The forex market is one of the most exciting places to invest in. However, not everyone who fancies their chances makes money from trading currencies. In fact a large majority, some analysts put the figure at about 76%, lose money while a big chunk of that percentage burns their accounts within months.
As such, forex brokers have introduced incentives to try to encourage traders to join the market in light of a growing list of account closures. Some of these incentives include opening deposit bonuses, trading bonuses, as well as, forex rebates among others. Forex rebates have gained popularity over the last few years due to the way they are structured.
So, what is a forex rebate?
A forex rebate is a fractional deduction from an amount to be paid or a return for a payment made in a forex transaction. Normally, payments of this nature are made as part of the currency exchange rate spread offered by the broker. The spread is the difference between the Bid and Ask rates in a forex quotation.
Non-ECN/STP brokers popularly known as market makers offer trading spreads at a higher rate than what you would find from brokers offering floating spreads sourced directly from liquidity providers. The small increment in the spread is what market makers use to cover their costs and generate profits.
So, if for instance, ECN/STP brokers offer the EUR/USD currency pair with spreads beginning at 0.5 pips, market makers could set their spreads to start at a fixed rate of 1.5 pips. This means that 1 pip is used to cover their costs and generate profits.
Now, if that broker happens to have a rebate program, they might offer traders who enroll in the program rebates of say 20% of their cut in the spread. This would imply that traders receive a rebate of 0.2 pips for every trade closed. This can be an exciting way to earn some income while you trade, but there are also some notable pitfalls.
Advantages of forex rebates
- Forex rebates can be beneficial to beginner traders because as they learn to trade, they can continue to make money from their trades regardless of whether they are profitable or not.
- Forex rebates reward traders for what they do. This means that after signing up for the rebates program there is nothing additional required of them to qualify for rebates.
- Forex rebates also provide traders with an opportunity to earn more from their referred traders. Ideally, if you refer a new trader to sign up with the broker, you can begin earning more rebates from their trades once they begin to trade using a real account.
- It is free to join a forex rebate program. Traders are not required to make any payment to join the program. Furthermore, they can also join the program at any time even after trading for a while with the broker.
- Rebates can also make you a more profitable trader. This goal is achieved by earning more from your winning trades and losing less from your losing trades. For every trade that you lose, you can expect some amount reduced from the total loss in the form of a rebate. This amount is directly credited to your account balance. When your trade closes profitably, you can expect more profits since the rebate is basically added to your profits.
Also Read: Top 3 Best Forex Rebates Program 2020
Disadvantages of forex rebates
- Forex rebates do not always result in more profits and lower trading costs. Since brokers with forex rebate programs plan in advance to offer such discounts to their traders, some of them increase the size of the spreads to cover the extra cost. Generally, this is increased across the board, which means even those not signed up to the program trade under the same circumstances. As such, trade experts tend to advise beginner traders to avoid rebate brokers because spreads are likely to be higher than the industry average.
- Trading via a rebate program can make traders lose focus and become reckless. Since they expect a significant reduction in the losses incurred from losing trades and a bump in profits on winning trades, it is easy for such traders to be less careful with their trading strategies.
- Forex rebates can be abused by some brokers and forex marketing websites. One of the biggest drawbacks of rebate sites is the high number of scam programs. Some malicious internet users target unsuspecting traders with fake forex rebate offers. Upon opening a live account with the broker, they end up losing all their account money.
- Forex rebates can make traders trade for the wrong reasons. Because there are rebates on offer, it is very easy for greedy traders to increase the trading volume just so that they can earn more rebates. The downside to this move is that before they know it, they won’t have any money to trade. This can extend to the money they never intended to deposit in their forex trading account leading to a total collapse of money management.
In summary, forex rebates can be useful marketing tools for the broker. A lot of traders will jump in the bandwagon without considering the potential pitfalls of joining a forex rebate program. As such, it is important to do proper research about forex rebates before signing up for a program, just to be sure that that’s what you want to do.
On the flip side, forex rebate programs present a good business opportunity for forex trading marketers and educators. However, this area of the market has also been dirtied by unscrupulous users who have one thing in mind, to scam unsuspecting forex traders.
The bottom line is that if you want to gain from forex rebates, then don’t use your trading account. Instead, use your referral account and brokerage platforms that you have no trading account with. This can be the difference between you being part of the 76% who lose money and potentially burn their accounts within months and the elite 24% who remain profitable for the long-term.