Is Forex Trading a Pyramid Scheme?

Is forex trading a pyramid scheme? This is a question that has been asked by thousands, if not hundreds of thousands, of people around the world. A lot of people may even believe that this is all that forex trading is.

Choose your quick section of our is Forex trading a pyramid scheme below.

A Quick Overview of our Is Forex Trading a Pyramid Scheme Review:

• ✔️Forex Trading Explained
• ✔️Pyramid Schemes Explained
• ✔️Is forex trading a pyramid scheme?
• Is forex trading profitable, and how?
• Tips for success in forex trading

This misconception may however be widely accepted and therefore it is crucial to explore the components and inner workings of forex and that of a pyramid scheme, to compare the two to obtain  the answer.

Forex Trading Explained

The foreign exchange market, which has been dubbed as the FX or forex market, is the financial market in the world where foreign currencies are exchanged, as the name would suggest.

It is the largest, most liquid, and most volatile market in the world, and trades that happen in the market have the power to affect everything, from the price of clothing imported from China to the amount that you pay for a margarita while you enjoy your vacation in Mexico.

What does forex trading entail?

At its simplest, forex trading can be compared to the currency exchange which is done when people travel abroad; one trader buys a currency while simultaneously selling another, and the exchange rate is something that consistently fluctuates based on supply and demand for currencies.

Currencies are traded in the foreign exchange market which is a global marketplace that remains open 24 hours a day, from Monday to Friday. All forex trading is done over the counter, or OTC, which simply means that there is no physical exchange and that global networks consisting of banks and several other financial institutions oversee the market.

Where stocks involve a physical exchange of the underlying asset, where someone can own it, and where an entity such as a central exchange is involved in stock trading, forex trading is the opposite.

Most of the trades that happen in the forex market occurs between institutional traders, such as individuals who are employed by banks, fund managers, and multinational corporations. These market participants do not intend to take physical possession of the currencies; however, they are simply speculating about, or hedging, against future exchange rate fluctuations.

How are currencies traded?

All currencies are assigned with a three-letter code, like the ticker symbol which is assigned to stocks. While there are more than 170 currencies in the world, the US Dollar is involved in most forex trades, and thus it is imperative to know its code, which is USD.

Other important currencies, also known as major currencies, include EUR, JPY, GBP, AUD, CAD, CHF, and NZD.

All forex trading involves the expression of currencies as a combination of the two currencies which are exchanged, with the following seven pairs accounting for 75% of trading in the forex market:

• EUR/USD
• USD/JPY
• GBP/USD
• AUD/USD
• USD/CAD
• USD/CHF
• NZD/USD

Quoting of forex trades

Each forex pair represents the current exchange rate for both currencies, this information can be interpreted as follows:

• The currency to the left is the base currency and the one to the right, is the quote currency.
• The exchange rate represents how much of the quote currency will be needed to buy one (1) unit of the base currency. As result of this, the base currency will always be expressed as one unit, while the quote currency will vary and fluctuate according to the current market, and how much will be needed to buy one unit of the base currency.

Three ways in which forex can be traded

Most forex trades do not occur for the purpose of exchanging currencies, but to speculate on the future price movements, much like that which is done with stock trading. As with stock trading, forex traders attempt to buy currencies whose values they believe will rise relative to other currencies, or to rid themselves of currencies whose purchase power they believe will decrease.

The three ways through which forex can be traded include the spot market, forward market, and the futures market, with each discussed in detail below.

The Spot Market

This is the primary forex market where currency pairs are swapped and where exchange rates are determined in real-time, based on the supply and demand associated with currencies.

The Forward Market

Instead of immediately executing a trade, forex traders can enter a binding contract with another traded, locking in a specific exchange rate, or an agreed upon amount of currency, on a future date.

The Future Market

Similarly, traders can also opt for a standardised contract to buy or sell a predetermined amount of a specific currencies at a locked-in exchange rate, at a date in the future, with the trade being executed on an exchange rather than privately, such as with the forward market.

Both the forward and the futures markets are mostly used by forex traders who wish to speculate, or hedge, against future price changes that may occur in a specific currency. The exchange rates in these markets depend on what is happening in the spot market, which is the largest market between the others, where most forex trades are executed.

Pyramid Schemes Explained

What are pyramid schemes?

Simply defined, a pyramid scheme is a business model which is both dishonest and unsustainable, where there are a few top-level members who recruit new members. These new members are expected to pay upfront costs up along the chain, to those who enrolled them.

As newer member in turn recruits their own underlings, a portion of the subsequent fees that they receive from these new members, are also passed along up the chain. These schemes are also known as elaborate swindles which are highly illegal in a lot of countries.

How do pyramid schemes work?

Pyramid schemes get their name from their resemblance to a pyramid, starting with a singular point at the top which becomes progressively wider towards the bottom.

