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Borrowing money to fund your trading account,Good/Bad
Don't dare borrow money to start trading. It is a very bad idea. Bank not going to give you money unless you do it on credit cards. I can tell you a horror story about using credit card cash advances to fund trading account. Other option is to go to friends and family which is another very bad idea as they will hate you when you lose it. Even though they may tell you they understand the risk reality is they don't. They don't expect you to actually lose it and if you do it will not be good.
Borrowed money only increases pressure and trading is hard enough. If you start to lose that pressure when you are dealing with cash is difficult enough. If you are dealing with borrowed money and start to feel like you may not be able to pay it back or stay ahead of the credit card interest most likely you will start to take larger risk which will be your demise. There is risk with any business but trading is very different and should not be compared to taking loans on other types of business.
Borrowed money to fund your account = your demise.
"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
as a sole prop is not a "business" in any of the typical ways. The pundits that say treat your trading like a business are de facto correct, but most of them have never done anything tangible in the market.
A typical business has a "product" that is typically exchanged for money with a second party know as customers...trading is none of that. No service, no product and no customers means no exchange for money.
Trading should be self funding past an initial investment...and it does not to be anywhere near $100,000. A $5,000 account traded well is a $10,000 account in 90 days because we have leverage on our side...we make money using other peoples money.
Anyone who uses non-risk capital to start trading as a non classified sole prop is, in my opinion either lunatic or delusional. PLEASE PLEASE PLEASE do not do that. Risk capital defined as non financed actual dollars that you could live without and not miss if totally gone.
This is the hardest easy money in the world and while the successful consistent result attained by a VERY few looks glamorous, this is a bare knuckle back alley way to earn a living. The fool hearty, the unprepared, the arrogant, the easily discouraged, the thin skinned, the expert programmer with all the answers and no experience, the pop psychology trading author devotee's, the SIM trade heroes, awesome indicator groupies, and many other stereotypical sub groups are daily led to their demise and financial ruin.
Get a clue (education through experience) and build confidence with risk capital. If that means trading one lot micros with a $400 account so be it. If you can trade you will find a way. Build that account and routinely pay yourself. Lose $400 and find another $400. Keep your day job and never ever bring borrowed money or money required to operate your household to the table.
I started in this business by being fronted by the guy who was mentoring me. Kinda like thousands of guys did back in the pit when that was still relevant. This was a few years ago when leverage wasn't insane. You needed $50k just to punt a few grain contracts overnight.
Needless to say this wasn't like borrowing from grandma. My mentor had direct oversight on my account and kept me on a tight leash when it came to risk control. He also was confident enough that he could teach me to trade successfully like him.
Never had any problem returning his money after my learning experiences and I never would have gotten started without the help.
Of course these days I totally agree that you should just self fund an account to $10k yourself since margins and transaction costs are much less than they used to be (relatively speaking). If you can't make it with a $10k account you definitely can't make it with $100k borrowed.
Broker: Advantage, Trading Technologies, OptionsCity, IQ Feed
Trading: CL, NG
Posts: 1,038 since Jul 2010
Thanks Given: 1,713
Thanks Received: 3,863
Some of the most successful traders got started with a stake from someone else. So the thought of borrowing money to trade isn't entirely unheard of. The question is how are you going about it?
Are you working with a mentor as the previous poster referred to where they have direct oversight of what you're doing?
Or are you looking to borrow against your personal assets/credit from a bank to fund a trading account?
If your answer is the later of the two, what is your track record and experience in trading?
My point here is there are two types of scenarios that can play out here. One would be that you're an experienced trader. You've been successful for an extended period of time and would look to increase your working capital, etc. The other scenario which is less favorable, would be that you have very little to no experience in trading and are borrowing the money on more of a pipe dream. Its pretty clear to see who would most likely be the more successful of the two.
Another consideration is and I'm not giving you personal legal or financial advice here but something that I am familiar with which is, under what structure are you operating your business and borrowing the capital? I personally operate my trading within LLCs. The reason for that is paramount in that I'm separating my business' liabilities away from my personal liabilities and vice-versa.
My point here is similar to what others have eluded to. If you have no experience of extended success and are just looking to fund or increase your trading capital by taking a straight forward mortgage against your primary residence or personal loan or credit line (card) borrowing under your personal name or sole proprietor name, you're putting yourself/family into a potentially dangerous financial position should you fail to service that debt. Not only will you have failed at trading but you will be financially destroyed. I knew a guy during the dot com boom days that advanced cash off all his credit cards and invested it all in tech stocks. He did extremely well at first but then when different market conditions came along, he ended up getting nailed. On the flip side, I know another guy that took all of his credit cards and did an advance and bought a multi-unit condo building which turned into a multi-million dollar reward. Do you want to know what the difference was between the two of them? The tech stock guy had no idea what he was doing while the other guy knew real estate very well by working in the field as a realtor and finally went for it. There of course is luck involved but I think you'd get my point.
@wldman, thank you for a great post. Interesting point that with leverage, we are already trading using other people's money.
I'd be curious to hear your thoughts on starting out trading other people's money with size, through a prop like TST, where you don't put up your own capital, but give back 30-40% of profits, as opposed to starting out small on your own and building up over time (given competency in both cases).
@Rad4633: Borrowing money for funding a trading account is VERY BAD. An account can already be leveraged. If you trade with borrowed money, your are over-leveraged. Over-leveraged traders are calling for trouble and will see their accounts depleted.
Agree! Not different than any other business. Most advice given in the trading community is to not trade your monthly rent, only trade risk capital. This is for newbies wanna get-rich-overnight. Many big traders trade $millions in a day, mostly leveraged just as a business. But they know what they are doing, just like another good business.
So, here it is in a nutshell:
If one has acquired the skills, education, mental, physical, and resource capabilities demanded for a specific job he will most likely be successful. When he makes a mistake, he knows how to fix things.
If he needs more help he should go back to the big "if" and re-read and understand the fine print that follows.
Thx you TMFT Im smiling like a Texan reading your reply
1)Ok you have a valid point, If you had a business loan rather than personal kill the business loan thru bankruptcy and your personal score survives
2)Ok need 2 yr trading returns Ok I get this too
3)No worries my farm isnt tied to my home loan,plus I made the right away from hell to the home/plus 2 acres so please keep your PRETTY indi;s for me.....seriously ty TMFT I do get it!