Forex deposit bonuses are common ways to entice people into trading.
But are they worth it?
The title already gives you an idea of where we stand on this. But, hey, let’s dive deeper and see if forex deposit bonuses are as good as they sound.
Conflict of interest
Most traders know that retail forex brokers take the other side of their clients’ trades.
They sell to you if you buy, and vice versa. It’s called market making, and there is nothing wrong with it. Market making creates liquidity, which makes it possible to easily enter and exit trades.
The issue with market making is that it may create conflict of interest.
Conflicts of interest are present in many areas of life and do not automatically invite foul play. Having said that, it is a good idea to investigate deposit bonuses in light of them.
As with any type of promotion, you will want to think about what is in it for the party giving you the promotion.
Why is it good for the broker to give you a deposit bonus?
The answer is fairly simple.
It can lead to a gambling mindset and encourage you to take high risks.
The broker may hedge its trades, so they won’t necessarily profit from your losses directly, but the larger your trades, the more commission revenue they make. So there is a clear incentive to let you increase your trade volume through the bonus.
Now, don’t get us wrong here. Just because a broker offers you a deposit bonus does not automatically mean that broker wants to steal your money.
Simply put, way too many customers fall victim to deceptive advertisements and misleading terms.
To illustrate this, we’ll show you an example in the following section.
How brokers trick you into losing your money
Let’s assume you register an account and shortly after (or immediately upon registration), you receive an offer such as “Deposit at least $1000 and get 50% in free trade credit.”
The advertisements for these offers are usually designed to make you believe that the broker is essentially giving you free money so that you can lose a few trades while keeping your original deposit untouched.
Needless to say, this is not the case.
To understand why, you must first understand the difference between balance and equity.
(Most new traders don’t, which is exactly what the broker hopes for.)
Your balance is the value of your trading account after all closed trades. Your equity is the value of your account plus any floating profits or losses.
You can withdraw your balance if you wish. You can’t withdraw the equity, but you can use it as collateral for opening trades.
To illustrate further, suppose you open a trading account with a $1000 deposit and have no bonuses or open trades. In this case, both the balance and the equity are $1,000.
If you open a trade and it is in profit by $100, your balance remains $1000, but your equity has increased to $1100. If you close your current position, the $100 profit will be added to your balance. If there is a loss, the amount will be deducted from the balance.
Now the reason this is important is because deposit bonuses are credited as equity.
In other words, all they do is artificially inflate the value of your trading account. If you have a losing trade, it is charged directly to your balance, not to the bonus.
Below is a real-life example of this using the experience of a friend of ours.
He makes a £2000 deposit into the account, and the broker adds another £1000 in trade credit. He then proceeds to open a large trade, believing that he is only risking the trade credit he has just received.
After a few days, the trade goes against him and he ends up having a loss of £889.42.
In the below picture you can see that his balance fell by the same amount to £1076.51 (there was also a swap charge of -£34.07).
You can also see that even after the loss, his equity remained exactly £1000 higher than the account. This is because it was the balance that absorbed the loss while the trade credit remained intact.
Now, just to be clear, there is nothing wrong with this from a legal standpoint. This is how it works, and if you are experienced enough, you can figure this out from the terms.
But considering that these bonuses are directed toward new clients, it is easy to see why they are misleading and not doing much besides allowing people to take high risks without necessarily realizing it.
In any case, there is little justification to taking larger position sizes than what your deposit can normally support. It is not a sustainable way to profit from trading, and the broker is only serving their own interests by allowing you to do so.
What if you want to gamble?
There can be situations when you just want to take on a huge bet.
Maybe you found the opportunity of your lifetime or want to save your company from bankruptcy. Whatever the reason, you want to maximize your position size.
Does it make sense to use a deposit bonus in this case?
Well, it seems absolutely reasonable to do so. After all, you are not concerned about how sustainable it is in the long term. All you need is some extra collateral for a larger trade and a bonus gives you that.
That said, you should be really cautious even in this case.
A lot of brokers have clauses in their terms similar to this below:
Let’s say you win $100,000 but the broker says you “abused the promotion” and won’t pay you out.
What are you going to do?
Even if you go to court, it is very difficult to fight such a generic statement, especially if you only made one giant trade, which is clearly not the typical trading pattern of most people.
Conclusion
There are many forex brokers out there with many different types of promotions. Obviously, we don’t know all of them, let alone their terms and conditions.
What we tried to do here is tell you why deposit bonuses might not be as good as they seem to be.
We hope that this will help you save some money or just make you more cautious with these bonuses in the future.