How to Avoid Trading Scams 101: What You Need to Know

Every day, new traders are introduced to the market trying to get their first big payout through trading. Unfortunately, scammers are also out to get these newbies. While it may be relatively more difficult to scam an experienced trader who is nuanced enough, there can also be some mistakes that may occur from time to time, making them victims of scams too.

Security agencies around the world are working actively to ensure that these scams are eradicated. However, as a trader, there are actions and precautions you must take to protect yourself. In 2023, the FTC reported that consumers lost up to $10 billion from scams. A figure $1 billion higher than the previous year.

In order to curb these scams, this guide talks about ways to avoid trading scams and how to identify them.
Let’s dive in.

What are the types of trading scams?

Fake trading platforms

This is the most common type of investment scam. Scammers create fake trading platforms to lure in their unassuming victims. Often these platforms promise unusually high returns on investment or equally high guaranteed profits. A warning sign from these platforms is that they often lack the proper credentials to make them legitimate.

Ponzi schemes

These schemes operate by promising investors high returns with little or no risk involved. While they may seem legit for a while, it all comes crashing down eventually. This is because the scammers are not generating profits. Rather, they use the money from new investors to pay earlier investors thus creating the illusion of a legit investment. Eventually, as the number of old investors surpasses the number of new ones, the scheme crashes leaving many at loss.

Pump and dump

The price of a cryptocurrency is greatly affected by the information in circulation about it and how the market reacts to it. Scammers capitalize on this in a pump and dump scheme. They spread false information about a cryptocurrency or stock to increase the price. Once this has happened, they sell off their shares at a huge profit often leaving other investors with pennies.

Signal seller scams

This is another common trading scam mostly targeted at newbies and inexperienced traders in the market. Scammers claim to offer trading signals, expert advice and secret strategies for a fee, promising huge profits. Unfortunately, these signals and advice are false or misleading causing significant financial losses. In later sections, we would see the tactics used by scammers to lure their victims.

Phishing and identity theft

Phishing emails and links to websites are designed and sent with the aim of tricking traders into exposing their personal and financial information like passwords and wallet seed phrases respectively. This information gives the fraudsters access to their victims’ funds and personal identity which they steal.

When are trading scams more common?

Trading scams are very common. However, there are particular times when traders have to be extra careful and watch for fraudulent tactics.

• Market volatility: when the market is highly volatile, investors are more likely to start looking for opportunities to move their investments. This makes them more vulnerable to trading scams.
• Emergence of new trading platforms: when new trading platforms emerge, scammers may create fake platforms that mimic the original platform. Then, they pose as the legitimate brokers and take advantage of oblivious traders.
  In the same vein, they may also create fake platforms that promise better returns than the legitimate platforms.
• Lack of regulation: in countries where regulations are not strictly enforced, trading scams occur more frequently.
• Imminent economic downturn: in a bid to make as much profit as they can, as quickly as possible, investors are often desperate during an economic downturn. This makes them easy targets of trading scams.

Common tactics used by scammers

• Fear of missing out (FOMO): scammers often present investment deals claiming that it is a once in a lifetime opportunity with a limited time offer. It is not uncommon for them to add and show proof of others profiting from it. These profits are often too good to be true. This creates a sense of urgency which instills the fear of missing out on such a “good deal”.
• Poor knowledge: a lot of victims from trading scams are individuals that lack knowledge or are inexperienced about the trading market. Scammers take advantage of their newness and make exciting promises of big and easy profits.
• Greed: trading scams often promise significant profits in a short amount of time. Many traders fall for this due to greed. Potential victims are excited about the idea of a get-rich-quick scheme and fall right into the trap.
• Fake credibility: scammers often have proof of credibility. They gain their victims’ trust with fake testimonials and fake endorsements from experts. Some may have websites with certifications and ratings to gain the trust of their victims.

How to avoid trading scams

Some trading scams may be hard to spot. However, by following these tips you can spot and avoid trading scams early.

Be cautious of glittering promises: Avoid any investment opportunity or trading platform that promises an unusually high return on investment with low risk. If the deal sounds too good to be true, it is most likely to be a scam. With legitimate opportunities, there are no promises of high returns and there is a high risk with high returns.
Verify regulations of trading platforms: Ensure that the trading platform is licensed and proper regulated to eliminate any risk of scams. You can do this by checking international regulatory bodies such as the Securities and Exchange Commission (SEC) or a national exchange regulatory body.
Conduct adequate research: Check for the credibility of any platform before investing. Check for testimonials or reviews on websites or social media. Also, check for information about the company, its founders and its reputations and watch out for any warning signs.
Monitor your account activity regularly and report any suspicious activity to the necessary authorities: Stay up-to-date with the latest news in the trading industry to avoid falling a victim to any new scams you might not be aware of.
Be patient: Victims of trading scams are often individuals looking for a get-rich-quick scheme as a result of impatience. They want to make money fast and sadly they become targets to phony trades which leaves them at a loss that some never recover from.

Conclusion

Trading scams cause havoc and wreck many lives. However, by identifying the types of scams and being on your guard, you can avoid these scams and protect your investment. Remember to always follow the tips above when presented with a new trading opportunity. Always stay informed and protect yourself.

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