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By Hanniz Lam

These past few months, I’ve been approached by about 5 friends to invest in Forex.

No, I didn’t strike it big or anything but it seems like brokers are getting more aggressive in recruiting traders or investors.

I see friends posting about getting guaranteed returns, how happy they are and how we can be happy too. Getting 7% returns every five weeks. Does this sound too good to be true?

The pandemic has taught us that you need another source of income in life: either by trading, starting a business or by building on another skill, we all need that extra source. That’s why we see a significant increase in people trying to find out more about FX, trying to learn how to do it and also trying to get started whether it is trading or investing.

It won’t be fair for me to shoot anyone down so today let’s just learn what forex trading is about and how to spot forex scams and avoid them.

What is forex trading?
Forex trading is simply the practice of exchanging one currency for another. The ability to exchange currencies is important for things like international travel, conducting international business, and foreign trade.

Because there is no one universal currency, there must be a way to exchange the equivalent value of one currency for another. This is where foreign exchange comes into play.

According to research, it is a well-known figure that 80% to 90% of forex retail traders do not succeed in the forex world, most probably because forex is a high-risk investment.

Because the market is based on competition and speculation, it is quite difficult, perhaps even impossible, for everybody to be profitable at the same time. From what we gathered, there are also apparently very few truly successful forex traders out there.

These are interesting findings given the fact that the foreign exchange market is the most actively traded market in the world, according to Nasdaq. More than RM20.2 trillion are traded on average every day, exceeding the global equities trading volumes by 25 times. This high liquidity makes it easy to buy and sell currencies.

What is the spot market, futures market and forwards market?

In today’s market, there are three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market, and the futures market.

The spot market has always been the largest in forex trading because it is the so-called “real asset” that the forwards and futures markets are based on.

Different people will approach different markets for different purposes. When traders trade the spot market – which means selling and buying based on current prices, it is very straightforward.

You turn on any trading platform, and you look at the current price – and that is the price you will be buying or selling at.

For the forwards and futures markets, you are pricing the currency three months or four months, even one year ahead. So it’s a form of hedge or pre-planning purchase. It is quite complex to price a currency over an extended period especially with so many things that could affect the market.”

Is forex trading legal in Malaysia?

The short answer is yes. In 2012, Bank Negara Malaysia stated that forex trading or the buying and selling of foreign currency in Malaysia is allowed only through licensed commercial banks, Islamic banks, investment banks, and international Islamic banks, according to Forex Malaysia. However, the platforms or brokers you use must comply with these rules.

1. The Financial Services Act 2013

Power of Bank to specify standards or issue codes
140. (1) The Bank may specify standards or issue codes for the purposes of developing, or maintaining orderly conditions or the integrity of, the money market or foreign exchange market.
(2) Without limiting the generality of subsection (1), standards specified or codes issued under that subsection may include standards or codes relating to—
(a) obligations and duties of any market participant or any officer of the market participant; and
(b) the issuance, sale, purchase, repurchase, borrowing or lending, of or other dealings in, currencies or other financial instruments traded in the money market or foreign exchange
market including over-the-counter derivatives whose price, value or payment obligations are derived from, referenced to or based on interest rates or exchange rates.
(3) Standards or codes may only be specified or issued under paragraph (2)(b) in respect of over-the-counter derivatives derived from, referenced to or based on interest rates for the purposes of maintaining monetary stability.
(4) Any market participant or any officer of the market participant in the money market or foreign exchange market shall at all times comply with any standards specified or codes issued by the Bank under this section.
(5) Without limiting the Bank’s powers to take action under any provision of this Act, the Bank may impose any condition, restriction or prohibition including, suspension from trading and restrictions on dealings in these markets on any market participant or any officer of
the market participant for failure to comply with or give effect to such standards specified or codes issued under this section.

