There’s a famous experiment, that has been repeated many times in slightly differing formats, that involves someone trying to give free money to random strangers.
Sometimes they offer them the notes and try to convince them that there is no catch. Sometimes they just leave the money in clear view with a sign saying it is free.
The outcomes of these experiments are always the same. The vast majority of people do not take the money.
Usually they try to ignore whoever is conducting the experiment – as you might expect if someone was asking them for money.
If someone is actually engaged they usually need a lot of convincing before they take any money. The vast majority of people refuse to take the money.
If the money is just left unattended but with clear instructions to passers-by then the numbers who take money are even lower. You can see examples of this by clicking here or here and there are many more on the internet.
The Importance of Trust
What is going on? Are people really that dumb?
The problem appears to be a matter of trust, or the lack of it. People expect a catch. They just don’t trust someone that tries to give them free money.
So, if a financial broker said they wanted to give you free money, provided you agreed to give them some money first, it would hardly entice someone to deal with them, would it?
Wrong. Free money, usually described as bonuses, is commonly used by Binary Options brokers to entice new clients to open accounts and lodge funds. They do this because it works.
And it works even though there are important conditions, catches if you like, attached to the bonuses. This appears to be in direct contradiction to the results of the experiments.
What is going on here?
These are various possible explanations for these very different outcomes. One may be that people that engage in trading binary Options are more likely to trust, more gullible than the general public. So they are the ones who would take the free money in the street.
Perhaps, it’s a possibility, but I’ve never seen any evidence to support that in any way and I would need a lot of convincing.
Perhaps it is that when a person decides to trade Binary Options they need a broker and when deciding between the various options they see the bonus, the free money, as just an added benefit of dealing with a particular broker.
Possibly, but this still leaves us with a contradiction as they should still view this ‘incentive’ with suspicion to reflect the lack of trust in the free money experiments. The offer should still backfire on the broker because you’ve got to trust your broker.
A third way to explain it may be to assume that people who trade Binary Options are actually pretty much the same as everyone else. So, they still expect a catch when offered free money.
If they don’t find the catch, they will likely become even less trusting and refuse the free money. This is in keeping with the results of the free money experiments that when people had the opportunity to engage and discuss the situation they could then be convinced.
But what about when there is a catch, let’s call it a condition, and it is made obvious? A person would then think they understood what is happening and the need for trust, and its importance as a deciding factor, would be replaced by a more logic-based calculation of the benefit of the free money.
This is what the brokers are doing when they offer a bonus. They are saying ‘I’ll give you free money, but there are some conditions. Here they are, they don’t really amount to a very much at all. We just want your business’.
The trader can then assess these conditions against the free bonus money and decide it’s a fair trade-off or not.
Now it seems a bit of a no-brainer – take the money.
The Conditions for Getting a Bonus
Usually two conditions are emphasized – the need to open an account and to fund it. These can’t be missed by a trader.
But there is always a third condition that seems to be a lot less obvious. If a trader accepts a bonus then there is usually a restriction placed on the trader’s ability to withdraw the funds until they have engaged in a certain amount of trading.
This seems fair and not too onerous. After all, without this condition you could just open an account, put in some funds, get the bonus and then withdraw all.
And a trader opening an account is going to trade the funds anyway, so they are just being asked to do what they intended to do before receiving the bonus.
This in Not as it Seems
But therein lies the catch that is not understood. It is not unusual for the broker to require that the trader will engage in trades of perhaps 10 to 20 times the value of the bonus before they can withdraw any funds.
So let’s say you open an account with €1,000 and get a 100% bonus with a restriction that you must trade 10 times this before you can withdraw. This would be a pretty generous looking offer from a very competitive broker.
You now have €2,000 in your account to trade with. It’s your money, there’s no argument about that, you just can’t withdraw it for the moment.
But look what the trading condition means. You will need to place trades with risk totaling €10,000 before you can withdraw any money.
Brokers typically recommend that you risk about 5% of your funds on any trade. I think this is far too high, but that’s a separate point.
On each trade you will risk €100, that’s 5% of the €2,000 in your account. So you will need to place 100 trades to meet the restriction.
Now do the Calculations
You begin to trade with a stake of €100 on each option. Let’s say you take a put on the Euro against the US$ and there is a payout ratio of 80% and you keep trading this market.
The point to remember is that as a new trader you have only a 50% chance of winning. You don’t have a proven methodology so don’t fool yourself or let anyone else fool you that your odds of winning are any better than this.
This means that on any two random trades you expect to win one and lose one. You are down €20. After 20 trades you are down €200 and you are a bit disappointed.
But what can you do? You can’t withdraw the remaining €1,800 in your account, or even the remaining €800 of your initial funding. You are not going to walk away, so you keep trying.
Let’s assume you keep doing this for 100 trades. Your account is now worth €1,000. You’ve lost all the bonus. You have met the criteria for withdrawal, but you are left with only the funds you initially deposited.
This example is actually rather generous to brokers. Most will offer less than a 100% bonus and most will require that more than 10 times the bonus is traded before you can withdraw anything.
So you won’t be able to withdraw anything until you have lost all the bonus and much of your starting funds.
If you have turned your trading over to an ‘expert’ recommended by the broker then this is what will happen. Most people will be a bit smarter of course and won’t just keep doing the same thing.
They may reduce the amount per trade so as not to lose as much on any particular trade. But this just prolongs the process as you still have to risk €10,000 and you still have a 50% win rate.
Most traders will try to improve their chances of winning. Many will be successful, but you will need to get up to close to 60% wins to make back any losses. Few will achieve this.
As a result, while I’m not saying that all traders will trade their account down to zero, most will lose back the bonus pretty quickly and will also lose some of their initial funds.
But even then most will not have met the withdrawal criteria and so cannot stop trading and withdraw funds. Guess who is the real winner here?
What to Do Now?
It’s not much use complaining to some internet forum then about scam brokers because they let you know in advance all about the restrictions. Sometimes the print is a little small, but it’s your responsibility to read the conditions.
So, what should you do. It’s very simple. Refuse to take a bonus, or anything that places a restriction on your ability to withdraw funds.
Then realize that you need to have a methodology to ensure that you have a win rate that is at least in region of 60%. Otherwise you will not make profits with Binary Options no matter what incentive your broker is offering.
If you are at all unclear about why this is so then I recommend that you download and read the free Introductory Guide to Trading Binary Options.
No Free Money
The results of the free money experiments seem counter intuitive at first, but are actually readily explained. Trust, or lack of it, is very important and is the deciding factor.
But, be aware that trust can be replaced by information and calculation as the deciding factor. The problem is you may not be making the correct calculation.
Indeed, if you are relatively new to Binary Options then you almost certainly won’t be making the correct calculation. So do not accept a bonus.
Now, what should you say the next time a broker offers you free money? No thanks!
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