Part of our responsibility as the premier forex trading and training company in Kenya is to help our clients make the best decisions concerning every specter of their financial lives.
A few days ago, we got an interesting question from one of our clients (I’ll call him John.) Here is John’s exact question:
“I know that taking a loan to invest in forex trading sounds crazy, but I have been able to make money in the forex market. I have tripled most of the demo accounts that I have opened, and recently, I was able to take a live $100 account to $500 within two weeks. I know that I could make more money if I just had the right capital to invest in the forex market. Can I borrow money to invest in forex.”
You have probably found yourself at the same exact spot, or you will find yourself battling the same decision. Is it feasible to borrow money to invest in online forex trading?
Should You Borrow Money for Forex Trading?
No. You should never borrow money to invest in online currency trading.
The thing that you should keep in mind is that trading on a demo account is very different from the real thing. Trading on a demo account does not have any emotional attachment. It is not your money, and the loses you suffer do not affect you in any way. Now, think about what would happen if you were to lose 500,000/= of a bank loan?
It would probably drive you crazy. You’d make more dangerous trades trying to cover your loses. You will start trading from emotions, and therein lies the problem.
Even if you didn’t lose all your money, you’d probably spend awake nights, watching the charts and quietly praying that the markets go your way. That is not what I call financial freedom. It is more like financial slavery.
The money that I would recommend you invest in forex trading is money that you can afford to lose. Don’t use your children’s school fees and do not use your landlord’s rent. Start with a small account. If you can start with 50K and double the money every month, you’ll be good to go. If you started with 50K, doubled the money every month and reinvested the profits, you’d have an account with more than Ksh 2M after only 12 months. Think about that.
If you really must hit the ground running and you want to start your account big, consider selling some of the luxury items that you have. A car comes into mind.
Pros and Cons of Getting a Loan to Trade Forex
On the pro side, personal loans do provide an immediate source of capital that can be used to potentially amplify profits. The interest rates are usually lower than credit cards as well.
However, trading on margin or with borrowed money is an extremely risky move that can backfire horribly. For one, trading forex is already risky on its own without adding loans into the mix.
The forex market is highly volatile and prices can swing rapidly. If trades go the wrong way, losses get multiplied by the leverage from borrowed funds. Yikes! Margin calls can force traders to deposit more money or liquidate positions during unfavorable moves.
Additionally, those loans don’t disappear if you lose money! You still have to pay back the loan plus interest regardless of whether your trades are profitable or not. And if you can’t make the payments, your credit score takes a huge hit. Not good at all!
While some skilled traders are able to profit consistently and pay off loans quickly, most people lack the discipline needed to trade well with borrowed money. Emotions like greed and fear are amplified, leading to impulsive decisions.
Can I Ever, Ever Borrow Money to Trade Forex?
Note that I do not recommend you apply this strategy if you are new to trading… but yes, if you know what you are doing, borrowing to invest in forex makes sense. Banks do it all the time. But you will have to have your own portion to trade with. Trade on your portion only. If you lose your portion, withdraw the borrowed money out of the account and don’t trade again. Borrowing to pimp your account is a good move as it reduces your reliance on leverage. Again, note that I do not recommend you do this if you are new to trading.