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Is Forex Trading A Pyramid Scheme?

Charlie Brooks

May 11, 2022 16:37


The foreign exchange market has existed for centuries and is composed of banks and other financial institutions from around the globe. Sadly, numerous individuals have fallen prey to forex-related pyramid schemes, frauds, and other fraudulent activities. Is the FX a pyramid scheme? 

Due to a lack of understanding of how FX works, some individuals may believe it is a pyramid scam. In actuality, it is far more than that, and here's why. 

It is not a pyramid scam because it offers a real product, and the money you make is not from new members entering the program but from trading currencies on the Forex Market.

What are pyramid schemes?

Simply said, a pyramid scheme is an unethical and unsustainable economic model in which a small number of top-level members attract new members. These new members are expected to pay up-front fees to those who originally enrolled them.

As newer members recruit their own subordinates, a percentage of the money they receive from these new recruits is also passed up the hierarchy. These schemes are also known as complex frauds, banned in many nations.

How are pyramid schemes operated?

Pyramid schemes derive their name from their similarity to a pyramid, which begins with a single point at the top and gradually becomes wider as it descends.

To illustrate how they function, the following fictitious example can be used:

Mike, the founder, stands at the apex of the pyramid and thus represents the number "one." Then, Mike recruits ten second-tier persons to the level directly below him in the pyramid, with each newcomer paying him a specific fee for the opportunity of joining.

These buy-in costs are channeled into Mike's wallet, and each of the ten new members is obliged to acquire a total of one hundred new members on the third tier. These members are obliged to pay fees to second-tier recruiters, who then provide Mike a portion of their earnings.

Especially at recruitment events, hard-sell pitches are used to entice individuals to participate in schemes similar to the one described above. Individuals who are courageous enough to take the plunge would, in theory, collect a considerable sum of money from the recruits below them. However, in practice, the pool of prospective members tends to diminish over time.

When this occurs, the top-level operatives are the ones who walk away with the most money, while the majority of the lower-level participants may have lost all they invested in the scheme.

The vast majority of these pyramid schemes do not include the actual selling of a commodity or service with real intrinsic value.

Variations in pyramid schemes

There are various distinguishable varieties of pyramid schemes, including:

Multi-Level Marketing (MLM) is a legitimate business model that incorporates the sale of tangible goods and services.

Chain emails that attempt to get naive receivers to donate huge sums of money to everyone listed. The donor is encouraged to delete the first name on the email list, replace it with their own name, and forward the chain email to their own list of contacts in the hopes that the next recipient will also donate monies.

Ponzi schemes are investment frauds that operate on the principle of stealing one individual to pay another. Accepting investment funds from new and inexperienced investors guarantees existing investors large returns. These are the schemes that are "too good to be true," about which prospective investors and traders are always cautioned.

A Brief Overview Of Forex

Forex markets have existed for almost a century, but they have never been conducted professionally. People have been exchanging goods and currencies to acquire goods and services, and the modern forex market has emerged as a result.

After the demise of the renowned Bretton Woods accord in 1971, more currencies were permitted to float freely. Each currency's value was determined by its circulation quantity and demand. The providers of services for foreign exchange trading regularly watch the values.

Initially, commercial and investment banks were the most important participants in the forex markets, trading on behalf of their investors. In this age, currency trading became an asset class, and you earn interest on the difference between the interest rates of two currencies. You may also profit from fluctuations in the exchange rates between currencies.

Before the advent of the Internet, it was incredibly difficult for individuals to engage in forex trading. Before the advent of the Internet, the majority of forex traders were multinational corporations, affluent individuals, and hedge fund operators. Due to the high capital requirements of forex trading, this challenge exists.

With the availability of the Internet, there is a global retail market that caters to individual traders, offering access to foreign exchange markets via secondary markets, brokers, and people. Today, numerous forex brokers and dealers provide significant leverage to individual forex traders, allowing them to invest in huge trades while having a tiny capital account balance.

How Does Forex Trading Work?

