How To Avoid Dodgy Brokers

Did you know that 90% of traders occur a loss of money, and only 10% of traders are consistently profitable? Why is that? Let us take a look at a few things you will have to keep in mind when venturing into forex trading.

One of the most important things is to avoid dodgy forex brokers. With the market saturated with brokers, who all state they can help you get to the top of the food chain in forex and make consistent profits. So here we will take a look at how to avoid the pitfalls of choosing the wrong broker and how to spot fraudulent activity and choose the broker that best suits your needs.

Are you being scammed?

First of all – there is a clear distinction between typical investment losses and online broker fraud.

Losing money on your investments does not imply you have been a victim of fraud and everybody who trades online will at some point lose money on their trades. Also, keep in mind that there are occasions when clerical errors do happen. That, in itself, is not fraudulent behavior, and a serious broker will assist you in sorting this out in a reasonable timeframe.

Should it become a consistent or regular thing then a thorough investigation will be necessary. The critical focus should be if your broker places its own interests before yours. Or at the very least the lines are blurred between the two. That is where ethical standards can lead to crossed wires, and a red flag should be raised that fraudulent activity might be taking place.

There are several types of online broker fraud.  Below we will list some factors that will help you to identify whether you are at risk of becoming a victim of broker fraud:

  • Did you authorize the trade or grant discretionary authority to make trades on your behalf? If not, and you can see non-authorized trades that is an illegal activity, and could be disguising in-house trading activity.
  • Are your investment orders being executed in a timely manner and in your best interest? If not, there is potentially in-house trading execution happening and you should contest this and if necessary report it to the relevant authorities.
  • Did your broker ask you to utilize an address other than your home or business address?  Used your personal or business information for purposes other than setting up your account? Setting up erroneous or illegal accounts is another example of fraud and should be immediately reported.
  • Did you receive unsuitable investment offers? The definition of an unsuitable investment are ones that do not fit your investment profile or go outside your initial scope of investment agenda. You and your online broker should have agreed on a plan of your investment preferences.  And your broker should stick to this framework. He or she may come with offers from time to time that they deem extremely valuable but under no circumstance should they attempt to pressure you to make investments you are not comfortable with.
  • Did you ever get misleading information, advice or trading techniques that seem to goo to be true? If your online broker is offering you trading advice, it has to be transparent and based on factual information that can be verified. Any broker claiming to have ‘inside information‘,  gives misleading information regarding the potential risks or rewards of investment, could be acting fraudulently and you should be aware.
  • If you have a discretionary relationship with your broker, it is essential that you monitor the portfolio and make sure the broker is acting in your best interest and within the scope of your agreement. Also keep tabs if there is a consistent pattern of the trades over time.
  • Keep continuous track of the depositing and withdrawal of your funds. Make your own notes, and do your own independent analysis of your accounts on a regular basis. Any persistent delays with withdrawals, in particular, over and above standard practise should be reported. Transparent and easily accessible processes of money flows are key requirements for any regulated online broker.
  • All online brokers need to be formally regulated in their local jurisdiction to enable them to execute investment trades or make investment recommendations. Proof of their formal credentials should be easily accessible and you should keep a copy of this for your own records should there ever be a dispute.
  • Indications of money laundering activity are the biggest red flag, and should you have any suspicions you need to make a report immediately. Once the report is made your funds are to be frozen with no access for the broker or the brokers company. Money laundering is such a grievous act so below we will show you how to recognize any sign of money laundering.

