Borrowing money to trade stocks is one of the easiest traps for traders to fall into. Raju is a living example. At first, he traded with his own savings. He had wins and losses, but kept a level head: if he lost, he treated it as tuition; if he won, he didn’t get too excited. But after getting it right several times in a row, he got carried away. He thought he had a good eye for the market and knew how to time his trades, so he started using leverage. Leverage feels great when you’re winning: with 5x leverage, a 10% rise in the underlying asset can generate a 50% return on your principal, making it easy to mistake a rising market for trading skill. But leverage is an amplifier, and if you get the direction wrong, you can lose your entire principal. Here’s the simple math: with 5x leverage, you put up 100,000, borrow 400,000, and have a total position of 500,000. If the asset drops just 20%, its market value falls to 400,000, wiping out your principal. With 10x leverage, a 10% drop in the asset could get you liquidated. And that’s not even counting the interest, repayment deadlines, and liquidation thresholds that come with borrowing. A little market volatility can leave you feeling like you’re roasting over an open fire. I’ve always thought that position sizing is a hundred times more important than stock picking. Picking stocks is about finding opportunities; position sizing determines whether you’ll survive long enough to realize them. Losing your own money hurts, but losing borrowed money makes you panic. Once you panic, your decisions go off the rails: you can’t bring yourself to cut losses when you should, and you can’t hold on when you should. All the discipline you’d planned goes out the window. I knew someone who used a consumer loan to take on 3x leverage. After a series of pullbacks, he watched the market all day and couldn’t sleep at night. In the end, he was liquidated near the bottom, lost his principal, and still owed interest. By contrast, people who limit the risk on each trade to 1%–2% of their total capital and keep their overall leverage at zero or very low may not catch a winning stock every time, but they can stay in the game. Do you know anyone who can’t sleep once they start using leverage? Share your thoughts.