What is Forex

This is the second part of the series: How to build your own algotrading platform.

Before building any algotrading systems, you need to know how to trade manually. What that actually means is that you need to lose money on your own before blaming the machine. As simple as that.

So, let's talk about Foreign Exchange or Forex as the cool guys call it.

First of all, why do we choose Forex for algotrading? Why don't we become millionaires trading like everybody else? Why not just buy Tesla, Amazon, Google, Facebook, Twitter and hope for the best (PS: please read the legal outro at the end of this blog post before buying any stocks).

Easy answer. You cannot win (or lose) money fast enough by buying stocks.

Forex has a nice (or terrible, depending on which side of the coin you are) thing called leverage.

Leverage can be 1:10, 1:50, 1:100, 1:200, 1:1000 depending on how suicidal you are or how sketchy your broker is (don't worry, we'll talk about brokers in the next post). Let's see an example.

We want to place a trade of $1k. The logical thing is that in order to buy something that costs $1k, you need to have in your account $1k, right? Nope. You can always get a loan. Oooooooor: Enter leverage.

If we have a 1:100 leverage, we can place a trade and "control" $1k with just $10. For those that failed at math (don't be ashamed, I am one of you), $10 x 100 (leverage) = $1,000. That means you can trade big and win big! Actually 100 times more big! The catch is that you can actually go 100 times more small. Let's have another example.

I just got my bonus ($1k) and I want to play on Forex. Without any leverage, I can buy 1,000 Forex units that cost $1 (by the way, there are no Forex units but we'll talk about this later). How many units can I buy with 1:50 leverage?

If you answer if 100,000, you did something wrong. The answer is 50,000 ($1,000 x 50 leverage).

There you have it. One of the reasons that we are doing Forex, is because you can lose/win big. We'll get back to leverage when we start placing trades.

There are three more exciting reasons actually that are even more awesome (dare to say awesomer?).

  1. Forex (almost) never sleeps. The markets are open ALL DAY, six days per week. To be more exact, there is not one market but four and they are overlapping providing the "all day" effect.
  2. Forex is very volatile and there are tons of money moving around (more than 5 trillion per day). Crazy right?
  3. No fees on trades. You don't pay $10 per trade like you are doing with stocks. Here you pay the spread which is just a fraction of a cent (again, we'll talk about this in another post).

All these reasons (leverage, all-day, volatility, fees) make Forex the most exciting platform to build and deploy your algorithms.

Coming up next, Forex brokers. How not to be scammed before even writing a line of code.

If you have more feedback, ping me at jonromero or signup to the newsletter.

Legal outro. This is an engineering tutorial on how to build an algotrading platform for experimentation and FUN. Any suggestions here are not financial advices. If you lose any (or all) you money because you followed any trading advices or deployed this system in production, you cannot blame this random blog (and/or me). Enjoy at your own risk.

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- Mon 12 October 2015

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