Forex is a scam!


Forex is a scam!

I studied and practiced for quite awhile and as soon as I went live those MM make sure to go against your trade-they along with the big banks make the money.

I feel they analyze your deal and make sure to go against it.

This is something I received from an obviously disgruntled now ex-forex trader yesterday. He’s not the first to make that statement, and I’m sure he won’t be the last. I’ve been involved in the forex market as a trader and/or analyst for more than a decade now, so I think you can figure out where I stand on the subject.

The primary argument folks who make the scam claim put forward is that fact that forex brokers take the other side of your position in their market making actions. They thus conclude that said brokers are trading against you.

First of all, not all forex brokers are market makers. Some are ECNs. They simply pass your orders through into the market like a stock market broker does. Since they don’t act as market makers and take no positions they do not earn the spread, so they make their money from commissions instead.

Oh, and by the way, not all stock market transactions are straight pass throughs to the exchange either. Some brokers act as market makers in certain stocks, so if you trade those stocks through them they are doing the exact same thing as the non-ECN forex brokers do. I don’t think anyone ever calls that a scam. Further, the whole basis of the interbank market – and all OTC markets – is transactions between buyers and sellers and market makers. In interbank forex, the banks are the market makers, both with and amongst each other and with the funds and companies that are their customers.

On top of that, there are market makers in all markets. They are the ones who provide steadily liquidity by always being ready to provide a quote and take the other side of a trade. Without them the markets would operate much less smoothly. As a rule, market makers in all markets look simply to make the spread over and over and over again. They don’t generally look to take positions, but rather to be net neutral.

Forex brokers who act as market makers operate in basically the same fashion. They are just offsetting customer longs and shorts against one and other. Do they sometimes have an overbalance? Sure. In such cases they have internal processes which determine whether they keep the exposure or whether they offset in the market. Different brokers handle things different ways in that regard.

One of the other arguments scam claimers make about forex brokers is that they run people’s stops. Guess what? That gripe has been in the markets for years – all markets. For traders in the futures pits are supposedly notorious for that kind of action. Here’s the thing, though. The markets and market makers exist to facilitate transaction flow and make their money from it. They are going to do whatever makes sense to increase that flow. That periodically could include running stops.

That sort of action, though, is a bit easier in the futures pits than in the widely dispersed forex market. Brokers and dealers generally keep their prices tightly in line because if they don’t they can lose business. As such, stop running is not something easily accomplished. It would take a highly coordinated effort among a wide array of market makers to do that kind of thing.

In most cases, the claims of stop running coming from forex traders is nothing more than people getting burned by putting their stops too close to the market and getting taken out by normal volatility.

The question I would ask for anyone who is making a claim of forex being a scam is whether they can demonstrate a trading system with a meaningful trackrecord of success and that they followed said system as designed. A lot of traders spend a relatively short period of time in demo trading and make good returns with no real proven method, then find that things are very different when it comes to real money. This is more about the trader than the broker.

The idea that your broker looks at your specific open positions – out of the many thousands of trades that might be open at a given time among all their customers - and make decisions based on it is egotistical and self-centered in the extreme.

If you really have a problem with market making forex brokers then trade through an ECN.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • Katherine

    Taking the suggestion of the “demo” account, I’ve actually opened more than one to test multiple platforms. These demo accounts all have live charts on them. While some brokers may limit your demo account availability for a finite number of days, there are so many vendors I doubt you’d run out of “demo” account access to charts for a good long time.

    Anyway, my whole point is… If you think the market maker is trading specifically against you, check the other vendors charts! Surely one market maker has no more influence over everyone else’s charts than you do.

    I’m still in demo mode, but seemingly get traded against regularly. Seems almost like just about the time I give up and bail out of my position, the market moves in my direction immediately afterwards. Seems eerily predictable. So, I checked some other charts. Guess what, besides the spread, they were identical. Just proves that Murphy’s law and inexperience are my only foes at the point.

  • Mark

    Yes, Forex is opertated like a scam! These Hedge Funds and major institutions see all orders coming through and trade against them with their millions and billions of dollars causing all of the small traders getting wiped out. The guy writing this article is baised because he works in the industry, protecting the “big boys.” It;s B.S. How is it when I practice trade the trend continues as predicted, but when I place a big order it immediately switches direction and wipes me out? Stay out of Forex, it’s unregulated and they scam you and me.

