The forex market is the biggest financial market in the world with an estimated $6.6 Trillion USD daily volume out of which over 20 billion US dollars is traded in South Africa. It is an over-the-counter market, meaning there is no physical office space and everything is done online.

Most of the volume is from banks & businesses that participate in the forex market for global traders. But retail traders who trade in the forex market make up for less than 5% of the volume, and are only engaging for speculation.

Most of the traders lose money in forex trading. As per statistics, as high as 85% of retail forex traders lose money, and there are so many scammers who scam investors with the promise of high returns from forex trading. These scams & losses have led many to ask if forex trading is real or a scam. 

A lot of factors make fraud prevalent in the retail trading industry, such as unregulated brokers, lack of education among the general public, scammers on social media etc.

Despite warnings from FSCA & other regulators, many people still fall for scams. This gives a general impression that forex trading is a scam which isn’t true. In this article, we will discuss some important points regarding forex trading. 

#1. Patronize only regulated forex brokers

Online Forex trading is regulated in South Africa by the Financial Sector Conduct Authority (FSCA). This means that the FSCA grants operating licenses to South African forex brokers and keeps an oversight to ensure fairness and transparency in their activities.

The FSCA has the power to discipline any erring forex broker under its regulation, demand documents and appoint auditors to review the activities of forex brokers that it has licensed. 

In the event that the forex broker goes bankrupt, the FSCA could get a court order to freeze the brokers’ accounts and make arrangements for affected traders to recover their money.

For example, the FSCA once exercised these powers against forex broker JP markets when it invoked section 38B (1) of the FAIS act. The act gives the FSCA the powers to apply to a court for the liquidation of a financial service provider (FSP) even if the FSP is solvent; if after conducting an inspection or investigation, it is not satisfied that the clients or public interest is being served.

This is why traders in South Africa should choose & patronize FSCA regulated brokers only. And traders must always check & ensure that the forex broker is actually regulated by the FSCA by verifying their FSP number on fsca.co.za. Traders could use the FSCA’s search for authorized FSPs by entering the broker’s name or FSP number to see the information like contacts, compliance officer, products approved etc.

#2. Read online reviews about forex brokers

A forex broker could be regulated but may still choose to be fraudulent so there are certain warning signs and red flags to look out for when dealing with forex brokers.

Most forex brokers have their trading Apps which are available for download on various mobile phone App stores. Reading the reviews left by other users about the trading App could help you spot issues with the forex broker.

If the broker is fraudulent or unreliable you could see bad reviews calling out the broker. 

Most scam brokers hire people to write positive reviews about them, that is why you shouldn’t read just the 5-star reviews, also read the 2 star and 1-star reviews and take a clue from the reviews.

Look out for complaints such as delay in withdrawing funds, inability to withdraw funds, requests to deposit more money before funds can be withdrawn, and poor customer service support as these are red flags that could mean the broker is not trustworthy.

Should you observe these red flags, it may be time to look for a new broker as you are better safe than sorry. It is easier to change broker than to wait for court processes to play out before you get your money in the event the broker becomes insolvent. 

It is also advisable to read case studies about traders who have been scammed in the past so as to learn from their mistakes and not fall into the same trap. 

#3. Watch out for Social Media forex scams

Most scammers contact their victims via social media. This is due to the fact that through social media, scammers can reach a wider audience who they can scam.

Social media also makes it difficult for regulatory authorities to track these scammers without breaching privacy rules, so the scammers create Facebook groups, WhatsApp chat rooms, etc. and conceal their activities.

A South African lost R115,000 to a scam broker after he found a video on YouTube related to online trading. And there are so many scams like this where investors lose thousands of Rand to scammers.

The scammers could also pose as forex gurus on social media and post pictures of flashy cars and mansions, get celebrity endorsements etc. all with the goal of converting their social media followers to victims.

Their social media followers who want to live the same flashy lifestyle may do whatever the scammer says. The so-called forex guru could then defraud his social media followers by doing some of the following:

• Deploy an unlicensed trading App for his followers to download 
• Act as an account manager for his followers
• Sell fake forex signals to his followers
• Ask followers to give him funds to invest for them

None of this ends well as once the victims part with cash, the forex guru uses it for his personal gain. When the social media followers ask for their money, he simply refuses to respond.

Recovery of funds becomes tricky and complicated as the scammer is not licensed and the scammer could even use the victim’s funds to buy cryptocurrency from various exchanges to evade with the money. 

#4. Educate yourself

You should read articles like this one on forex trading, attend forex webinars by licensed professionals, listen to the news, read books on forex trading etc. so as to properly educate yourself before trading forex.

Forex trading has a lot of technical terms like Contract for difference (CFD), leverage, margin, pips, margin call, stop loss order etc. which you must understand before trading live.

You should also use the demo trading feature on your trading App where you practice in a simulated trading environment with virtual money so as to hone your trading skills before going live. 

#5. Start with small initial capital

At the infant stages of your forex trading journey, you should trade with small capital.

Even if you have had adequate practice while demo trading, putting up $100,000 of your own funds while trading live sure feels riskier than putting up $100,000 of virtual money in demo trading.

When trading live, your emotions come out and fight against you and you could easily abandon your trading plan and start revenge trading to cover losses you have made and this always doesn’t end well. 

As a general rule of thumb, never trade with capital you cannot afford to lose. 

#6. Use Stop loss orders

The forex market is so volatile that the exchange rates of currencies can change unexpectedly.

A Guaranteed Stop loss orders enable a trader to limit his losses by setting a stop price for the currency pair being traded. Once that stop price is crossed, the trader’s position is automatically closed and a buy or sell market order is instantly triggered at the set price. 

#7. Avoid excessive leverage

Leverage trading refers to taking a loan from your broker to trade with. The higher the loan amount, the higher the loss or profit you could make.

With leveraged trading, there is a risk of a margin call to pay in more funds to your trading account if the trade goes against you. A margin call is put across to you when your initial margin is found to be insufficient to cover your market exposure. 

A leverage of 1:400 means that with $1 you can trade worth $400 of a security. So, if you came to the market with $10, a 1:400 leverage would expose you to currency worth $4,000.

If the market moves against you by 10%, you lose $400 which is 40 times your initial capital of $10. However, if you used a leverage of 1:50, with $10, you are exposed to currency worth $500 and if the market moves against you by 10%, your loss becomes $50 which is 5 times your initial capital of $10. 

Some forex brokers offer very high leverage, so it is up to the trader to be disciplined enough and self-regulate. If you are a new trader, you must not use leverage so as to avoid losing all your initial capital. 

Forex Trading is not a Scam but it is very Risky

Forex trading is not a scam however the forex market is very volatile and risky because a lot of factors can cause currency prices to fluctuate. This makes it difficult to predict the market.

Unlike in stock trading, there are no balance sheets and income statements to analyze. Forex traders need to patronize FSCA licensed brokers, educate themselves on the forex market and its time zones, employ risk management tools and use leverage modestly.

Also, note that forex trading is very risky, and there is a high likelihood that you will lose your capital. So, you must not risk any money that you cannot afford to lose.