One isn’t hard-pressed nowadays to find well-marketed campaigns about welcome or credit bonuses from recognized brokers; ‘deposit $500, and we’ll match it’ or ‘$1000 startup no deposit bonus.’
For the most part, there is no harmful intention with these promotions since these brands will often deliver on what they promised. However, a deep dive into such offerings almost always shows they do not provide clients with an edge and can actually be detrimental to their trading for several reasons.
The main problem with most welcome or credit bonuses
With numerous brokers, promotions are typically given to new clients who sign up for their services (often referred to as welcome bonuses; credit bonuses for existing traders).
A typical model with welcome or credit promotions is when the broker promises to double a trader’s deposit, seemingly giving them larger equity. For example, if one deposits $500, the broker matches this with the same amount, culminating in a $1,000 total.
On the surface, it seems as though the trader has a greater account size while only having committed half the equity. Though in nearly all cases, the extra money is not actually real (even when the trading platform can show $2,000), but rather leverage increase.
Let’s look at an example to illustrate this point.
Example 1
Let’s imagine a trader usually risks 2% per trade. With $1,000, this equates to $20. If they choose a credit bonus that effectively doubles this amount, their equity is now $2,000, but with a catch.
The natural inclination would now be to risk $40 per position as this still represents 2% of the overall equity ($40 is 2% of $2,000). However, the main problem is that if the trader loses this amount, it is deductible from their original $1,000 and not the supposed $2,000.
So, in this circumstance, the trader is now really down 4% instead of 2% by taking more risk than they intended. If they are not aware their balance is not technically $2,000, they may execute with bigger positions on the belief they have a bigger equity.
In some cases, such a bonus can increase the chance of an account blow-up if the trader has no knowledge of its structure. The ‘extra money’ is just a leverage increase they could easily receive on their own if they wished without any strings attached.
Example 2
The second example is generally a no deposit bonus, illustrating how this is nearly never free money. In this scenario, a trader may need to deposit funds equal to any profits. Broker ABC offers a $500 no deposit bonus and represents this as ‘free trading funds.’ There would be a few Ts & Cs that make the whole experience unfavorable.
One common demand is the trader only has seven days (or another short period) to make any profit before losing the bonus. Let’s assume a trader makes $1,000 from the promotion.
Typically, a requirement is to deposit the equivalent from their own pocket before being allowed to withdraw the profits.
The other strings attached with trading bonuses
These also offer present other uncomplimentary terms and conditions to traders.
Unrealistic volume requirements
Referring back to Example 1 of the $2,000 balance, let’s assume the trader can gain $400 on a position and wishes to withdraw this amount.
In other cases, brokers will stipulate an unjustifiable volume requirement before a trader can withdraw the profits. One standard calculation is taking the resulting bonus amount and dividing it by 2.
So, in the instance above, the broker may state one needs to trade 1,000 standard lots (2,000 divided by 2) to withdraw any profits from the bonus.
Such lot sizes here are almost always unrealistic and not feasible on accounts worth less than $10,000. Although this can vary widely, it’s not uncommon to see this condition with these offers.
Not many traders can afford to trade such large positions in any capacity. While with some serious dedication, a trader can reach these targets, this defeats the purpose of a bonus in the first place.
Overall, regardless of the circumstance, these volume requirements are impossible (more so in a brief period) without taking a significant risk.
Bonus removal
Another reason why bonuses are problematic is whenever a trader decides to withdraw from their real funds; there is usually a proportion of the bonus that is subsequently removed.
Referring to the previous illustration, if one withdrew $200 from their $1,000 investment, $200 would also be taken away from the credit.
Final word
Whether a trader is funding a live account or is switching to a new broker, it’s the wiser option to invest what one can realistically afford without any form of bonus applied. In this scenario, the trader has no unrealistic requirements to meet within a certain time-frame.
It also makes it simple from an accounting perspective because your equity represents the real funds in a trading account. In many cases, when a trader has chosen a bonus, their account reflects an additional metric that can be confusing when positions are open.
Ultimately, many of these offers are merely just an increase in leverage, which is something a trader can usually do individually without any rigmarole. It is better to trade a small account without any attachment, even if it means the growth will be slower.
In the end, none of these promotions truly provide traders with an edge or free money to trade with.
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