You have probably heard that many brokers offer a deposit bonus.
And you may be wondering what advantages brokers get from giving these bonuses?
Well, they do it for various reasons including for example to:
locate more traders – who can then check-out their trading platforms and trade with them
increase their current customers’ trading volumes
replaces buying costly advertising space to reach new or existing customers.
However, brokers also offer deposits to traders as a method of improving the odds of their Forex traders’ success:
…the longer a trader is active…
…the more commission a broker can earn.
Aiming for win-win
Mathematically speaking, the more capital a trader has:
the bigger the lot size of the trades will be; and
the larger the lots, the more commission can be made.
This is called a win-win situation because it helps both the broker and trader.
Simply put, brokers have a vested interest in a trader’s success.
In fact, the deposit bonus offer can generally be viewed as a fair marketing offer or sponsorship.
After all, it would not be in a broker’s best interest to squander such a useful and strategic offer by not playing fair.
Well yes. By accepting the deposit bonus offer, you are accepting a kind of marketing offer – much like a celebrity getting a sponsorship.
Do a reality check
So before I get into the strategy specifics, it’s important to note that I mentioned these bonus offers are generally fair i.e. not always.
It is therefore always important to check the history of the broker offering the deposit bonus and whether they are licensed to operate in the markets.
Choosing a regulated broker ensures your deposit money is safe and that the broker will play fair.
After all, not playing fair raises alarms for the regulator and no broker wants that.
See my previous blog for more info on how to know your broker.
Now let’s look at the higher risk vs. higher reward trading strategy.
The first steps
Before you start thinking about trading a deposit bonus, you should make a trading plan.
Our Trading: Battle Plan e-book can help you here:
… by defining strategies, risk and goals…
…that help you avoid disaster when trading with a higher amount of risk.
Once you have made your plan, you need to make a compounding spreadsheet that will set your daily trading goals.
I suggest using my account projection sheet for this purpose.
Consider risk vs. reward
Rigid risk reward (RR) rules are not perfectly compatible with certain trading styles, especially if you opt for a higher risk to reward strategy.
For example, systems that use dynamic support/resistance levels for entry/exit (such as MAs, trendlines etc.) can suffer if you try to apply strict RR rules and rigid entry/exit points.
Also, if you scale into and out of positions, or you trail stops – your R:R calculations become more complicated (but not unmanageable).
For this reason, we need to use an expectancy calculation.
Calculate what you expect
The R:R must be coupled with the win/loss probability of your own strategy.
When those two factors are joined, you get the expectancy result for your strategy.
Namely, expectancy = (average win ratio x average profit) – (average loss ratio x average loss).
if your strategy produces 70% winners and 30% losers; and
your risk/reward is 1:2; then
your expectancy result = (0.7 x 2) – (0.3 x 1) = 1.4 – 0.3 = +1.1
When you are having a positive expectancy it means the respected strategy will make money over the long run.
But, a negative expectancy means that this strategy will lose money over the long run.
Generally speaking, a trading strategy is considered good if it has a positive expectancy above +0.5.
Keep in mind that getting a statistically reliable expectancy value can be tricky.
Your system needs to be tested over a large sample of trades for it to be valid.
And the expectancy value works best for more automated scalping systems and short timeframes.
So that’s the higher risk vs. higher reward strategy, which you can use to trade with a deposit bonus.
Pretty simple right?
But if you have any questions, please don’t hesitate to ask.
Cheers and safe trading,