15. Forex strategy – SIAMESE TWINS

Forex strategy - SIAMESE TWINS

How to trade forex with this forex strategy – SIAMESE TWINS

In late  2007,  China overtook  Japan to become  Australia’s  largest trading partner.  In  2009,  China became  Australia’s  largest export market,  consuming commodities such as iron ore,  coal,  gas,  and wool in record amounts.

According to  Australia’s  department of  Foreign  Affairs and  Trade, Australia’s  total trade with China in 2010 was $105 billion, almost 24% more than the previous year. It was the first time that Australia’s two-way trade with a single nation topped the $100 billion level. Forty years ago, two-way trade between China and Australia was less than $100 million.

For this reason, alone, Australia’s economy tends to move in tandem with  China’s  economy.  When china reports good numbers on the Purchasing  Managers  Index  (PMI),  gross domestic product  (GDP)  or the trade balance,  Australia’s  currency tends to rise.  Similarly, when China reports disappointing figures, the Australian dollar tends to fall as well.

This strategy seeks to take advantage of the movement of the AUD/ USD by taking the cue from China’s reported figures and monetary policies. It is especially useful since we are not able to freely trade the Chinese currency (yuan) yet.

Time Frame for this forex trading strategy

The Siamese twins method works with the daily candle (D1). This means that each candle on the chart represents 1 day of price movement.

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Indicators for this forex trading strategy

No indicators are used for this strategy.

Currency Pairs for this forex trading strategy

This strategy is applicable only to AUD/USD.

Strategy Concept with forex trading strategy

When China announces good data, such as high GDP and high PMI numbers, the AUD tends to strengthen for two reasons.

FOREX-APPS-PIPS-WIZARD-PRO

  1. China will start to import more raw materials from Australia. This increase in business gives rise to a stronger AUD because China has to pay for such materials in AUD.

  2. Good data from China tend to increase speculation on higher-yielding currencies. This is because  China is largely seen as a major global player, and good numbers from China tend to have a knock-on effect on the world economy. This positive effect on the global economy encourages the appetite for risk, which in turn strengthens the AUD because its interest rate remains one of the highest among the G20 nations.

We take a  long position on  AUD/USD  immediately after  China announces better-than-expected data. Similarly, we take a short position on AUD/USD  immediately after China announces worse-than-expected data.

I call this strategy Siamese twins because the economies of China and Australia are joined at the hip. When China does well,  the Australian economy flourishes, and vice versa.

Long Trade Setup with forex trading strategy

Here are the steps to execute the Siamese twins strategy for long:

  1. Look for any major news from China. On November 30, 2010, we see how China cut the banks’ reserve requirement ratio for the first time in three years. This frees up more cash, which encourages banks to lend.

The effect is seen as positive because it spurs economic growth in China.

  1. Go long on AUD/USD immediately. (See Figure 9.23.)

  2. Set the stop loss below the previous low.

  3. The trade will have two profit targets with a risk to reward ratio of 1:1 and 1:2 respectively. (See Figure 9.24.)

From the long example in Figure 9.25:

Entry  price  =  1.0000

Stop  loss =  0.9600

Profit  target  1  =  1.0400

Profit  target  2  =  1.0800

China cuts bank reserve requirement ratio for the 1st time in 3 years (30 Nov 2011)

Forex strategy - SIAMESE TWINS

FIGURE 9.23   News Release

Forex strategy – SIAMESE TWINS

FIGURE 9.24    Set Stop Loss and Profit Targets

Forex strategy - SIAMESE TWINS

FIGURE 9.25   Trade Hits Profit Targets

The risk for this trade is  400  pips,  and the reward is  800  pips if both targets are hit. The risk to reward ratio is 1:2, which yields a 6%  return if we take a 3% risk.

Short Trade Setup with forex trading strategy

Here are the steps to execute the Siamese twins strategy for short:

  1. Look out for any major news from China. In this example, we see how the actual number of China’s HSBC flash manufacturing PMI is worse than expected. The effect is seen as negative because it is viewed as a contraction in China’s economy.

  2. Go short on AUD/USD immediately. (See Figure 9.26.)

  3. Set the stop loss above the previous high.

  4. The trade has two profit targets with risk to reward ratios of 1:1 and 1:2 respectively. (See Figure 9.27.)

From the long example in Figure 9.28:

Entry price=1.0458

Stop  loss =  1.0638

Profit  target  1  =1.0278

Profit  target  2  =  1.0098

Worse than expected numbers for China’s HSBC Flash Manufacturing PMI (22 Mar 2012)

Forex strategy - SIAMESE TWINS

FIGURE 9.26   News Release

 

Forex strategy - SIAMESE TWINS

 

FIGURE 9.27    Set Stop Loss and Profit Targets

 

Forex strategy - SIAMESE TWINS

FIGURE 9.28 Trade Hits Profit Targets

The risk for this trade is  180  pips,  and the reward is  360  pips respectively if both targets are hit.  The risk to reward ratio is  1:2, which yields a 6% return if we take a 3% risk.

 Strategy Roundup with forex trading strategy

The Siamese twins strategy is perfect for position traders because of the long time frame employed. When China announces news—either good or bad—the subsequent effect on the Australian economy may take weeks or even months to play out.

As we learned in the swap and fly strategy, a long AUD/USD trade can give you additional swap as well. This amount can be very significant if the trade is held for several months before it is exited.

 

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