2 min read

Trading leverage sin

Trading leverage sin

What is leverage?

Leverage results from using borrowed capital as a source of funding when investing to expand a firm’s asset base and generate returns on risk capital.

Almost all failures in trading are caused by leverage or at least have leverage as one of the factors. From beginners to experienced traders all can be affected by the leverage sin.

The beginner trader

The beginner is using leverage to "maximize the profit". He can not maximize anything because he does not know if he is profitable or not in the first place.

The beginner knows about the concept of  "maximize the profit" from the charlatan educators that are promoting short-term trading aka day trading and incentives people to use as much leverage as they can. Of course, day trading benefits the trading platforms, not the traders. It's a clear conflict of interest.

The beginner does not know any better and in a short period of time will enter in the well-known club of  "90 90 90". 90% of people lose 90% of their money in 90 days.

The beginner should focus on researching trade ideas and make them profitable. If the trader is profitable over a decent period of time 1 - 2 years, then we can talk about "maximize the profit".

If you are a beginner and use the leverage to trade then you only increase the probability of failure. You will be stopped out from positions and you will don't know why.

The bottom line for the beginner is that the "leverage sin" is inflicted on him by the charlatan educators who have a clear conflict of interests.

The experienced trader

The relation between an experienced trader and leverage it's like the trader trying to control a beast. The leverage can be very effective if is used within reason and is not abused.

Most traders use 4x leverage in stocks. Traders only increase the leverage if they are killing the market. Basically, if you have a good track record then you can increase your leverage. Most traders do not like to go over 6x leverage, you do not want to lose control of the beast.

The leverage becomes a sin for the experienced trader when they are getting too greedy and think that they can control the beast.

Leverage should only be used by experienced profitable traders.

If you are a beginner, do not fall for the tricks from charlatan educators. Keep your priorities straight.

Be well.