  • http://www.theessentialsoftrading.com John

    Mark you make me laugh! :-)

    As the “guy writing the article” I have no bias. I do not now, nor have I ever worked for any bank, brokerage, fund, or any other institution involved in taking positions or managing transactions in any market. My work as an analyst is for a group which provides analysis on a 3rd-party basis. Seeing as our forex commentary (I’m currently in stocks, but used to be in forex) is available to both FXCM and Oanda forex traders at no cost (and by subscription to anyone who wants it otherwise), the idea that I’m biased toward the institutions is a complete joke.

    And Forex is becoming increasingly more regulated.

  • Adewole Musilu

    I’ve read and listen to different people with claims and counter claims that forex trading is a scam. I personally transact with AVAfx, a forex platform. What I experienced is that anytime I opened the platform ready for trade, a position would be opened automatically against the trend without my involvement. I reported the case to AVAfx but claimed it was a virus on my computer. I formated the computer and installed an antivirus, same thing happened.
    My question then was that why is it that a positioned is opened against the trend and not in the direction of the trend? with frustration, i was forced to wthdrew remains of my fund.

    • http://www.theessentialsoftrading.com John

      Thanks for sharing Adewole. I’ve never dealt with AVAfx so I cannot personally comment.

  • Mr.Wiseman

    as we have now seen that investments banks, hedgefunds, large insurance agents, ratings agencies and others have been colluding in more than a few mulit billion $ scams while the regulatory authorities sat back on their laurals,it requires much more to convince Joe public to part with their money and trust any organised money making system than a few words on an internet page. I am not convinced yet i have been conned, and more proove will be required before i trust any forex broker pertaining to offer me direct access to the real Forex market.

  • Kris

    I am desperately looking to find a way to make money from home. I’d like to get into the trading scene but dont know where to start or even if its a good idea. Im willing to invest in the time to learn. Im even willing to start small and take the time to build it up. but again…NO where to start…Should I start with stocks? Should I do Forex? I barely know the difference between the two. Is it even a viable option in todays economy?

    • http://www.theessentialsoftrading.com John

      Kris – I strongly recommend you look at my introductory trading course or book. They were both specifically written for people like you who want to get involved in the markets, want to do it right, but need a good starting point.

  • Mark

    Kris, you won’t make an income from home from Forex, 98% of people lose their money one year because it is an unregulated market designed to wipe you out. They don’t even execute trades at the price you initiated. Stocks are easier because it’s regulated but with all the skill in the world you will lose money (like the pros) about 2/3 of the time, so cut your losses and have your third stock run a huge profit and you have a chance at making an income. That’s the real side of the story you don’t hear often.

    • http://www.theessentialsoftrading.com John

      Mark – Contrary to what you may have heard, forex is increasingly more and more regulated. In the US it’s been put under the oversight of the CFTC, and through them the NFA. It’s not the Wild West it used to be, at least in the US. I can’t speak to other countries.

      As for comments about not getting executions at the right price, I can’t think of any time among the years worth of trades I’ve done where I didn’t get a fill in line with expectations (or if so that wasn’t corrected by the broker). If you’re having problems with that then either there’s a problem with what you’re doing or your broker is doing something untoward (unlikely as they actually want you to execute trades).

      Stocks are neither easier nor harder. All the same mistakes trip traders up. The only difference is the permissible leverage. Believe me, regulation does not mean less chance of losing money. After all, regulation didn’t prevent Enron or any of the other scandals that crushed any number of unfortunate stockholders.

  • david

    I and millions of people need opportunities to survive. After researching all complaints, looking at broker websites, the nfa and ctfc websites, I concluded that though the forex market is legitimate, forex brokers are not. It is a scam to trade the forex market. It should be heavily regulated and enforced. It is a SHAME that the forex market has such great opportunities that everyone needs but is WASTED because of all those crooked brokers who cheat, lie, and steal your money.

    • http://www.theessentialsoftrading.com John

      Forex brokers ARE regulated – at least in the US. They fall under CTFC supervision via the NFA.

  • Mark

    I lost nearly all my money making big trades; small tades on the other hand I made over 1000% gain. That”s an indication someone trades against the big trades.

