Understanding bonuses is very important for both the trader and the broker as each side has different goals in mind in this agreement, however bonuses can be beneficial to both.
When I started in Forex with a well-established broker, I learned the concept and power of bonuses. At first, I thought it wasn’t a serious business issuing funds to trader accounts, but my superior, at the time, mentioned that it is real funds and you have to treat it with respect. Traders spend an inordinate amount of time in front of a computer screen trading and many do not succeed – not only is it frustrating, it gives the appearance that the broker has pocketed one’s time and money. However, a bonus can help in calming a trader’s frazzled nerves and it also gives traders a new opportunity to profits, which was not there before.
The problem with bonuses is that brokers have to be careful not to give the impression that they are the Salvation Army or a target for every Robin Hood in the world. In many instances, brokers don’t know their customers, despite repeated claims to the contrary. There is no local round-table to discuss traders as there are several outlets for traders to know about brokers. Brokers are more likely to want to eat alive their competition (whenever I shake a competitor’s hands I check my wallet). Thus, it’s very important to have a robust bonus program while creating an atmosphere and terms that are comfortable to the broker to protect against abuse.
It takes just a single trader to ruin a good offer, so you have to have thick skin in order to handle a strong promotion. From my observations, the main issue brokers have is when a trader profits from the bonus through suspected arbitrage of another broker’s offer. Brokers want to see traders use the bonus and profit from current market conditions, which is what a trader should be focusing on.
This also begs another question: Why are more of the aggressive offers done by mid-size to smaller brokers? This is in direct relationship to trader needs, as they come to realize that larger brokers do not require larger incentives so their offers are not ongoing, and most likely less forthcoming with large cash bonuses as well. The bonus is a way to level the field with larger brokers who have stronger regulation and marketing because if you are not aware, it is expensive to earn a customer’s first investment.
Lately, I have seen two attempts by larger brokers to counteract this trend by offering $25 no deposit bonuses, but have the word bonus placed prominently coupled with 100% bonuses, though are limited to say $500. Any larger sized 100% bonus most likely has terms where the broker (even larger sized brokers) has the right to change the offer due to traders finding a way to exploit the offer.
Keep in mind that most of the bonuses haven’t changed much throughout the years, but it is confusing for the traders since there are so many options therefore I have written a simple way to understand them.
There are three questions a trader must ask as to why you want a bonus: 1) Leverage 2) Use as equity 3) What does the broker want in return?
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Brokers must ask themselves three questions as well: 1) What type of clients do they want? 2) Is this for marketing purposes or to help the trader? 3) What is the time frame and expected monthly payout with this offer?
No Deposit Bonus: The easiest offer to create and generate traffic, but also the quickest way to lose money and generate negative reviews on the Internet and forums. The larger brokers have found a nice niche offering $25 to $50 for registering an account. You normally can withdraw profits, but must trade a certain amount of volume before claiming the bonus. The offer can be abused since it has most likely been offered by another broker as well, so you can do the opposite and make out. This offer, from my observation, is becoming more restrictive through targeting certain countries or other methods.
Redeemable Bonuses: This is by far the superior offer for a trader since he or she can claim profits from trading and an additional bonus when a specified trading volume has been met. Normally, this is a welcome bonus and issued one time upon your first investment. Upon your first withdrawal, the bonus is cancelled. However, if you continue depositing, the volume will most likely occur and you’ll be issued your bonus.
Some brokers issue the redeemable bonus upon depositing, but you can only claim it upon a certain amount of trading volume – it’s normally larger than a rebate.
Non-Redeemable Bonuses: Many traders, especially in Asia, want maximum leverage and buying power. Besides 500:1 leverage, bonuses are issued that are usually 100% or above but not redeemable. In most instances, it serves the purpose to increase purchasing power. Upon profit taking, the bonus is cancelled, or proportionally deducted from the account. What this means, is that if you are issued a $3,000 bonus and withdraw $1,500, then $1,500 is removed from your bonus. Normally, a broker allows this once or twice before cancelling the bonus.
Technology Bonus: Instead of a cash bonus placed into your trading account, you are issued a physical item like an iPad or Apple Watch. Remember what I said earlier about how brokers treat bonuses as real cash? With this offer, it’s demonstrable proof that brokers will invest in their traders but will require trading volume before allowing withdrawal – it’s a relationship after all.
Guaranteed Stop-Loss: Markets gap and move around, most traders do not realize this and feel, for the most part, it’s the broker moving the market. It simply is too big a market for that to occur. Rather, to help keep trader complaints down and market this feature now, many brokers offer this feature that comes in handy during economic events.
Fixed Spreads: Following up on my comments above, anytime you see pricing that does not fluctuate is a bonus of sorts as the broker is guaranteeing a price that does not exist in the interbank market. Even with fixed spreads, there is no guarantee that during economic events your execution will be filled, but possibly be re-quoted so you need to test this.
Every broker and every offer has its pros and cons, to judge the merits of an offer, besides the reputation of a broker, is to see the length of time it has been offered and if the terms and conditions are clear.