giveaways (or free seminars) to become you lot started.

Only then, to really see results—or so y'all're told—you'll need to pay a fee (or deposit funds). And information technology's ordinarily not a piffling amount.

Proceed in heed that there are some genuine courses and systems on offer, merely these are typically more straightforward and depression-key in their presentation.

What matters is to know how to differentiate betwixt genuine and scam offers.

Experienced traders offer plenty of good advice on how to avoid possible forex scams.

Andrew Lockwood, for instance—a veteran forex trader and head of Forex Signals, a forex education and mentorship community—suggests the post-obit fundamental areas to be aware of when because a forex trading organisation:

Flashy lifestyles—if you see expensive cars, fancy homes and gold watches being promoted to you, either explicitly or implicitly (e.thousand. in the "background"), then chances are these are false promises—existence motivated purely by the idea of making "quick, large profits" is unrealistic in forex trading
False celebrity endorsements—just because you see your favourite glory endorsing a trading system, information technology doesn't mean the endorsement is true, and remember that near celebrities wouldn't want to associate themselves with questionable, money-making schemes
Guarantees of unrealistic returns—every bit we've discussed, if you're existence offered guaranteed returns that are unrealistic, and then chances are they're non achievable, and if there isn't a alive track record to verify against (i.e. not merely a demo account), or if they refuse to prove you this, and then you should certainly be sceptical
Pressure level to put downward a deposit—If you feel that y'all're existence pressured to eolith funds, and then this is a telling sign of a scam—whatever legitimate company or system would desire you lot to be entirely comfortable with what's beingness offered before you transfer whatsoever coin
Merchandise indicate services—these are actionable trade ideas provided equally a service, but unfortunately they unremarkably don't work (consistently) over long periods of time, and when they practice work (for short periods) information technology's often just the laws of probability playing out
Skillful advisors—these are automatic algorithms that generate trade ideas and in some cases can be a legitimate ways of algorithmic trading, but the ones that are usually offered up for sale typically don't work (if they did, they probably wouldn't exist for sale, or they'd be extremely expensive)
Managed accounts—these are fully managed forex trading services where all that you need to practice is deposit money and the remainder is taken care of, simply unfortunately there tend to be a lot of unscrupulous operators behind these, so you need to do some conscientious due diligence
Fake reviews—in today'due south earth of social media and easy access to communications, fake reviews are unfortunately commonplace, so exist careful not to believe the scores of seemingly glowing reviews well-nigh a item forex system as the reviews may simply be made up

If you pay attending to these areas—y'all can acquire more well-nigh them in this article—you lot'll go a long way towards avoiding possible scams.

And generally speaking, the sometime adage "if it's too skilful to be true, it probably is" has a lot of merit when it comes to forex trading systems—don't believe lofty promises and be realistic in your expectations if you want to avoid scams.

Choosing a forex broker

Concluding, but by no means least, an often overlooked attribute of forex trading is choosing the right banker—it'due south easy to underestimate how important this is.

It seems easy to just go with a broker that's uncomplicated to open an account with, requires the everyman corporeality of upper-case letter deposit, offers the highest leverage, and has the all-time-looking platform, right?

Unfortunately, there'southward more to information technology than that.

A practiced broker will ensure that your trading capital is safety, that you're not being overcharged in spreads or other fees, and that y'all have access to the correct tools and resources for successful trading.

Choosing a proficient broker will also give you access to a skilful range of currency pairs (in forex) or other instruments and markets if you lot plan to trade beyond forex.

So, how do yous cull a reliable broker that'due south right for you?

Well, agreement how brokers work—the differences betwixt them, the engineering science options bachelor, and the ways in which the retail and professional brokerage markets differ—is a circuitous area. Only here are the essential things to look out for:

Regulation—First and foremost, is the banker regulated? And if and then, where? The all-time regulatory jurisdictions include Australia (ASIC), the UK (FCA), and the US (CFTC/NFA)—whatsoever of these will provide confidence that the banker is reliable and meets a prepare of minimum standards. Keep in mind that regulations are generally different in the US compared with the rest of the world, primarily in terms of limits to leverage, and restrictions on certain types of instruments (e.thousand. CFDs) and hedging.
Spreads/commissions—These should not exist too large
Available markets/pairs—What different types of markets can you lot trade (e.1000. indices, commodities, and stocks, which may be important if you lot desire to trade beyond forex) and besides the range of currency pairs bachelor for trading in the forex markets (east.g. less liquid "exotic" currency pairs beyond the majors)
Minimum deposit—Not also large
Ease of withdrawals—Can you withdraw your deposited funds quickly, easily, and without any fees?
Client support—This can exist quite important for novice traders
Trading platforms—Eg. MT4/MT5, cTrader and Trading View

Based on these criteria, the following brokers are recommended by Forex Signals for their reliability, pricing, and execution (non-Us residents):

Axi	A popular choice, Australian and UK-regulated (does not accept The states clients), zero minimum deposit, access to avant-garde trading tools
Avatrade	Australian and Irish-regulated (does not take US clients), good social trading features, low minimum eolith, excellent educational resources—recommended for novice traders
IC Markets	One of the largest brokers, Australian-regulated (does not accept U.s. clients), low spreads, low minimum deposit, good customer support

Recommended forex brokers (non-US residents)

For United states of america residents, brokers that are regulated by the CFTC, NFA, or both, are a expert option—3 of the near pop are: IG, OANDA, and Forex.com.

Conclusion

Forex trading is a legitimate style to brand money. Nevertheless, forex scams abound, so you demand to be enlightened of what to look for to avert these.

And yes, forex trading can exist profitable—there are many successful forex traders who make consistent profits every yr.

Just information technology isn't easy. And most forex traders really lose money.

The forex market is the largest and almost liquid marketplace in the world—trading 24/7 on weekdays—and this is why many people turn to forex trading since you tin trade across many timezones.

If you're a newcomer, however, in that location'southward a bit of terminology to acquire—spreads, pips, leverage, and drawdowns—that volition help you lot understand the essential elements of forex trading.

Information technology's also important to cull the correct banker to ensure the rubber of your capital, practiced pricing, and quality execution. Recommended brokers include Axi, Avatrade, and IC Markets.

Simply maybe the biggest challenge for newcomers is to take expectations that are realistic—the manufacture is awash with simulated promises and potential scams.

Despite what many may lead you to believe, realistic expectations of forex returns are in the range of 2-v% per month—if you're successful.

If y'all do actually well every bit a forex trader, you may exist able to make upward to x% per month, consistently over many years.

Expectations beyond this are highly unlikely or extremely risky.

So, if you're considering forex trading as a possible way to make money, call up that information technology can be done, but it takes time, noesis, practice, and patience.

Don't believe those who tell you lot otherwise.

Giri Rabindranath is a CFA Charterholder and holds a Principal'due south degree in Finance. He has over 25 years of professional person experience in the financial industry. The views expressed in this article are solely for informational purposes and do not represent financial advice in any style whatsoever.

Risk Disclaimer: Trading CFDs, forex, and other fiscal instruments, specially if leveraged, is risky. It isn't suitable for everyone and may effect in loss, sometimes substantially more than the initial investment. Depending on the type of instrument, you may non own or have rights to the underlying assets. By performance is no indication of future performance and taxation laws are bailiwick to individual circumstances and are as well subject to change at whatever time. The information on this website is general in nature and doesn't take into account your personal objectives, financial circumstances, or needs.

References

[ane] https://world wide web.bis.org/publ/qtrpdf/r_qt1912f.htm

[2a,b] https://world wide web.compareforexbrokers.com/forex-trading/statistics/