Forex trading, commonly known as FX, capitalizes on variations in currency exchange rates. Robert Johnson, a finance professor at Creighton University's Heider College of Business, asserts, "The FX market does not decide the absolute value of a currency; rather, it defines the value of one currency relative to another." On the FX market, practically any major currency can be traded against another major currency.

For example, you could wager on the U.S. dollar against the Japanese yen. Or the yen relative to the peso. Individual investors occasionally speculate on currency movements, despite the fact that the majority of foreign exchange forex activity is conducted by multinational firms hedging natural positions.

Ways to trade Forex currently

Spot Market trading

Spot market forex trading is the largest market since it trades the most for futures and forward markets. This trading system means that when individuals speak to Forex trading, they mean Spot market trading.

It is the location where currencies are purchased and traded at their current trading prices. Price currencies are determined by their supply and demand. Several criteria, including the economic performance of the owning country, sentiments based on the current sociopolitical environment, and interest rates, are used to calculate the supply and demand of currencies. The impression of a currency's future performance against another may also influence its prices.

Spot transaction refers to the agreed-upon value of the exchange rate between two currency pairs, and spot transactions are the primary Forex transactions.

The Futures and Forwards Markets

A forward or futures market contract is an agreement between two parties to purchase a country at a fixed price in the near future. Forwards and futures markets, unlike spot markets, do not deal with actual currencies; rather, they deal with contracts that reflect claims to a particular form of currency plus a stated price per unit and a future date of transaction settlement. On the Forwards and Futures markets, contracts are purchased and sold at the Over-the-Counter market based on the size of the trade and the settlement date.

Is forex trading a pyramid scheme?

Trading forex is not a pyramid scheme, and this is evident in the aforementioned components and the forex market's operation and characteristics. Forex traders who begin trading have complete choice over whether or not they will trade, how they will trade, what they will trade, and when they will trade.

Forex trading requires a methodical approach, a variety of tactics, trading opportunities, and a number of other factors. It does not include deceiving others in order to earn a profit. Forex trading is a lawful business whose primary objective is buying and selling currency pairs and not pyramid share marketing to recruit others into the forex market.

There are numerous reasons why forex trading is not a pyramid scheme. Check out the following reasons:

  • Forex provides you with complete control over the buy/sell button.

  • Forex also allows you the flexibility to close a trade or prolong it.

  • Forex traders have complete autonomy over selecting the most profitable trades.

  • Forex traders are able to conduct a thorough analysis of forex signals.

  • In forex, currency pairs, equities, and commodities are traded.

However, a pyramid scheme can emerge if fraudulent websites use multilevel marketing to offer forex items.

Despite this, it is essential to note that there are scams out there that target naive traders, particularly beginners. Therefore, it is essential to learn how to identify forex trading scams. False promises should not sway forex traders; we will then examine forex scams and how to identify them.

Common forex trading scams

Signal vendor scams

Signal sellers are companies that provide advice on the optimal times to purchase and sell currencies based on what they claim to be market analysis. Typically, investors are charged a price for this information.

Signal seller scams occur when companies charge investors without providing them with advice or providing trading specifics before vanishing. Typically, they say that their data will ensure successful trades and huge returns.

Forex system scams

A forex robot is a piece of software that uses an algorithm to automatically purchase and sell currencies on your behalf.

The software is authorized forex robots that can be checked and evaluated by an impartial organization to ensure that it functions properly.


Some fraudsters provide untested or counterfeit software that executes transactions arbitrarily and could result in investment investors. Always conduct extensive research to offer yourself the best chance of avoiding a robot scam.

Scams by Forex brokers

Sometimes, criminals pose as legitimate forex brokers or investment platforms that already exist in order to deceive individuals into participating in fraudulent forex funds.

Frequently, fraudsters would use a legitimate forex broker's name and registration number. Always verify the FCA registration and only use the contact information mentioned there. It is usual for con scammers to provide explanations for why these statistics are incorrect, such as being out of date.

Some con scammers also create duplicate websites to dupe investors into paying them.

Forex Ponzi scheme

Forex pyramid schemes are centered on the recruitment of new members into investment clubs that purport to offer advice and data to aid traders in making profitable forex trading.