    • http://www.theessentialsoftrading.com John

      Mark – Or could it simply be that you were taking too much risk with your big trades and that once you lowered your risk your drawdowns didn’t do nearly as much damage?

    • THE Truth

      I been reading Mark common from beginning. I know how you feel MARK and completely agree with you. I trade for living and I do very well in Stock market. However Forex market is whole new game, every tick is being control by interbank, every tick it move it move to make money for the banks own interest, someone win someone have to lose. Money don’t come from no where. you take a buy some one have to sell to make trading work and complete. Don’t you ever wonder why 5% or less is making it in market. 95% blow up account in less then 6 months.?? Don’t believe me try this is REAL MONEY account, Pick random buy or sell 30 pip SL 30 pip TP. Do it for about 100 or 1000 trades. about 90+% of the time you will get hit on SL and its will never be 50/50 chance like stocks.

  • http://aoede-jimbob.blogspot.com/ Jim Manning

    I do believe their is a lot of market manipulation and that Traders really start believing their own mail – certain economic analysts are very capable of saying anything the institution they work for want then to say to set up market conditions. Oil Futures are one good example and crashed when OPEC finally called them all out by cutting production not once but twice. The Aussie Dollar is the sixth most traded currency in the world – it does not deserve that status – but dealers see it as safe and able to be manipulated.
    The big fund managers can easily set a market to their requirements.

  • Pierre

    ok, here it is the truth about Forex (or trading in general). The market is TOTALLY random, therefore it is IMPOSSIBLE to be consistently proficient. Over time, no matter what strategy you use, you’ll lose money, and your money goes to the pocket of your broker. If the market had some degrees of predictability, then one would learn how to make money out of it, since there is NONE, it’s like gambling. In other words, if you go to the casino, you have the same chance to win or lose. The 5 % of winners simply doesn’t exist…never existed, and never will! I’ll give you a perfect analogy with the world of sport. Experts know that it’s impossible to develop big muscles or run 100 meters in less than 9 seconds without steroids. However, there are testimonials (the ones who are not caught at the doping test, which is a true farce) who swear that they did it. They are simply paid off to lie to the public, so the dream can continue.
    The market is the same. If you’re thinking of investing your real money, do it, but just for the fun and the excitement, NEVER hope that you’ll make any money out of it, if not out of pure luck.
    Good trades to everybody

  • Pingback: Don’t Hate the Game, Hate the Player — Even in Forex | The Currensee Exchange | Forex Trading Blog

  • Ike

    In truth, the people who are complaining on here just don’t know how to trade properly. Why are you selling yourselves short and taking these losses? Of course the market is going to go down. If you actually followed it while trading, you can easily ensure that you make gains in the end. Buy low and sell high. It’s that simple. Obviously there will be some fluctuation in the market, but have a little patience for crying out loud, and stop thinking the market it a get-rich-quick scheme.

  • dick hertz

    I am an experienced equities trader with more than 12 years of online trading. I have educated myself regarding FOREX. No expert here, but I probably know as much as the next guy with 11 months of FOREX trading under his belt. Here’s the point: After 1,455 trades over the course of 11 months, 89.9% of my trades have resulted in losses. All types of trades: from 2 minute scalps to trades lasting almost 10 months. I have used numerous technical analysis tools, many of which have proven helpful and profitable in my stock trading.
    Even if I flipped a coin before every trade, I’d probably be some where around 50% in terms of losses and profits. On a bad day of coin-flip trading, I would almost assuredly be right at least 1/3 of the time (33%). It is virtually impossible to be wrong almost 90% of the time – UNDER ANY CIRCUMSTANCES. There is NO mathematical model to support it. NONE. Even if I did the exact opposite of what I believe the charts suggest, I would still not be wrong 90% of the time. IT IS IMPOSSIBLE. Therefore, the ONLY logical explanation is that the FOREX market is fixed. How and to what extent, I don’t know. But there is simply no other explanation.

    • http://www.theessentialsoftrading.com John

      Nice handle. Since the reported statistics to the CFTC show that about 30% of retail forex traders make money each quarter, clearly it’s not impossible. Thus, your logic is flawed from the start. And that assumes win % is the determining factor in profitability, which it isn’t.

