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A Hidden Account Killing Mistake - Using Credit Cards |
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Thursday, 19 February 2009 00:00
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by John Jagerson
Over the last few years it has become popular for forex dealers to offer an alternative funding method over wire transfers or checks. You can now fund most forex accounts through a credit card. The ratio of accounts funding their balances this way is increasing this year and it may be one of the things that has helped the forex industry to maintain some growth during the economic crisis.
Funding with a credit card is convenient but that is its only legitimate purpose. The danger for traders lies in the common practice for smaller traders to bulk up their account by "charging" their balance to their credit card without an intention to pay that balance off right away.
The logic behind this behavior is that traders assume that they can make more money in the market than they are paying in interest. If that were true it would be an efficient use of capital or leverage. However, they only consider the net returns during a period of profitable trading. What are the affects of using debt to trade when you go through an unprofitable period? This is the trap within the leverage fallacy. Using debt as leverage not only decreases gains during periods of profitability but it amplifies losses during those inevitable periods of losses.
The bottom line is that this is a no-win situation that many traders are falling for. This fallacy helped create the problem speculators and borrowers are facing in the US housing market right now. Using credit cards for convenience is smart but using them to speculate in the currency market puts the odds against you.
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