More about this Act can be read on Page 81 and 82 here

2. The Capital Markets and Services Act 2007

This Act gives powers to the Securities Commission Malaysia, to license and regulate businesses dealing in securities.

3. The Money Services Business Act 2011

An Act to provide for the licensing, regulation and supervision of money services business and to provide for related matters.

Comparehero.my shared these tips about making your first trade:

Step-by-step guide on how to trade forex and make your first trade

Now that you have some understanding of forex, let’s take a closer look at how you can make your first trade. Follow these steps:

1. Choose a currency pair

In forex, you are always exchanging or trading the value of one currency for another. What that means is you buy one currency while selling another at the same time. That means you will trade in pairs e.g. RM/USD.

Typically, new traders begin by trading the most commonly offered pairs of major currencies – but there are no restrictions to this.

2. Analyse the market

Quite similar to stock trading, you will need to research and do a thorough analysis of the market – two tactics that make up the foundation of trading. Remember, that operating on emotion will never end well.

To avoid feeling overwhelmed by all the different currencies – because there’s a lot, narrow your research on a particular currency pair, and gather valuable resources for the two. Regularly look at current and historical charts, and monitor the news for economic announcements, as well as perform other technical and fundamental analysis.

3. Understand the quote

Since you will trade a pair of currencies, you will notice two prices for each currency. The difference between the first and the second rate is called the spread. That difference is the amount that a dealer charges for making the trade. However, spreads vary according to dealers.

4. Choose your position – buy or sell?

A buy position means you believe that the value of the base currency will rise compared to the quote currency. If you’re buying MYR/USD, you predict the price of the Ringgit will strengthen against the dollar. (The Ringgit is bullish and a bearish dollar)

A sell position means you believe that the value of the base currency will fall compared to the quote currency. If you’re selling MYR/USD, you predict the price of the Ringgit will weaken against the dollar. (The Ringgit is bearish and the US dollar is bullish).

Here’s an example:

A buying position
The current price for MYR/USD is 1.3555/560. You believe that the Ringgit is bullish, so you enter a buy position for one lot or one unit of the MYR/USD. Your trade is priced at 1.3555.

Later in the day, the MYR/USD is now at 1.3888/180. Your trade has gained 333 pips, and you opt to close your position at the current sell price of 1.3888 and make a profit.

A selling position
Let’s say the Ringgit is bearish, and you decide to enter a sell position for one lot or one unit of MYR/USD. Because you are selling, your trade is at priced at 1.3555/560.

Later in the day, the MYR/USD is now at 1.3888/180. Your trade has lost 333 pips. You close your position at the current buy price of 1.3555 and accept your losses.

If you’ve read this far, good job! It means you are willing to understand what you are investing in and not blindly trusting people with your hard earned money.

What are forex trading scams?
Forex trading scams are when criminals trick people into investing in fraudulent foreign currency schemes.

They often promise once in a lifetime investment opportunities where traders can make high returns overnight or within weeks.

The scammers often disappear after they’ve received payment, leaving investors with nothing but some play the long haul game not unlike Ponzi schemes.

Seven common forex trading scams

Fraudsters use lots of sophisticated techniques to steal money through forex scams.

Here are seven common forex scams to watch out for.

Signal seller scams

Signal sellers are companies that offer suggestions about the best time to buy and sell currencies based on what they say is market analysis. They usually charge investors a fee for this information.

Signal seller scams are when companies charge investors without giving them any advice, or give some trade details and then disappear. They usually promise that their data will guarantee successful trades and high profits.

Forex robot scams

A forex robot is a software programme that can automatically buy and sell currency for you using an algorithm.

The software in legitimate forex robots can be tested and reviewed by an independent body to make sure it works.

Some criminals sell untested or fake software that makes trades at random and could cause investors to lose money. Always do as much research as possible, to give yourself the best chance of avoiding a robot scam.

Forex broker scams

Sometimes criminals pretend to be legitimate forex brokers or investment platforms that already exist to trick people into investing in non-existent forex funds.

