Why You Shouldn’t Take the Deposit Bonus From Forex Brokers
It’s everywhere…brokers offering you a forex bonus, but here’s why you shouldn’t take it. “Deposit $500 and we’ll give you a $100.” “We’ll match 100% of your deposit up to $1000!” Have you seen them? It’s tempting to take this “free money” offer. After all, that extra cash gives your new trading career a nice boost. Don’t take the forex broker bonus. There are several reasons why.
Don’t Take the Forex Broker Bonus – Withdrawal Issues
The main reason not to take a forex broker bonus is that it’ll likely lead to withdrawal issues.
Let’s say you deposit $1000 into a forex account, and for this you get a $200 bonus (see Day Trading with $1000 or Less). While this gives you $1200 in capital to trade with, you can’t withdraw that amount. In fact, while you may have $1200 in your account, if you go to withdraw $300 for emergency expenses, the forex broker won’t likely allow it. Why? Because now their money is mixed with yours. They have a vested interested in keeping your capital in the account because it protects theirs
What if you want to switch brokers, so you go to pull out your money? The bonus you accepted forces you to stay.
The only way you can withdraw the bonus, or any of your own capital, is to trade enough so that the full forex bonus is “released” to you. Typically, you need to trade $10,000 for each $1 of the bonus (read the fine print, bonus terms may vary). So in order for that $200 to become yours, you need to trade $2,000,000 worth of currency. Forex bonus terms vary, but the bottom line is that you need to trade a lot, regardless of how it’s structured. Some brokers do allow withdrawals while in the “bonus accumulation” phase, but often you’ll lose the bonus accumulated, or the bonus is pro-rated to the withdrawal amount (this is fair, but we still have other issues). This brings us to the next reason you shouldn’t take a forex broker bonus.
Think about the above statement for a second “You need to trade $10,000 for each $1 of the bonus.” This statement seems typical across the sites reviewed (not all of them of course), but in some cases up to $100,000 needs to be traded to release just $1 of the bonus!
If the EURUSD moves 1 pip while you’re holding a mini lot ($10,000 worth of currency) that equates to a $1 increase or decrease in your account equity, depending on if the trade moves in your direction or not (see: Introduction to Forex Trading). Essentially, the forex bonus is only worth 1 pip ($1) per mini lot trade. That amounts to squat when you really think about it.
For the potential withdrawal issues, is making $1 per mini lot trade really worth the hassle? Making 20 pips on the actual (1 mini lot) trade results in a $20 gain. Since most new traders aren’t full-time traders they’ll swing trade, seeking bigger profits from positions, potentially 100 pips or more. If you make 120 pips on a trade you make $120, or if you lose 120 pips you lose a $120. That $1 bonus per $10k traded starts to look pretty insignificant.
Thinking about this tiny amount is likely to induce you to trade more often, taking poor quality trades. Therefore, not only is the bonus worth squat, it is likely to actually negatively affect your trading.
The Forex Bonus is Aimed at New or Minimal Capital Traders
Let’s continue with the point above. Usually, forex broker bonuses are aimed at new traders, or traders with small amounts of capital typically depositing $5,000 or less, often $1,000 or less. If you have a $1,000 account, even with leverage it’s going to take most traders (who aren’t full-time) a long time to trade $2,000,000 in order to withdraw (their own funds and) their $200 bonus, as in our example above.
If you manage your risk and don’t risk more than 1% of your account balance on any one trade, on a $1,000 account ($1200 with the bonus) that means you can risk $12 per trade. If trading a mini lot, that means you need to take trades with a 12 pip risk or less (difference between entry price and stop loss order). You need to make 200 such trades in order to make that bonus yours. At one trade a day, that takes nearly a full calendar year. Making a trade every other day means two calendar years of trading before that bonus is yours. What if you want to make a withdrawal in that time?
Not quite as glamorous as it sounded in the ad, is it?
Now if you open an account for $10,000 and get a $200 bonus it works a bit better (see How Much Money Do I Need to Trade Forex?). Because you have a lot more of your own capital, you can take larger positions, and still keep your risk per trade under 1%. You attain your bonus much quicker, likely within a matter of months. But most traders who are taking this bonus aren’t depositing $5,000 or $10,000, they’re depositing $100 to $1000. If you take a $200 forex bonus on a $200 deposit you’ll likely never be able to withdraw your money. It’ll take you so long to trade the necessary $2,000,000 in currency that the learning curve in trading will have already eaten through the deposit.
