Is it dangerous to trade with debt? | Forex Factory

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Is it dangerous to trade with debt?

  • #1
  • First Post: Feb 2, 2009 1:55am Feb 2, 2009 1:55am
Hi all,

Just want to start a topic, is it dangerous to trade with debt? Is it dangerous to take a personal loan out since loan rates are so low and trade?
Can the human pschology handle this money? Personally i think its too difficult but i would like to hear other's thoughts.

I want to convinve people and friends whether borrowing to invest is correct?

Winlots
  • #2
  • Feb 2, 2009 2:11am Feb 2, 2009 2:11am
And uhm, what if that money is lost? Then what?

If they can survive w/o it, and understand that risk, then ok. If it's going to put a strain on their finances tho to pay it all back if it's lost... don't do it.

If you can't afford to lose, don't play.
  • #3
  • Feb 2, 2009 2:15am Feb 2, 2009 2:15am
I tried explaining this to a young guy who seems to have no mind of about his life. All his thoughts was with money i can trade.

However, i think he has become addicted than anything
  • #4
  • Feb 2, 2009 2:42am Feb 2, 2009 2:42am
Quoting winlots
Hi all,

Just want to start a topic, is it dangerous to trade with debt? Is it dangerous to take a personal loan out since loan rates are so low and trade?
Can the human pschology handle this money? Personally i think its too difficult but i would like to hear other's thoughts.

I want to convinve people and friends whether borrowing to invest is correct?

Winlots
Yes, it is dangerous. The fact that you are asking this question means deep down you know the answer!
If it's too good to be true, it probably is.
  • #5
  • Feb 2, 2009 3:44am Feb 2, 2009 3:44am
well yeah,

if u r borrowing money , means u ve no money to trade in the first place ...
which shows either
1.u r not a good trader (well good trader has money , a lot , always)
2.u r beginning ur trading career with no money, y borrow if u r just still a beginner and 100% sure will lose it ...
To Live is the rarest thing in the world , Most people exist , that is all
  • #6
  • Feb 2, 2009 4:33am Feb 2, 2009 4:33am
I wud say if you have proven to be profitable on demo for at least a few months and feel confortable, then save up a couple of hundred pounds/dollars/euro whatever. Unless your system requires you to have such a large account to begin with. Then use small lots and gradually build from there.

On the other hand a small loan wuldnt be out of the question. Its somthing you wud need to think about yourself, weigh up the pro's and con's of doing it. Dont go by what other ppl say, its ur life and money.

My advice wud be tho if u can afford the monthly re-payments for an amount you want without earning it through trading, then instead of borrowing, just put some money aside and save, that way you dont pay interest and all your money goes into your trading, which you will need.

Ok it will take longer, but it wud be the less costly way to do it, and you give yourself more time to develope good trading habits etc.

lol maheswara! by your reasoning know one wud ever become a gd trader. Things just arnt as black and white as that.
  • #7
  • Feb 2, 2009 7:08am Feb 2, 2009 7:08am
Quoting fry2010
My advice wud be tho if u can afford the monthly re-payments for an amount you want without earning it through trading, then instead of borrowing, just put some money aside and save, that way you dont pay interest and all your money goes into your trading, which you will need.
I would have to second this motion. Learning to trade takes time and is extremely time consuming along the way. Then developing a method of trading that matches your personality takes even more time. Along with this I would hope you or your friend learn that trading is a three legged stool.

There is method to trading and that's what everyone concentrates on but that cannot support you...you have to also have a trader's mind set and good risk management skills. Borrowing to trade is NOT a good risk management skill, in fact it may be a sign of a gamling addiction.

Have your friend learn about trading and also learn about risk management and trading psychology. This will take a bit of time to do correctly. Along the way he can put his "latte" money in a jar and have several thousand ready for trading when he/she is ready. This will keep initial risk small while also allowing for the opportunity to build.

Sounds to me like you've received this information pretty much everyway it can be stated...hope your friend listens.
  • #8
  • Feb 2, 2009 7:46am Feb 2, 2009 7:46am
Quoting winlots
Hi all,

Just want to start a topic, is it dangerous to trade with debt? Is it dangerous to take a personal loan out since loan rates are so low and trade?
Can the human pschology handle this money? Personally i think its too difficult but i would like to hear other's thoughts.

I want to convinve people and friends whether borrowing to invest is correct?

Winlots
Depends on your bankkruptcy laws and if you have no property or whatsoever.
If you can borrow a substantial sum, what is the risk.
Bankrupt ? After how many years are you no more bound to your debt in your country?
Look at all those firms who had borrowed and went bankrupt? It's just business?

Make sure you borrow from an Islamic country - Seems charging interest is illegal - so as the money depreciates, you can always pay back and be free of debt again.

Listen, it's not serious !!
LOL
  • #9
  • Feb 2, 2009 8:30am Feb 2, 2009 8:30am
Well if you do it at a large enough level you can then ask the government to help bail you out which in turns means we the tax payers will off set you losses.. so go for it ... privatizing profit and nationalizing losses is now an american way best of luck and keep us posted
btw one of the reasons credit card company stopped all transaction with on line gambling sights is because of a californai court decision several years back where a women took out > 100k in cash against her credit card to partake in onlien casino gaming ... loss her 100k then sued the credit card companies and won for allowing her to make up her own mind as a 31 yo sane mind women ... you have to love it


Quoting winlots
Hi all,

Just want to start a topic, is it dangerous to trade with debt? Is it dangerous to take a personal loan out since loan rates are so low and trade?
Can the human pschology handle this money? Personally i think its too difficult but i would like to hear other's thoughts.

