Leverage

In contrast, an often overestimated factor involved in the appropriate choice of a broker is maximum leverage allowed by the broker. Most forex brokers have a margin requirement of 1% or even lower, which allows for 100:1 maximum leverage – more than enough for any sensible trader, and yet some traders insist on ridiculously low 0.25% margin requirements resulting in 400:1 maximum leverage. This has been the highway to ruin for most who have tried to use anywhere near that much leverage. You don’t have to be a genius to see why, since leverage multiplies your losses as much as your wins. All it takes is a small losing streak and your account is blown. In any case, this is not a lecture on the pitfalls of high leverage. We can address that in another article. Suffice it to say that low margin requirements and the resulting high maximum leverage should NOT be a big factor when choosing your forex broker, with one notable exception. Some traders may feel that it is better to keep only a small percent of their total trading capital with their broker, preferring instead to hold most of it in a bank account where it is insured and collecting interest, while using high leverage to make up for the "shortfall" in their broker account. If the trading account then experiences a drawdown, it can always be topped up from the main pool. This is somewhat more complicated, and can be more costly due to more transactions being made between accounts, while the delay between getting funds from the bank account to the trading account can also be an added cost. The benefits of this do outweigh the downsides for some traders though, particularly ones who have a significant amount of trading capital and do not trade intraday, because the transaction costs and delays then end up being negligible as compared to the total amount of capital and the average timeframe of open positions.