A trader shows +300% annual returns over the last 12 months. It's spectacular. You consider copying them immediately.
Then their account goes to zero in two weeks. Completely liquidated. Done.
What happened? Leverage finally caught them.
What Is Overleveraging?
Overleveraging = borrowing too much money to trade.
You have $10,000. Instead of trading with just $10,000, you borrow $90,000 from your broker. Now you're controlling $100,000 (10:1 leverage).
The upside:
Your gains are 10x larger. +10% market move = +100% account gain.
The downside:
Your losses are 10x larger. -10% market move = -100% account loss (you lose everything).
Red Flags for Overleveraged Traders
Red Flag #1: Returns Over 100% Annually
Historically, extremely high returns (>100%) almost always indicate excessive leverage.
100%+ annual returns require either exceptional skill (rare) or leverage (common). Exceptional skill looks like 30-50% returns with low volatility. Leverage looks like 100%+ returns with high volatility.
Red Flag #2: Sharpe Ratio Below 1.0 With High Returns
Example: +150% annual returns with Sharpe Ratio 0.6.
Translation: They earned huge returns but with excessive risk relative to those returns. This is leverage behavior.
Red Flag #3: Risk Score of 8-10
Most platforms display a "Risk Score" (0-10 scale):
- • Risk Score 0-2: Very conservative
- • Risk Score 3-5: Moderate
- • Risk Score 6-7: Aggressive
- • Risk Score 8-10: Extremely overleveraged
Don't copy traders with Risk Score 8+.
Key Takeaways
- ✓Returns over 100% annually = probably leverage, not skill.
- ✓Risk Score 8-10 = trader might blow up soon.
- ✓Check Sharpe Ratio + MDD + Risk Score together.
- ✓Consistent returns = skill. Chaotic returns = leverage.
- ✓Diversify across traders to reduce blowup risk.
Continue Learning
Why 500% Annual Returns Are Mathematically Unsustainable
The math behind why extreme returns always end badly. Learn what's actually sustainable.
Maximum Drawdown: Why Your Worst Loss Matters More Than Your Best Gain
Maximum Drawdown reveals the worst loss you'll experience. This guide shows why MDD matters more than returns.
The Trader Evaluation Checklist: 7 Red Flags That Separate Winners From Blowups
A systematic framework for evaluating traders before you risk your capital.
