Right of the bat, the answer to the question "is currency trading a scam?" is it's not. It's correct to say that a lot of investors lose money in this market. Still, that alone can't inculpate forex trading as a scam, especially since a select few can make money consistently, plus some countries vehemently pursue the regulation of forex brokerages. But how come there's this de trop link to financial frauds? And, why is there a persistent doubt where currency trading is involved?
What's in this article?
Forex is a zero-sum game
A zero-sum game is a more accurate picture of what currency trading is, and this had already been a popular discussion years ago. What a zero-sum game is, in simple terms, the gain of one party is the loss of another. So, if one trader wins a trade, it comes at the expense of another trader.
This isn't necessarily malfeasance. It only means that the game is purely speculative. The role of a forex trader is to outsmart and outclass all the other participants in the currency market. It's similar to a jungle in which fighting for survival is key.
So, what causes people to say that Forex is a scam?
There's certainly no shortage of reasons why Forex is associated with scams, but it can be narrowed down to three:
1. People who lost money
Clueless investors who blew up their accounts are the naysayers of Forex trading. They are the first ones to raise misguided doubts about the FX market's legitimacy because they have no idea how they ended up losing their money.
These traders are typically the ones who fell for dubious Forex advertisements, and what motivated them to partake is the thought that this market is the path to easy money.
And, the other batch of losers are the ones who can't crack the code to profitability and have completely labeled forex trading as a scam.
2. Dishonest Marketing Tactics and Brokers
The bad experience of some traders, as mentioned, is due to the dubious advertisements which are conceived by fraudulent brokerages. By and large, they are the ones doing the most damage to the reputation of the Forex market.
In the past, some brokers would advertise how much money their supposedly profitable clients made during a short period. Since other parts of the world haven't fully matured in their relationship with the internet, these blatant scam advertisements worked like a charm.
3. Markets related to Forex
Lastly, the other financial products which have something to do with currencies but don't fit the description of foreign exchange trading also soiled the reputation of the Forex market.
One financial instrument which has been subject to fraud and scams is binary options, and most traders view this product as something very akin to Forex -- but it certainly isn't.
Forex trading is a lot more complicated than just guessing if a currency pair's exchange rate will be above or below a specific price after a few hours.
And although some shady companies do manage to slip by regulation, most forex brokerages are still liable to regulatory bodies in the countries where they operate.
How to avoid Forex scams?
Avoiding scams takes a combination of cynicism, shrewdness, and practicality. It also helps to be curious about how companies make money or any pertinent details about an investment offer. And seeking the opinion of professionals like a licensed financial advisor is also helpful.
Other questions about Forex
In this section, the common misconceptions and questions about the currency market will be elucidated.
1. Is Forex Trading a pyramid scheme?
The answer: No. It's not supposed to be.
People ask this question because they might've heard of the companies that attempted to use pyramiding schemes for luring investors to their scam. And pairing it with FX delivers a perfect blend to promise high returns to unsuspecting investors.
Moreover, the same concept translated to gold trading and cryptocurrencies too, but it characterized more of a Ponzi scheme -- robbing Peter to pay Paul.
These companies are defunct now because of several legal issues (hopefully, nothing of the same nature resurfaces).
2. Is Forex Trading Gambling?
No, it's not gambling unless the trader likes it to be. It becomes gambling when traders go in and out of the market arbitrarily. The market in itself is already volatile, and trading it without a concrete plan amps up the risk.
Trading also becomes gambling when an investor trades out of excitement and with no intention of learning from each trade.
Approaching the forex market doesn't always have to come from a gambling perspective. A methodical strategy can be used to mitigate the risk and increase the probability of success. (More about gambling and forex trading here).
3. Is it true that it's easy to make money trading Forex?
Yes and no.
It's easy to make money, but it's challenging to be consistently profitable. Almost anyone who had tried trading currencies, at some point, closed a trade on the positive side.
But what they can't do is multiply the initial amount they deposited.
A few of the factors that hinder a trader from becoming profitable are a tendency to gamble, the inability to accept a losing trade, and the tendency to get greedy at an inopportune time.
Trading the foreign exchange market is definitely not a scam. There are just those who propagate the idea that it is because they either had a bad experience or they're simply ill-educated and ill-equipped to trade currencies. Additionally, forex trading can't be identified as a scam, especially if a trader deals with a regulated forex broker.
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