Trading with borrowed funds

Discussion in 'Trading' started by BMK, Apr 2, 2022.

  1. qlai

    qlai

    I would only take it if I were:
    1) consistently profitable in different market regimes
    2) my trading can be easily scalable to utilize the loan

    I would say up to 10%. If you can’t make at least that, no point trading.

    My friend asked me once if I would consider trading his money and I said : “Until I can trade consistently, I can’t take your money. Once I trade consistently, I don’t want your money.” There are exceptions to that, but for most non-professional traders, I would be interested to hear why this doesn’t hold true.
     
    #11     Apr 2, 2022
  2. jnbadger

    jnbadger

    I am guessing you are where I was many years ago. You are making assumptions about your future returns based on back testing or looking at past charts. Don't borrow money to trade. It is seriously a stupid fucking thing to do.
     
    #12     Apr 2, 2022
    globalarbtrader and smallfil like this.
  3. TheDawn

    TheDawn

    You should only borrow funds to invest *if* the return rate that you are able to earn on the borrowed funds is higher than the borrowing rate tax-adjusted, otherwise it's not worth it. There is no such thing as a "comfortable rate"; everything depends on how much you can make on what you invest with the borrowed funds. If the interest rate on the loan is 10% but if you are able to make 15% on the investment that you made with the funds from the loan, then that 10% is a comfortable rate for you. But even if the interest rate on the loan is 5% but if you are only able to make 2% on the investment that you made with the funds from the loan, then that 5% interest rate on the loan is not a rate that you should be comfortable with.
     
    #13     Apr 3, 2022
  4. Of course you can game this type of thing in theory by borrowing at some huge LTV with respect to your assets and YOLO’ing it on GME weekly calls or something and going bust by a lot if it doesn’t work out.

    More practically, it depends on your returns and your consistency of course, as well as what the market will bear in terms of lending rates to a trader on an unsecured basis, 8-10% maybe? Whether or not they can call their loan back on short notice or not is a big factor in whether you can invest through a crash for example. Non-callable is worth a fair bit IMO, several % premium I would think.

    these days 30 year fixed is looking like a free flier on high inflation as long as you invest in anything real (stocks, RE, commodities), so 3-4% seems like an easy choice to take. Higher gets harder depending on your skill.

    all that said, I would probably not go more than 2-3x leverage from this loan, just to avoid drawdown risks or blowing up. I once paid double digit rates in such a situation, when I was more optimistic and less solvent. Now I would probably pay half that.
     
    #14     Apr 3, 2022
  5. sridhga

    sridhga

    Some hedge funds are already doing this. Otherwise why did easy money (printed money) prop up the market during the pandemic?
     
    #15     Apr 3, 2022
  6. sridhga

    sridhga


    I did borrow to trade sometimes. I paid like 12% interest per year. These interest rates are common in my country. Yes if you are a dedicated trader and you have a strategy, you can win and survive this. I also did this when I had no other source of income other than trading income. In USD terms, I borrowed like about 1300 USD. Repayment period was 30 months with equated instalments. I also had about 5000 USD of my own trading fund in addition to this at the time. I traded using these funds every day.
     
    #16     Apr 3, 2022
  7. wmwmw

    wmwmw

    I don't see the difference between this kind of loan and a high leverage.
    For borrowed money,in essence they are the same. If you are consistent profitable,leverage is much more convenient and useful.
    If you are not consistent profitable,leverage is also better, because it only impact your trading account,not your life.
     
    Last edited: Apr 3, 2022
    #17     Apr 3, 2022
    TheDawn and sridhga like this.
  8. For me, I feel like I want my friends and family to benefit from my success.

    Fortunately, my family are thieving, lying dickheads and my friends are already successful on their own.

    So it's all mine!
     
    #18     Apr 3, 2022
    qlai likes this.
  9. If you can trade consistently then roughly speaking your goal should be to grow your capital until you've exhausted all the capacity of your edge.

    As long as you haven't reached that point yet, borrowing more to trade could be considered. You'll need to trade off the rate of growth with risk when you determine how much leverage to use. Fortunately, drawdown size can often sub-linear in leverage when you have a system that can be more diversified when you have more capital.
     
    #19     Apr 3, 2022
    qlai likes this.
  10. qlai

    qlai

    You are correct assuming that your goal is to maximize amount of money you can make. There are lots of talented traders who tried to manage OPM and the aggravation was not worth it for them personally.
     
    #20     Apr 3, 2022