While you can certainly find a reputable forex broker to trade in the mostly unregulated forex market, forex scams are also more common than you might expect. Therefore, a good case can be made for doing some research before opening an account with a forex broker.
Knowing what to look for in a broker can help you avoid falling for a forex broker scam. Suppose you’ve never traded in the forex market and wish to become a successful foreign exchange trader. In that case, knowing how to choose a forex broker is an important step toward achieving success in this highly competitive field.
In this article, Benzinga examines the signs of a disreputable forex broker and offers insights to help you avoid falling for forex scams when looking for an online forex broker to trade through.
What is a Forex Broker?
A forex or foreign exchange broker is a financial intermediary firm that offers a margin trading service to allow retail clients to trade currency pairs online. An online forex broker generally provides access to the forex market via one or more supported trading platforms.
What to Look for in a Broker
The main consideration when choosing an online forex broker is whether your trading capital can be safely deposited with the firm. You’ll want to make certain that your money will be securely held by the broker in a segregated account from its own funds and that your funds can be readily withdrawn by you upon demand.
Before depositing money with an online forex broker, you should first research the broker carefully to ensure the company is solvent and has a decent reputation with its clients. You’ll also want to check to make sure the broker is duly regulated and operates in a jurisdiction that provides you with legal recourse just in case a problem arises when you want to withdraw your money.
That means you will probably want to open an account with one of the larger online regulated forex broker firms that are overseen by one or more major regulatory agencies operating in a highly developed country.
How to Choose a Forex Broker
Benzinga has compiled some helpful tips below about how to choose a reputable forex broker so you can avoid falling for most forex broker scams.
Do Broker Research
You can do research about forex brokers using independent moderated review sites like ForexPeaceArmy, which specializes in keeping online forex brokers honest. Trustpilot is another possible source of customer reviews for online forex brokers, although it lacks the careful oversight required to keep companies from giving themselves good reviews. You might also be able to check up on a forex broker that services U.S. clients by using the BrokerCheck service offered by the Financial Industry Regulatory Authority (FINRA) to check for its licenses and outstanding legal actions.
Check for Complaints About Fund Withdrawl
One of the major customer complaints that scamming forex brokers receive is that of substantially delaying or failing to allow customers to withdraw their trading funds. This action is a major red flag that you should take very seriously since it suggests your margin deposit may not be safe with that broker.
Read the Fine Print
Online forex brokers operate in many different jurisdictions, so they are not consistently regulated. This means you will need to read through all the fine print when you sign an agreement with them to open a margin trading account. You will also want to read the details of any promotions offered to make sure you qualify for account-opening incentives and research how the fund withdrawal process works.
Open a Mini Account
If you are satisfied with the research you have done on a broker, you can usually open a mini account with them. You can then deposit only a small amount of trading capital so that you can trade in the account for a short period before trying to withdraw funds. This practice will let you test whether the broker is legit without risking the entire amount of your trading capital.
Look Out for Churning
Excessive trading to generate commission is known as “churning.” This action is a possible risk if you give either your broker or an account manager that benefits from increased trading activity authority over your forex trading account, so watch out for it in such situations.
Already Working with a Bad Broker?
If you suspect you are already working with a bad forex broker, first read all the fine print in your account agreement to make sure you didn’t miss something when you signed that document upon opening an account.
If you still feel wronged, then let your broker know in writing about the legal actions you will take if the outstanding issues are not resolved promptly. Such actions can include making adverse comments online, reporting illegal or unethical actions to the broker’s regulator and taking legal action in a court of law with jurisdiction over the matter.
Best Forex Brokers You Can Trust
Even though many online forex brokers operate legitimately, you cannot trust just any broker that offers to open an account for you. Benzinga has taken the guesswork out of finding a reputable online forex broker by compiling the following comparison table of trustworthy forex brokers.
CedarFX is not regulated by any major financial agency. The brokerage is owned by Cedar LLC and based in St. Vincent and the Grenadines.
Frequently Asked Questions
Forex trading involves trading currency pairs. This type of trading is a perfectly legitimate activity retail traders can engage in via a variety of online forex brokers. However, not all such brokers are legit, so careful research is recommended before opening and funding a trading account with a forex broker you are unfamiliar with.
The forex market is the largest financial market in the world and is not a scam. Despite that fact, some disreputable individuals or firms might try to scam unsuspecting retail forex traders, so caution is strongly advised when depositing your trading capital with unfamiliar companies.
Can a forex broker steal your money?
Not legally, but then not all online forex brokers operate legally. Make sure a forex broker is not a scam company by researching it thoroughly before making a margin deposit.