Members of these schemes pay a membership fee and are urged to recruit new members in order to earn a commission.

In this scam, membership fees are used to create revenue rather than forex trading earnings. As fresh recruits join, you ascend the pyramid and 'earn' more money, hence the name pyramid scheme.


When no more members can be recruited or when membership begins to decline, scheme leaders typically shut down the operation and seize all the money.

Forex managed account scams

Some investment firms offer managed forex accounts in which a professional forex trader invests your currency on your behalf. And investors are typically required to pay a charge or commission for this account type.

Scams involving managed forex accounts occur when con artists profess to offer skilled forex trading services but instead steal the money of investors. Prior to investing your money, it is essential to conduct extensive research on any financial service or platform you might use. Always check the FCA registration to determine whether or not they are approved to prevent being taken off guard.

Forex Ponzi scheme

Utilizing Forex Ponzi schemes, fraudsters promote nonexistent forex funds that promise a high rate of return in a short period of time.

To provide the idea that the scheme is succeeding, they typically only require minimal initial investment and pay first investors the promised profits.

Then, these investors are encouraged to recruit their friends and relatives to invest in the scheme.

Once a sufficient number of scammers have paid into the scheme, the con artists vanish with the money, leaving investors with nothing.

How can I spot Forex scams?

The single most critical thing a person can do to avoid getting scammed on the Forex market is to understand how to trade properly. However, the difficulties of locating reputable Forex brokers and lecturers are further tougher. Due diligence is essential to ensure that the broker has actually made the amount of money he or she claims to have. The Forex market is not a casino but is a serious business where daily transactions involve trillions of currency units. Utilize demo accounts and practice making long-term earnings before trading with real money. Like any other professional talent, Forex trading can take years to learn well. Avoid any claims that assert "you can generate money quickly."

Rather than accepting assertions at face value, you should do your own examination. A newbie trader should be critical in their approach, analyzing statistics and developing their own profitable functions on a demo account beforehand. This will take time but will benefit the novice trader more than relying on an automatic computer program. Do not rush into an investment that appears to be too good to be true.

A person may also want to investigate the legitimacy of the company making the claims or selling the expertise/course. Check the location or jurisdiction where the business is registered, as many Forex scammers trade from jurisdictions where they feel it will be difficult to prosecute worldwide.

Tips for identifying forex scams

These red flags will help you recognize a forex scam and prevent you from falling victim.

Unsolicited offers: It is certainly a scam if you are contacted about a forex investment opportunity out of the blue. Never disclose your personal information or send money to a company that has it.

'Risk-free' investing: Investing always involves some level of risk. Thus any organization claiming to offer investment opportunities without risk is likely a scam.

Unrealistic profits: Forex scams frequently promise unrealistically high returns on your initial investment. Any organization promoting investment opportunities promising instant wealth is likely to be bogus.

It is likely phony if a company tries to drive you into making a rapid investment. Some con scammers offer perks or discounts to convince you to invest immediately.

Advertisements on social media: An increasing number of con scammers are using social media to promote bogus investment possibilities. They frequently use photographs and videos of luxury things to convince individuals to invest.

Problems with withdrawal: Scam brokers push traders to deposit additional funds, and these traders have issues when attempting to withdraw funds.

It may be a scam if a broker uses overly aggressive sales practices to market a product or service for which they cannot supply sufficient information. Attempts by brokers to coerce or frighten traders into depositing funds are a clear sign of a scam.

Unregulated brokers: This is one of the first red flags that traders must be aware of, and traders are highly discouraged from dealing with unregulated or offshore-regulated brokers.

Traders must avoid engaging with brokers situated in remote places or brokers who refuse to identify their location.

Wrapping up

Foreign exchange is not a pyramid scheme. However, pyramid schemes can occur indirectly in foreign exchange through multilevel marketing organizations. Through affiliate programming, these businesses indirectly profit from forex. Typically, they sell forex-related movies and merchandise. The likelihood of fraud is high. Therefore, avoid falling victim to forex scams and MLM companies. Always conduct adequate research prior to trading with any broker.