  • dick hertz

    LOL. Yeah, OK, let’s all believe what the government of the United Staes tells us. The Commodity Futures Trading Commission guys used to lunch with the SEC guys who conducted the Madoff audits for all those years, right? Wow, someone actually PAYS to write articles?

    • http://www.theessentialsoftrading.com John

      I didn’t say reported by the CFTC. I said reported to. The brokers report the figures. Maybe you don’t want to trust them either. Fine. Whatever. I’m not going to get into a debate on that here. You are, however, a sample of one and your year’s worth of experience bouncing from method to method and time frame to time frame mean very little by way of proof. I’d say the same to someone claiming brilliance on the basis of one year’s great performance too.

  • Robin Latrell

    Winning % is not the determining factor in profit?? Don’t tell me — you work for the Obama Administration, right? Up is down; debt is good; higher taxes mean greater revenue; some day, cars will run on farts. Don’t quit your day job. I hope it has nothing to do with finance. And if it does, let’s hope nobody listens.

    • http://www.theessentialsoftrading.com John

      Seeing as I can demonstrate to you systems which have very high win % but very poor performance (and vice versa) – and you could probably think of some yourself – clearly win % is not the determining factor in profitability. It’s part of the equation to be sure, but not all of it. This is one of those things newbies fixate on, usually to their detriment.

  • ken

    typical wall street crappola. dick hertz’s (great handle!) point is well taken. movement is ultimately up or down. u can’t be on the shitty side of a trade 89 times out of 100 with over 1000 trades executed without it being manipulated. winning % is not the determining factor? lol. ok, tell that to the red sox and the yankees. this moronic babble is why regular americans are totally fed up with wall street and the corrupt pirates doing the fleecing. lies, deception and then for a change a pace, more lies.

    • http://www.theessentialsoftrading.com John

      You’re seriously comparing trading to baseball? Seriously? Talk about babble.

      Wins in baseball are binary. You either win or you don’t. Your run differential doesn’t matter. In trading that run differential most definitely matters. If you win 99 times out of a 100 and that 100th trade wipes out all the profits from the rest of the trades then it doesn’t make a damn bit of difference that you won 99% of the time, does it? Flipping that around, if you lose 70% of the time but the other 30% are big enough winners that you’re well in the green, does it matter one iota that you only had a 30% win rate?

      This is NOT me saying that the size of your winners is the determining factor. It’s me saying it’s a combination of win % and the relative sizes of your wins and losses that decide your performance.

  • ken

    it’s still noteworthy that you’ve failed to address mr hertz’s principal contention –> nobody’s gonna be wrong 89% of the time. i’m no math teacher, nor do i possess a graduate degree in finance. however, i do have a phd in LIFE, and my decades of living tell me nobody (smart, dumb, expert or newbie) is getting snookered 89 times out of a 100 without someone else pulling strings. period.

    • http://www.theessentialsoftrading.com John

      You apparently weren’t paying attention when I said a sample of one individual who has admitted to using all different kinds of time frames and trading styles over a year’s time is insufficient evidence of anything – good, bad, or otherwise – no matter how many trades. Of course, if he’s been trading with some no name, unregulated broker then I might allow for potential shenanigans. Otherwise, show me evidence that the employed methodology should have been profitable.

      Of course the real question is why someone wouldn’t stop trading (at least live) after say the first hundred or so trades when the win % was so low.

  • Brad

    Once you decide to start to day trading, don’t expect to learn everything about it in an instant. You will surely need to learn for some time, and you need to exert a lot of effort. Practice makes perfect, and forex trading requires a lot of it.

    Before using real money, you can practice through simulated forex trading software and do a paper trade. Here you can incorporate all your trading techniques and see if they actually work.

    Don’t be a scared to lose a certain amount of money, because any trade involves a lot of it. But it doesn’t mean that you should not limit your losses, you can make use of stop orders. And most importantly, you should learn from your past losses. Forex trading is serious business but it is fun and profitable.

    A good trader by day should be disciplined. Make discipline a habit in order to make sound decisions, and act in accord with trading systems/strategies. This way, you can do your trade in a consistent and reliable manner. Certain situations require an individual to make decisions based on their pre-set criteria and parameters.

    You should make it a point to habitually follow your forex trading system plan; this way you can effectively evaluate the results of your plan. If your expectations are not met, perhaps its time that you make certain adjustments and fine tuning, so that your plan will still be of good use in the future.