FOREX Boomerang Testing

The term "forex" is short for "foreign exchange," and represents the brisk trade in international currencies. The global forex market is very busy, with an average daily turnover of $4.0 trillion as of April 2010. The market operates 24 hours a day, 5 days a week. It continues to grow, with almost 55 percent of forex transactions taking place through banks in Great Britain and the United States. Many forex traders are individuals, and the boomerang is a strategy individual traders test and use in the market.

Forex Basics
Forex is also known as FX, or sometimes 4X. Forex is an over-the-counter market, which simply means that one financial instrument is traded directly for another. All trades are done by computer, and a trade is executed in the act of buying one currency while simultaneously selling another. In short, a trader exchanges one type of currency for another. Approximately five percent of forex traders consist of companies that buy and sell products with foreign countries, and convert profits into local currencies. The other 95 percent of forex traders are speculators who trade strictly for profit.

Testing
Testing refers to simulation of a trading environment. The simulation is used to test trading strategies without actually risking any money. The theory behind testing is that trading strategies replicated successfully in a testing environment, using historical market data, may be successful in real trading. Strategies can be implemented manually, or automated with software known as trading robots.

Boomerang
The boomerang strategy is designed for the EUR/USD currency pair. This is the most commonly traded currency pair in forex and it has a narrow bid-ask spread, which is the difference between what a seller is asking and what a potential buyer is bidding. A narrow spread is conducive to trading strategies involving quick execution. The boomerang is that type of strategy, and is based on the tendency of the forex market to have very little activity at certain times of the day. This is due to inactivity in the three major forex markets -- Great Britain, the United States and Japan. This creates unpredictable and unreliable market movements.

The Strategy
The boomerang strategy starts with a sell order for a currency, entered at a price that is above the current market price. This allows a possible execution if the market moves higher. At the same time, another trade is set as a buy order at a price below the market, to execute in case the market moves down. A common term in forex trading is "pip," which stands for "percentage in point," and is the smallest allowable change in price, equal to $0.0001. In the boomerang strategy, trades are set at 15 pips above and below the market price, with stop-loss orders placed on each trade in a 15-pip margin. A stop-loss, also known as a stop order or stop-market order, is a sell order placed to execute when a security --- in this case, a certain currency --- reaches a designated price. Stop-loss orders are used to limit a trader's losses on his positions.

Trading Activity
Since trading activity is very thin during the major markets' downtime, one large trade order can move the market, with the probability that the market will retrace, or move right back to where it was. This provides the opportunity to execute at least one trade. This strategy is designed to close trades quickly to make a profit, but is best used by an experienced trader.