If the government won't question a blatant pyramid scheme, let fate do the job

One of the frontpage stories in my local newspaper today tells the tale of how a [Deadly crash shattered teacher's life][]. A young couple is left permanently paralyzed for one and crippled for the other. All because of "brazen and aggressive" driving of two other drivers. Alan Kippax was racing with his cousin Peter Kippax on the street. Peter lost control of his Porsche and crashed into the aforementioned young couple's Pontiac. Peter died in the crash and Alan was sentenced to be guilty of his contribution in this tragedy. While this is certainly a sad news, unfortunately, it isn't rare either. And what does it have to do on my trading blog? You see, it is actually the last line of the article that really caught my attention. > Kippax, who used to run an emerald marketing network, Ontario Treasure > Traders International, is global sales manager for Business In Motion. Business In Motion. That rings a bell in my head. Exactly a year ago, [CBC News aired an investigative journal][] on this company. In the show, PSA President Robert L. FitzPatrick concludes: > BIM is a blatant pyramid scam which – by its design > – will inflict losses on 90+% of all consumers who > are ensnared. from Pyramid Scheme Alert Alan Kippax (the one alive) was never charged or questioned in Canada regarding BIM. Even though he was convicted of fraud by the government of England in another pyramid scheme and in lieu of overwhelming evidence against him and BIM here in Canada. It is sad that it takes another tragedy to bring to justice another tragedy. Yet, I find it incredibly just that at least one more financial scam has come to an end, although in an unfortunate manner. As for Kippax. I feel no remorse for him. A loved one dies in his face and he's left alive to bear the consequences of his crime (not to the full extent, but still) in prison. How fitting is that for a scammer? (Yes, I am evil.) My questions are, why are there still so many financial scams out there, right in our backyards, in this so-called information age? Is our government deliberately turning a blind eye or are they really that incompetent? How many more [Madoff cases][] will it take for us to wake up to this problem?

Some tricks scammers use to game their trading system with 488% gain

The rise in popularity of social sites for trading has paved the way for ever more unscrupulous trading system sellers to spread their high yield scams. Just to be clear, I am not against websites such as Myfxbook and Covestor, nor against trading system sellers in general. However, there are always bad apples in a basket. And there are many bad apples out there. Trading social sites typically nurture a community of traders by enforcing transparent and audited trading history. Unfortunately, it is because of this claim, people are enticed by trading systems showing unbelievable high yields of 200%, 400%, 800%, or even more in mere weeks on sites such as Myfxbook or Covestor. But if the history of every trade taken is published and the account is verified, doesn't that mean that they are just really that good? First of all, if these people can double or triple their accounts in a few weeks or months as they claim, why the heck are they selling their system to you for a few hundred bucks and lose their monopoly?! If you have a Lamborghini in your garage, do you rent it out for a few hundred bucks to total strangers? Common sense should be on red alert. For sake of argument, let's say that you give them the benefit of the doubt. All is not as simple as it seems though. Here is one old trick in the book scammers may use to game a transparent and audited trade history. I will use one of the top performers currently on Myfxbook to illustrate how their scam work. And surprise, surprise, this particular system is on sale for a limited time (will see why later) for only US\$365. Figure 1 is the account percentage growth graph of this particular system. 488% gain in 4 months!

[caption id="" align="aligncenter" width="580" caption="Account growth chart"][][][/caption] Let's take a look at the trading performance statistics. Remember, these are real, audited numbers.

[caption id="" align="aligncenter" width="580" caption="Trade performance statistics"][]1[/caption] Aside from the impressive 90% success rate (something only Goldman Sachs can achieve consistently), the rest of the numbers actually look quite normal. Notice that their average pips won and lost are both around 13 pips. So this is supposedly a short-term scalping strategy to catch small but high probability moves. Which does exist in real life, as you know. Then as if you're not convinced of their awesomeness yet, here's a snapshot of some recent trade history.

[caption id="" align="aligncenter" width="580" caption="Trade history"][]2[/caption] This is where you might start to raise some eyebrows. Observe that 5 out of 8 trades shown are minuscule gains but they have no stop loss in place! That's not a problem, per se. Some systems don't use an open stop order. However, notice the open and closing time. These suspicious trades were held for almost a day! That's like an eternity for a scalping system. Who knows how much drawdown have occurred in the account during those hours! Actually, we do, take a look at the figure below for an open order of this system.

[caption id="" align="aligncenter" width="580" caption="Open trade"][]3[/caption] Caught red-handed! The open order shows a gigantic loss running. See the -\$9290 loss being held? That's about a third of their current balance of \$29k! But here's the trick. What the system does is wait for market noise to swing the price back to breakeven and then close the trade for a +1 pip. As the trade isn't closed at the moment, this humongous drawdown doesn't count as a loss and is nowhere to be seen in the trading history. That is what happens with many of those unusually small pips but long-held trades as discussed above. In effect, they are risking their entire account balance on just a few pips of profit on every trade. The reason why many of these unbelieveable systems typically have a trade history of only a few months at most? That isn't just for show. Sooner or later, their luck runs out with this no-stop rule and the market will have them choke down those monstrous losses. Eventually, their account just blows up. But at that point, they can make a switch-aroo and pull up another trading history that hasn't blown up yet to replace this one that just failed. Then it's business as usual. What's more amusing is thatsomeone asked this question of why there is a huge drawdown in another huge drawdown open trade months ago. The response from the author is that it was just a careless programming mistake. Imagine, here they are selling a massively "profitable" system on one hand and then claiming a glitch on another. In summary, the key to a statistically 100% winning system is simple. Follow the trend with no stop and only close a trade with a positive gain. But as I've explained the fallacies with this approach above, never try that with your money as you are risking all for so little! For general advice on avoiding forex scams, the Wikipedia entry offers an overview and ForexCrunch has a good article on 7 Ways to Avoid Forex Scams.