Joining bonus offer – good or bad?

I see a lot of adverts from Forex brokers and Spread Betting companies offering joining bonus for new clients, some pretty generous as a percentage of the initial deposit. Some offer a fixed amount like £100 when you open an account, deposit a certain minimum amount and take a few round trip trades. Others offer ‘refer a friend’ schemes giving away bonus to the new client as well as the introducing friend again tied to initial deposit and number of round-trip trades.

One that caught my attention recently was an offer of 65% of initial deposit as bonus (up to a maximum of £20,000) – quite a handsome amount, especially when very few traders can claim earning that sort of return in a full year of trading.

So what is the catch, why do brokers offer these bonuses and how does a new trader decide whether to take one or not.

Here is my two pence for all those new traders considering such an offer.

First and foremost, when you are about to open an account do research on competing brokers. Look at the various aspects such as where they are based, whether they are regulated by FCA (financial conduct authority in UK) or a similar authority in the country of their operation. Ask yourself, is your money safe with this company and country

The second aspect you should examine is the cost of trading i.e. commissions and/ or spreads. It is often ignored because on the face of it the spread difference of 1 or 2 pips on any given product doesn’t feel too much, but you must look at this in percentage terms.  Company A offering 2 pips on say EUR-USD is 100% more expensive than a company B offering 1 pip to trade this pair.

The third and most important aspect, particularly relevant to bonus, is the conditions tied to the offer. Invariably you will be required to take certain amount of trades in a fixed time. This is how the company making such generous bonus offer plans to earn it back via spread costs. The question to ask yourself is whether you will be able to make those trades in the specified period with your style of trading and risk profile? Or you will be compelled into taking trades just to fulfil the criteria and take suboptimal or random trades? This can lead to excessive trading and developing bad trading habits.

Just to illustrate this point using an example, let me pick on this bonus offer of 65% of the initial deposit I came across recently. Let us suppose you have a risk capital of £10,000 and use this as initial deposit to the account. You get 65% of this amount as bonus giving you a total of £16,500 in tradable amount. In order to ‘earn’ this bonus however you must take trades equal to 3 times the bonus amount in single pip spread costs i.e. equivalent of a £19,500 per pip trade or 100 trades of £195 per pip.  You have 60 trading days to complete this, which means on an average more than one trade of £195 per pip trade per day. Do you see the risk involved with such trading size – a 30 pip stop loss would mean £5850 loss on single trade that is 58.5% of your risk capital!  I think focussing on retaining the bonus can lead you to seriously bad trading practices of taking excessive risk and overtrading.

To be fair to these companies, they make a full disclosure of conditions, and hence the responsibility lies with the trader opting to take those offers. Experienced traders can see through these but often new traders and those after quick easy money from markets fall into the trap. Remember there is no easy money to be made in the markets. Only disciplined traders who have an edge and continuously learn and evolve with the markets can make consistent success.

My word of caution to new retail traders – beware of these bonus offers, examine the condition well or else you will feel sorry after losing both the bonus offered and your deposit.

Trading the financial markets (Stocks, Forex, Futures, Spreadbetting etc) has risks associated with it. Whilst it can be extremely rewarding, it can also result in losses, which if not managed properly can exceed your initial investments. Before embarking on trading, please ensure you understand the risks involved.