Indications Of Money Laundering Activity

In the big picture, money laundering is damaging in so many ways. It allows criminals to hide the proceeds of illegal activities, it can also destroy the economy, harm honest taxpayers, and poses many risks to your business and reputation. Liquidity problems can arise when large sums of laundered money disappear without notice and to unknown recipients. If you are deemed to be part of money laundering you might face hefty legal costs if enforcing authorities discover that you’re facilitating a money-laundering operation. This is why it is imperative that you are aware of the signs and understand how money laundering works when it comes to online trading:

  • Unusual transactions or activity compared to the normal and expected transactions on trading accounts.
  • “Too good to be true” tips and offers of trades and transactions that are not based in the current market climate.
  • Any request to use your trading account to facilitate trades with other monies or deposits that do not come from your own funds. These deals may be tempting since they offer large compensation and large percentages to you, but it is a clear sign there are illegalities going on.
  • Unwillingness or avoidance of providing information about where the tips come from or sources of information. Any questions you have on any trade should be transparent and forthcoming in a timely manner.
  • Unexplainable losses, withdrawals, delays in receiving withdrawn funds, and lack of transparency in the trading account.

Make sure you understand the AML regulations in the regions and territories you are trading in. It is your responsibility as a trader to make sure you do not get caught up in money laundering activities and you can only do this by being vigilant and do your research into the subject.

Checklist Before Signing Up:

  1. Ensure your broker is fully regulated and approved. Do your research, read reviews, and use the comparison sites that are available. There is a plethora of these domains out there and use more than one. Cross-reference the broker you would like to sign up with and see if more than one comparison site has the same impression of the chosen broker.
  2. Take some time to read the small print in the terms and conditions. Assess what the relevant regulator offers in terms of protection for you as the trader. Always be aware that some multi-regional or global brokers will have had to satisfy more than one regulatory framework. Do your due diligence in the beginning and then you can trade in peace knowing you will be safe.
  3. Countries with dedicated financial regulatory agencies are often better to set up your accounts in. Some of the countries with dedicated regulatory agencies can be seen below. There are several more but these are the ones used the most for forex trading:
    South Africa (FSB) – Financial Services Board.
    USA (SEC) – Securities And Exchange Commission (FINRA) – Financial Industry Regulatory Authority
    Eurozone (MiFID) – Markets In Financial Instruments Directive
    UK (FCA) – Financial Conduct Authority
    Australia (ASIC) – Australian Securities and Investments Commission
    India (SEBI) – Securities and Exchange Board of India
    Japan (JSDA) – Japan Securities Dealers Association
    Switzerland (FINMA) – Swiss Financial Market Supervisory Authority
    Cyprus
    (CySEC) – Cyprus Securities and Exchange Commission
  4. Go into the brokers website. Set up a demo account if necessary to snope around (you can delete this if the broker doesn’t fulfill your needs and requirements). Make sure the broker has a safe and secure website and fully encrypted processes to protect from any third-party intervention and that they can answer any questions you may have on the security of their online portal.
  5. The broker should be fully insured and deal with recognized, regulated banks within the jurisdiction where it operates. This information should be easily accessible on their website.
  6. The broker should always be able to ring-fence client funds to protect against it going bankrupt or being asked to cease trading. This will likely be achieved via a third party, like a regulated banking partner.
  7. The broker executes withdrawal and deposit activities within three working days. Again, all information on the withdrawal process should be easily accessible on the website, preferably without having to sign up to read and assess it.
  8. Brokers who have 24-hour dedicated client live support should be preferred. This allows for a quick response to any queries you might have. The best of the best, have support in more than one language, but it should at least be available in English and the dominant language of the region you are trading in.
  9. Source any credible broker reviews or client feedback before agreeing to execute through their trading portal. You can also use Google, Yelp, Trustpilot, and the likes to read reviews from actual clients.  A serious broker should also be willing to provide how many clients it has signed up in a given timeframe. Transparency and a willingness to answer your questions as a new trader is key in this.
  10. Check that your potential broker has the availability and range of trading instruments that you require. Also, make sure that they will not be offering products that are not relevant to your needs or that you can opt-out of anything not relevant to you. FLexible packages for new traders is always preferable.
  11. Demo accounts: This means that the broker offers a type of account which a new client can use to better understand the trading portal and how the broker operates with your money. A demo account should give you access to all aspects of the web portal, even though some of them are time-barred it should give you enough time to get comfortable. If it only gives you a couple of hours, maybe find one that at least gives you a couple of days or one where your demo account can be converted to a full-fledged trading account easily.

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