Forex strategy 14- 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  hina  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 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

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

 Indicators

No indicators are used for this strategy.

 Currency Pairs with 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.

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.

2. Go long on AUD/USD immediately. (See Figure 9.23.)
3. Set the stop loss below the previous low.
4. 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)

FIGURE 9.23   News Release

Forex strategy - SIAMESE TWINS

FIGURE 9.24    Set Stop Loss and Profit Targets

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