I want to convinve people and friends whether borrowing to invest is correct?

Winlots
  • #10
  • Edited 2:26pm Feb 2, 2009 8:31am | Edited 2:26pm
So your friends are not good enough traders to trade a 25 dollar account up to the money they need so they think that if they borrow 10,000 dollars they can make it a million? Suddenly borrowing money makes them a great trader and gives them the skills they have not devoloped???

Yet their first trade is borrowing money?? Which is a trade with a instant sure loss??

By the way my understanding is that 95 percent of all business that go bankrupt do so do to debt, and 95% of business that succeed have another cash flow source to keep them going.
  • #11
  • Feb 2, 2009 12:10pm Feb 2, 2009 12:10pm
I definitely wouldn't trade with debt, my 2 cents
  • #12
  • Feb 2, 2009 7:01pm Feb 2, 2009 7:01pm
Quoting winlots
I tried explaining this to a young guy who seems to have no mind of about his life. All his thoughts was with money i can trade.

However, i think he has become addicted than anything
Ask him this:

"Would you sign a loan agreement on a double or nothing auto loan? Like if you found a car for 20k and your loan was approved, but with a contingency. You may get a bigger and better car for your 20k, or you may get no car at all. Either way, the 20k must be repaid. And by the way, the odds are stacked a little against you. We only have one car--but it's worth more than 20k. And there's 19 other people entering the agreement. There will be 19 people getting nothing and one person getting a very nice car."

I guess it would be okay to take the deal if you were okay with the likelihood of having to walk to the bank to make your car payment each month. Or if you were in such good financial shape that losing wouldn't matter--in which case you'd be sharp enough to dismiss the deal.

The leverage we're offered already provides plenty of opportunity for reckless trading. Compounding 200:1 or 400:1 leverage by funding with borrowed money is gliding very close to the ground.

I'm assuming that the borrower has intentions of repaying the loan even if the trading endeavor fails. If that's not the case, you're talking about a different game entirely.
  • #13
  • Feb 2, 2009 7:23pm Feb 2, 2009 7:23pm
Not dangerous at all...but there's a catch.

If the person has less than 5 years experience trading and doesn't have any track record, it's suicide. Put the cash on a roll of TP or make a bonfire because that's where it will end up anyways.

But if the person has a successful track record for several years, it *may* make sense. And by track record, I don't mean some 20 year old who just so happened to have good trades for a couple months. I'm talking years.

And even at that, there's a risk. Perhaps too great a risk to make it worthwhile.
Not all sins are created equal
  • #14
  • Feb 2, 2009 7:45pm Feb 2, 2009 7:45pm
I would look at it like this even though my view might be flawed.

If you start with 5k and build it slowly to 25 k after several years, the net worth of your account is now 25k. If you borrow 25 more, even though your balance is 50k, your account's net worth is really only 25k still. Assets minus liabilities.
Now you probably are going to increase your position size in proportion to your new account balance (50k), but your account, in reality is only worth 25k. So in the end, you are really only increasing your leverage. That is if you have intentions of paying off the loan, win or lose.
The borrowed money can jumpstart your account, but a poor spell combined with the larger position size will quickly eat into your actual 25k account net worth.
This increased position size supported by borrowed money is where the danger lies. If you can pay back the loan, win or lose, without altering your lifestyle or causing hardship it may be alright.

Like Jay says, if you have a proven track record it makes a little more sense. I'd also say it would work better for a conservative trader whose methods don't involve large drawdowns. The higher the risk appetite, the more likely borrowed money will bring about disaster.
  • #15
  • Feb 2, 2009 8:49pm Feb 2, 2009 8:49pm
not enough leverage apparently!. No different than the housing market or your 401k right now. !
  • #16
  • Feb 3, 2009 10:01am Feb 3, 2009 10:01am
hmm track records means nothing

ask japanese fund managers back in 1990

it also depends on which currency you are borrowing

my experience is back in 1998 in Indonesia, most were borrowing USD to invest in Indonesian rupiah (earning about 8% interest difference) so it was kind of a low risk investment compared to forex trading
suddenly we have the big devaluation and the $1 M debt suddenly turned into gigantic $4 M

it was a disaster

some friends were even losing assets to the banks

OK now judge yourself, if they were to use the money for forex trading, I bet they would fell faster.
  • #17
  • Feb 3, 2009 7:12pm Feb 3, 2009 7:12pm
Quoting Gift_Art
hmm track records means nothing
So if you could create a baseball team with Babe Ruth, Hank Aaron, Cal Ripken, Lou Gehrig, Ty Cobb, Alex Rodriguez, Ken Griffey Jr, etc... you would pass then because "track records means nothing"?



Track record does mean something. It doesn't make you immune to failure but it does help your chance to succeed.
Not all sins are created equal
  • #18
  • Feb 3, 2009 8:06pm Feb 3, 2009 8:06pm
There is a difference between unskilled amateurs and a skilled professional having a bad day.
  • #19
  • Feb 3, 2009 9:30pm Feb 3, 2009 9:30pm
Is it dangerous to trade with debt? Why do you think the economy is all screwed up? The whole monetary system is nothing but trading with debt. I say go for it. Difference is that nobody is going to bail you out if/when you blow up.
  • #20
  • Feb 3, 2009 10:04pm Feb 3, 2009 10:04pm
Is it dangerous to put the muzzle of a loaded gun against your head? No matter if even You have the Trigger at hand.

I wish you well but apparently you are at some stage of desparation.
Borrowing to Trade is Not The Solution
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