Fraudsters will often use the name and registration number of an authorised forex broker. You should always check against the Securities Commissions website and read forums to learn about the trading company you are signing up with. There are many grey areas which you need to be aware about. It is common for scammers to give reasons why the companies wrongly listed such as the list being out of date or the company is being sabotaged.

Some scammers also set up identical websites to trick investors into paying them.

Forex pyramid scheme

Forex pyramid schemes focus on recruiting new members into investment groups that claim to offer advice and data that help them make successful forex trades.

Members of these schemes are charged a subscription fee and encouraged to recruit more people to join so that they can earn a commission.

In this scam, money is generated from membership fees rather than actual profits from forex trading. It is called a pyramid scheme because as new recruits join, you move higher up the pyramid and ‘earn’ more money.

When no more members can be recruited or membership starts to drop, the leaders usually close the scheme and take all of the money.

Managed forex account scams

Some investment companies offer managed forex accounts, where an expert forex trader invests currency on your behalf. And investors usually have to pay a fee or commission for this type of account.

Managed forex account scams are when fraudsters pretend to offer expert forex trading services but steal investors’ money instead. It’s really important to research any financial service or platform before investing your money. Always check the FCA register to see if they are authorised to avoid being caught out.

Forex Ponzi scheme

Fraudsters use Forex Ponzi schemes to advertise non-existent forex funds that guarantee a high level of return in a short space of time.

They usually only ask for a small investment upfront and pay initial investors the promised returns to give the impression that the scheme is successful.

These investors are then encouraged to get their friends and family to invest in the scheme.

Once enough people have paid into the scheme, the scammers vanish with the money and leave investors with nothing.

Price Manipulation

This is the most common scam performed by scam brokers. Some brokers manipulate their trading platforms to always be at the disadvantage of traders. This can come in the form of , where entry and exit orders are filled at prices undesirable to the trade.

For instance, a buy order is filled at a much higher price, which limits the eventual profits that can be realised on the trade, if any at all. There is also ‘stop hunting’, where the broker will seek to take out the applied by the investor before continuing to stream the correct prices. Essentially, price manipulation will result in the generation of losing trades for investors.

How to avoid forex scams

Protecting yourself from unscrupulous brokers in the first place is ideal. The following steps should help:

Do an online search for reviews of the broker. A generic internet search can provide insights into whether negative comments could just be a disgruntled trader or something more serious. A good supplement to this type of search is BrokerCheck from the Financial Industry Regulatory Authority (FINRA), which indicates whether there are outstanding legal actions against the broker. And if appropriate, gain a clearer understanding of the U.S. regulations for forex brokers.

Make sure there are no complaints about not being able to withdraw funds. If there are, contact the user if possible and ask them about their experience.

Read through all the fine print of the documents when opening an account. Incentives to open an account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say they cannot withdraw the bonus funds. Reading the fine print will help make sure you understand all contingencies in these types of instances.

If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more, and then attempt to make a withdrawal. If everything has gone well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of your experience online so others can learn from your experience.

Here are some questions to ask to avoid a forex trading scam

It should be pointed out that a broker’s size cannot be used to determine the level of risk involved. While larger brokers grow by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn’t always safe.

If you are interested, reach out to a forex trading expert for more insights.

Our article is pretty much an overview on what the forex trading industry looks like – there’s so much more about the market and industry to be digested before one goes straight into it.

On top of that, forex being decentralised makes it a double-edged sword because the lack of regulation could leave smaller players more vulnerable to scammers and dishonest people who just want to dupe and take advantage of curious investors.

Disclaimer: Neither mymoneyinsights.asia nor the content on it is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund.

The content on mymoneyinsights.asia is for general information purposes only and is not intended to be personalised investment advice or a solicitation for the purchase or sale of securities.

mymoneyisnights.asia. and/or its affiliates cannot and do not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source.

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