To explain how they work, the following imagined example can be used:

The founder, Mike, is at the point of the pyramid and subsequently represents the number “one”. Mike then recruits ten second-tier individuals to the level situated directly below him on the pyramid, with each newbie having to pay him a certain amount for the privilege of joining.

These buy-in fees are funnelled into Mike’s pocket and each of the ten new members are required to recruit another ten members on the third tier, which totals to a hundred new members. These members are required to pay fees to the second-tier recruiters, who subsequently send a percentage of their earnings to Mike.

To get people involved in schemes such as the example above, there are hard-sell pitches that are given, especially at recruitment events, and those individuals who are brave enough to take the plunge, theoretically receive a substantial amount of cash from the recruits below them. However, in practice, the prospective member pool tends to dry up over time.

By the time that this happens, the top-level operatives are the ones who walk away with the most money while most of the lower-level members can lose everything that they put into the scheme.

These pyramid schemes place heavy reliance on fees obtained from new recruits, with a vast majority that does not involve the sale of an actual product or a service that has realistic intrinsic value.

Types of pyramid schemes

There are several types of pyramid schemes that can be identified, namely:

• Multi-Level Marketing Pyramid Scheme (MLM) – which is a legal business practice which involves the sale of actual goods and services.
• Chain Emails – which work to persuade naïve recipients to donate substantial portions of capital to everyone listed in the email. After the donations are made, the donor is invited 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, with the hope that the next person will donate funds.
• “Ponzi Schemes” – which are investment cons that work on the premise of robbing one. person to pay another. They promise high returns to existing investors by taking investment funds from new and inexperienced investors. These are the “too good to be true” schemes that new investors and traders are always warned about.

Is forex trading a pyramid scheme?

Finally, after having viewed and explored what both forex trading and a pyramid scheme is, how it works, and what it entails. It is time to explore whether forex trading can be considered a type of elaborate scheme.

Forex trading is not a pyramid scheme. This can be seen in the different components explained above, along with how the forex market operates and what it entails. Forex traders who start trading have complete control over whether they wish to trade, or not, how they trade, what they trade, and when.

Forex trading involves a systematic approach, a variety of strategies, trading opportunities, and numerous other components. It does not involve tricking others so that traders can make a profit.

In having said this, it is crucial to say that there are, however, scams out there that work to lure in unsuspecting traders, especially beginners. For this reason, it is important to explore how to spot a forex trading scam.

How to identify a forex scam

• Withdrawal problems – scam brokers want traders to deposit more funds and these traders experience problems when they wish to withdraw funds.
• Sales techniques are overly aggressive – if a broker is working too hard to try and sell their product or service without being able to provide substantial information about it, it can be a scam.
• Brokers who try to manipulate or threaten traders into depositing money is a clear indication of a scam.
• Unregulated brokers – this is one of the first red flags that traders must be cautious of and traders are strongly advised against dealing with unregulated brokers, or brokers who have offshore regulation.
• Brokers located in remote locations or brokers that do not disclose their location – traders must avoid dealing with such brokers.

Is forex trading profitable, and how?

Success in forex trading can not be achieved by watching a few tutorials or YouTube videos and then taking to the markets thinking that you can beat them. Success requires time, dedication, and a few bumps in the road.

Even when trading through a forex broker that offers all the bells and whistles, it is crucial that traders conduct their own research and work hard to find the right strategy that works for them.

In addition, the first crucial step that traders must take involves choosing the right forex broker that caters for their unique trading needs and objectives. Traders must evaluate what they wish to achieve with forex trading, develop a trading plan that outlines their trading objectives, sets of rules, what they can set aside financially to trade, and several other components.

Tips for success in forex trading

It is a long and intimidating road to becoming a successful trader and a lot of traders give up before they have even truly started exploring the market. However, the following tips will provide traders with some insight and some tips that they can consider.

Forex trading is not a “get-rich-quick” scheme that will turn traders into millionaires overnight and traders must be prepared to work hard towards their goal.

Learn, practice, strategize

These are some of the most crucial ingredients in the recipe of successful traders. If one of them is removed, loss will become inevitable. Learning is the first step on the road of becoming more successful and the importance of learning must never be underestimated.

• Traders must study the concepts involved with forex so that when they start learning to trade, everything will be understandable.
• Define what needs to be learnt as there is a wealth of information and traders can easily get lost or overwhelmed.
• Learn about more than just trading, understand the factors that affect the market as it will help traders understand and predict movements in the market.
• Do not try to learn everything all at once, take it one section at a time.
• Traders must educate themselves constantly even when they are already trading.

Do not procrastinate

Envision trading as a business and a job that needs dedication and commitment. Do not avoid or delay it, design the right plan, and follow it.

Do not invest more than you can lose

Even though large investments have the potential for more profit, do not invest more than you can afford to lose. Make sure that your position sizes are proportionate to your level of trading knowledge.