Lessons from the Pros

Beware of the Ponzi Trap in Forex

While scanning the Forex news recently, I noticed quite a few disturbing headlines.

June 10, 2009
SEC Pulls Plug On Alleged $80M Forex Ponzi Scheme
The Securities and Exchange Commission yesterday charged two California men and two companies they control for conducting an $80 million Ponzi scheme that targeted Korean-American investors with promises of extraordinary returns from currency trading.

July 9, 2009
GA Man Charged With Running $15 Million Forex Ponzi Scheme -CFTC
A Georgia man was charged with allegedly operating a $15 million foreign currency Ponzi scheme specifically targeting Christian clients.

August 12, 2009
North Miami Beach man charged in Ponzi scheme
A North Miami Beach man was arrested Wednesday and is being held without bond on charges he defrauded more than 100 investors out of about $4 million in a foreign exchange Ponzi scheme.

August 12, 2009
Currencies trader pleads guilty in Ponzi scheme
CHATTANOOGA, Tenn. – A foreign currencies trader pleaded guilty Wednesday to cheating hundreds of investors in more than 20 states out of about $18 million to support a lavish lifestyle and buy presents for a girlfriend.

This issue is not exclusive to the foreign exchange markets.

Benard Madoff ran the biggest Ponzi scheme in history in the US equities markets. However, with four Ponzi-type schemes exposed in a three month period, it seems to be easy to pull off either a get-rich-quick scheme, or a Ponzi scheme in the Forex market which has very lax regulations. The promises in get-rich-quick schemes and Ponzi schemes are very similar. High returns with little risk. Get-rich-quick schemes promise that great wealth can be obtained from small amounts of money and very little effort. These schemes are sold as books or products such as compact disks about getting rich quick, rather than asking participants to invest funds directly. Many automated trading systems using Forex robots are advertised as making investors thousands of dollars overnight guaranteed.

A Ponzi scheme, named after Charles Ponzi who became notorious for using the technique in early 1920, is a fraudulent investment operation that pays returns to early investors from their own money, or money paid by subsequent investors, rather than from any actual profit earned. History is full of hundreds of these schemes which appeal to the greed of investors looking for high, short term returns or unusually consistent returns.

So how does a trader or investor avoid falling victim to one of these schemes? The best way is to educate yourself on how the Forex markets really work, develop a solid trading plan with rules, and have the discipline to follow the plan. There are no short cuts to this approach. Students from Online Trading Academy are allowed to retake the onsite Forex course as often as necessary to accomplish these goals. In addition, the Extended Learning Program (XLT) is devoted to helping students develop the skills over time to succeed as a disciplined trader.

If you are not able to trade for yourself, and you plan to hire someone to trade for you, you need to understand the strategy that the investment firm you hire is using. If the firm promises a high monthly return, this should be an early warning. If the returns never seem to fluctuate, this should be a concern, because all investments go up and down. Before investing, make sure you are not pressured. Do as much research as you can by investigating the investment firm both internally and externally using a regulatory body such as the NFA/CTFC or the SEC. Ask questions of the money manager, and do not accept vague answers about how the returns are obtained. Unfortunately, statements can be forged, but asking to review customer returns and obtaining a list of customers for referrals will usually expose potential scams if the investment firm refuses to comply. Make a commitment to lifelong education with a goal of some day managing your financial life. You are the person who cares the most about your success.

Steve Misic – smisic@tradingacademy.com