I was talking to a couple of new traders last week – helping them choose a broker according to their needs – and one of their arguments for broker selection definitely caught my attention. Broker A – said one of the traders – has a larger deposit bonus and therefore I am considering it more than broker B (which doesn’t). It was terribly surprising for me to see that new traders actually consider these bonuses a “good thing” when they are no more than “traps” disguised as free money with the intent to lure in traders and make them trade with higher risk levels. On today’s article I will talk about broker bonuses and why they are dangerous, unnecessary, tricky and why they simply do NOT constitute any type of “gift” from the broker to you.
When you open an account with a Forex broker you’ll notice that some brokers will give you an “additional amount of money” on your deposit ranging from a few dollars to even 20-30% of your deposit in some cases. This “additional money” is what in the industry in known as a “deposit bonus” which is an increase in your account’s value in addition to your deposit. What could be wrong about getting this “free bonus” ? What is so perverse about luring customers in with the idea of giving them additional “free cash” ?
The problem with the deposit bonus comes when you consider the very nature of this bonus and what it means to the trader in reality. The account deposit bonus is – in all cases – non-withdrawable, meaning that you cannot withdraw that money (so no free money) or only withdrawable until you reach a trading condition which is extremely unsound. For example the withdrawal of a deposit bonus on some brokers requires you to trade at least 10 round lots before you get the bonus. This means that you would be contributing – at the very least – 400 USD to the broker in spreads, often for a bonus which is much less than that, this of course assuming that your trades never lose money besides the spread. Certainly the broker will NEVER lose money and this “bonus” gimmick is just a trick to stimulate you to trade more. Brokers earn – in an ideal world – exclusively through your trading so the more you trade, the more they make.
Now let us consider another important point which is the psychological effect that a bonus has on a trader. You open your account, have 2K USD and 200 USD bonus, you then decide to trade with this account and you are perfectly comfortable risking 10% more since your balance shows you “have” 200 USD extra dollars lying around. The problem is that – in reality – you do not have that money (since if you lost the 2K the broker would not let you to continue trade) and you’re merely risking more per trade because you are within an “illusion” of having a higher balance. What this means is that the broker is making you trade more and you may not even notice.
Bottom line, the broker bonus is nothing more than a trick used by brokers to make you increase your trading volume, it is merely a “number game” which – as an end result – only provides an increase in leverage as the broker allows you to have more “equity”. In reality that money is NOT yours and will probably never be yours unless you pay many times its value through trading costs (spreads). In the end you’re far better off with a spread rebate program than with a bonus because the spread rebate program pays you “as you go” while with a bonus waiting to be eventually cashed in the long term you will inevitably have to take much more market exposure before you get that money.
Brokers have this bonus programs because they know that it is all “win-win” for them. If a customer sees that he or she is getting 20% more on his or her deposit then he or she is happy. If the customer then trades and margins out their initial deposit then its OK because the money actually never existed (the client just lost the deposit). If the client then trades like mad and manages to reach the “cash-in” threshold then there is no problem as the client has paid back the broker many times the value of the bonus. Long story short, brokers always win and the deposit bonus is just one in a long list of marketing tricks they use to make people join them and trade larger volumes. If it was for me I would make those bonuses illegal unless there was ANY type of benefit for the retail trader. In essence, NEVER choose broker based on the bonus, it is nothing but a useless marketing trick.
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