Forex

APMID is known to go where the money is. That’s why we decided to venture into the world of the foreign exchange market. This might seem crazy, and on some level it certainly is, but I think it’s the right thing to do. While we did quite well in Poker (which is some sort of gambling just like Forex might seem), as one of the APMID fellows lived of Poker for several months, we will do equally well in Forex.

This new series of posts will document our journey. In this first entry, we will quickly review what Forex is and how the basics of trading works. Future posts will discuss technical indicators, programming of automated trading bots, automated trading algorithms and the development of own indicators.

Forex Trading and Understanding Exchange Rates

Forex stands for the foreign exchange and it’s the platform which let banks and individuals trade currencies. The foreign exchange market defines the current value of one currency in comparison to another, thus building the basis for international business.

Forex is traded through a broker (a bank or any other regulated company), just like stocks, options, and other commodities. The difference to trading stocks, where you buy and sell shares of one company, in a Forex trade you always buy and sell currency pairs, at the same time. A currency pair is the basis for each trade; an example pair is EUR/USD, which obviously is the exchange rate between Euros and US Dollars. Whenever you buy a position of EUR/USD, you buy Euros by selling US Dollars. If you sell a position of EUR/USD you sell Euros by buying US Dollars. Thus, if you think Euro is strong and will increase you buy EUR/USD; if you think USD is strong then you sell EUR/USD and vice versa.

If the exchange rate of EUR/USD is 1.4125, then that means that 1 Euro is worth 1.4125 USD, as Euro is the base currency for that pair.

Pip, Lots, and Leverage

The smallest unit of increase or decrease in a currency pair is called Pip (”percentage in points”). If the currency is traded with 5 digits precision, then 1 pip is worth 0.0001 exchange rate movement. This might seem minimal, but you need to remember that the Forex market is 1) dealing with large positions and 2) is highly leveraged.

In Forex, traders buy and sell so called lots. One lot consists of 100′000 units of currency. Thus, if you long 1 lot of EUR/USD, then that position is worth 100′000 Euros! Why so large units? The answer lies within the movement of currencies. Since a pip is so small, a few pips movements are only a few cents difference in exchange rate. If you plan on making any significant amount of money (or loss!) you need to trade in manly proportions. 100′000 seems about a right!

How is it possible that we want to catch up with a market where the minimum trade size costs 100′000 currency units?! That’s where leverage comes into play. Brokers allow you to control much larger amounts of money than you actually have in your account, through leverage (again because of the small currency movements). If a broker offers you a leverage of 20:1, then that means you only need 5% of “margin” in your account of coverage for the position you trade.  Thus, you can buy and sell 1 lot with say $5000 (5%).

Clearly, the bigger your leverage, the more risky your trades become. That’s perhaps why brokers who offer you 500:1 margins look like online casino websites (even offering you bonuses and shit). You can imagine leverage a bit like the magnification factor of a telescope. With larger magnification, smaller changes on your side of the telescope translate into large distance changes at the object you study in the sky. In other words, small changes in the price give your larger profits or larger losses — probably faster than you can say jack shit.

Anyway, APMID is already developing algorithms and bots in MQL4, a trading language similar to C. Thanks to our combined programming experience of more than half a century, we will quickly develop some interesting things! Check back soon for a new article.


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