So if you deposit more then a bonus is good? No!
Most Forex Bonuses are Offered by Mediocre Brokers Or To Naive Traders
Given all the information above, you’re likely now seeing that a forex broker bonus is actually a bit of a scam. Not a fraudulent one, but more of an ethical grey area. Every broker that offers a forex bonus knows the above stats, and that most traders will never get to withdraw the bonus. On top of this, by providing the forex bonus the forex broker is assured that the trader can’t withdraw funds and is thus forced to trade with them until they become profitable, attain the full bonus or lose all their capital.
What type of brokers don’t want you to withdraw funds? I’m not saying…I’m just saying.
Look up very large forex brokerages…Oanda, Forex.com, FXCM, TDAmeritrade, Interactive Brokers and Saxo Bank…do you see “Free MONEY!!!” splashed across their sites? They may offer a tighter spread, rebates on commissions or some commission-free trades to very active traders, but you’ll almost never see “free money” dangled in a trader’s face. Something to think about.
NOT ALL FOREX BROKERS THAT OFFER CASH BONUSES ARE BAD (nor is the above statement recommending the brokers mentioned)! There are likely a lot of brokers out there which are quite reputable, but that offer a cash bonus which may result in you not being able to withdraw your funds. Read the fine print and be suspicious of free “carrots” dangled in front you.
Other Troublesome Things Squeezed into Legal Jargon
In the fine print here are a few things also of concern. The below statements have been copied and pasted from actual bonus terms and conditions on several forex broker sites:
The company reserves the right to cancel the [XX]% bonus without prior warning, so we strongly recommend refraining from use of bonus funds in developing your trading strategy. The company is not responsible for any consequences of bonus cancellation, including stop out, because the bonus is the ownership of the company until the customer earns it by completing trades of the total volume specified in the clause [X]of the present agreement.
Defeats the purpose of a bonus. If they can retract that bonus at any time, and you are trading based on the amount of capital in your account (your own capital plus the bonus), if the bonus is taken away by the broker, it could leave you in trades that are way too big for the capital left in the account (just your your capital now).
If volume requirements are not met and the equity of the account goes below the bonus amount then the bonus is removed automatically by the system. In other words, if the Cash Equity (Equity – Credit Bonus) becomes zero or less, all previously awarded Credit Bonuses will be canceled and withdrawn from the respective Client’s account. In these circumstances the Company shall not be liable for any consequences of the bonus cancellation, including, but not limited to, order(s) closure by Stop Out.
As indicated…that money isn’t free, and if you don’t do well that “free money” is going to be taken away. While wording of terms vary from broker to broker, the underlying tone is the same: you face potential complications by accepting the bonus, it takes a lot of successful trading for that bonus to become yours, there’s no actual free money, and it’s not going to be there for you when you actually need it.
Final Word On Forex Broker Bonuses
There may be some bonuses out there that are good, with minimal strings attached. Such forex broker bonuses are rare. Read the fine print, as each situation and broker are different. As a general rule, though…Don’t take it!
When you open an account explicitly state that you don’t want the bonus. Send an email or make a phone call if you have to. If some of their money makes it into your account, it will complicate things. And when it comes right down to it, the bonus is usually so small (relative to potential trading gains or losses) that it really isn’t worth it. The bonus is worth the most to the small trader, yet it favors them the least since it could take years of trading before that bonus money becomes theirs. Most small accounts are wiped out by that time. And it’s probably best to trade with a regulated broker, in a major global financial center, that isn’t offering “free money” in the first place. If you want to be a real trader, ignore these gimmicks. Find a good broker and forget about bonuses. Ultimately, forex broker bonuses equate to tripping over pennies while the focus should be on the much bigger money available from actual trading.
Read all terms and conditions before opening an account.
In order to adequately test out a forex broker you need to be able to make withdrawals. This is part of the process outlined in How to Find a Forex Broker That’s Right For You.
Check out my Forex Strategies Guide for Day and Swing Traders eBook.
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By Cory Mitchell, CMT @corymitc