Don't Take the Deposit Bonus From a Forex Broker – TheStreet
Ever seen an ad that says something like “20% deposit bonus” with a forex broker? Or, “Get $500 when you deposit $2,000”? Or, something like that? Forex brokers dangle “free money” to entice new traders into opening accounts.
Be aware that taking the broker’s money can result in multiple problems. If you are going to trade, just deposit your own money and trade. Don’t fall for these gimmicks, here’s why.
The One Advantage of a Deposit Bonus
Before getting into the negatives of accepting a forex broker deposit bonus, there is one positive. Upon opening the account with the required amount of capital, the deposit bonus typically goes into the account immediately. This means you have more capital to trade with.
If you deposit $3,000 and the broker adds $300, you now have $3,300 to start trading with instead of just $3,000. You can calculate your position size based on the larger amount, which means larger profit potential on the trades. There is potential to grow the account quicker because of this.
This can also be a negative though. If you trade bigger because of your larger account balance, and you start losing money, you will lose money quicker.
That Deposit Bonus is Not Yours, Yet
You start off with a larger account by taking a deposit bonus. That seems nice, but that money isn’t yours yet. You still only have $3,000 in your account (using the example above) even though you show a balance of $3,300.
In order to make that bonus yours, you need to earn it. Many brokers require that you trade $10,000 for each $1 of the bonus to become “yours.” If you received a $300 bonus, you’ll need to trade $3 million in transaction value before you’ve earned that bonus and made it your own (300 x 10,000).
Forex Broker Withdrawl Issues
If you take a forex deposit bonus, their money is now mixed with yours. They won’t allow you to withdraw until you have traded enough to make the bonus entirely yours.
Even if you deposited $2000, and got a bonus of $300, if you try to withdraw $500, expect problems. The broker will say you can’t withdraw because that is their money in your account too. You won’t be able to withdraw until the entire bonus has become yours by trading the required amount.
Given the Rules, the Bonus is Meaningless
While you get to trade with a bit more capital by taking a deposit bonus, it really doesn’t mean much in the long run. As indicated, to actually earn that capital you typically need to trade $10,000 or more to make each $1 of the bonus your own (withdrawable).
That is equivalent to one pip of movement in the EURUSD on a mini lot (10,000).
If you day trade, and are using 4 or 5 pip stop losses, getting one pip back from the broker is pretty good. And since position sizes are typically bigger when day trading, that bonus will likely become yours quicker than if you swing trade.
On that note, be careful not to trade just to release the bonus. Some people trade just so that the bonus becomes theirs, and they totally forget that the real money comes from trading well.
The bonus doesn’t mean much to a swing trader. If they are using 30 pip stop losses and striving for 60 pips profits, for example, receiving 1 pip per 10,000 traded is not even noticeable. Because of the larger stop loss, position sizes are smaller which means it will take much longer to make that bonus “yours”.
Calculate How Long Till That Bonus is Yours
Assume you deposit $1,000 and get a bonus of $200.
You now have $1,200. You decide to trade in a risk-managed way and risk 1% of your capital per trade. This means you risk $12 per trade.
As a day trader risking 5 pips per trade, you will be trading a 2.4 mini lot position size (24,000). For each trade, you will have $2.40 released to you. If you take 3 trades per day, that’s $7.20. It will take roughly 28 trading days for the full bonus to be released to you.
If you are a swing trader and your stop loss is 30 pips, your position size will be 0.4 mini lots. $0.40 gets released to you per trade. You will need to make 500 trades in order to earn that bonus. If taking one trade per day, that is about 2 years! That means 2 years where you could face problems with withdrawals.
These are simplified examples since the account value, and thus the position size, will change with each trade.
Deposit Bonuses Favor Large Accounts, Not Small
The bigger the bonus and the smaller the deposited amount, the mored tied you are to that broker, the longer it will take to withdraw, and the longer it will take to make that bonus yours. While bonuses are most likely to lure in small traders, the small traders are the ones that are most likely to be negatively affected.
A trader depositing $20,000 that gets a $500 bonus will likely have fewer problems. This is because the bonus is a small percentage of the account. Also, because of the larger balance, they reach the required trading amount much more quickly to release the bonus to them. Using a 5 pips stop loss, risking 1% per trade (200) and day trading the EURSD, the position size is 4 standard lots (400,000). That one trade releases $40 of the bonus. After 12 or 13 trades the trader has earned their entire bonus and made it their own. That may only take a few days of trading.
For a swing trader, it would take longer, but not nearly as long as a trader with a small account.
Read the legal disclaimers on these bonuses and they become less alluring.
Some say the bonus can be revoked by the broker at any time, so don’t base your strategy/position size to include the bonus capital. The bonus can be revoked resulting in being stopped out on your trades. The broker is not responsible for losses resulting from this action.
Others say that if the volume requirement has not been met to earn the bonus, and if the account drops below the bonus amount, the funds will be removed by the broker immediately. So if you deposit 1,000, get a bonus of 200, and then your account drops below 200 before earning the full bonus, they have the right to take that last 200 away from you.
The wording in the legal disclaimers are all different, but the message is the same. Be careful when accepting a deposit bonus, you face potential complications.
Not Bad, Just Understand What You Are Getting Into
A forex deposit bonus isn’t bad in and of and itself. Many people just don’t understand what they are getting into they take a bonus. If you understand the potential issues, and still want the bonus, by all means take it. Just don’t let it affect your judgment. The real money comes from actually trading well, not the bonus.
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