STRATEGY 14: SIAMESE TWINS

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Adam Turner
5 years ago
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1 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 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 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 This strategy is applicable only to AUD/USD.

2 Strategy Concept 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 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 = Stop loss = Profit target 1 = Profit target 2 =

3 China cuts bank reserve requirement ratio for the 1st time in 3 years (30 Nov 2011) FIGURE 9.23 News Release FIGURE 9.24 Set Stop Loss and Profit Targets

4 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 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= Stop loss = Profit target 1 = Profit target 2 =

5 Worse than expected numbers for China s HSBC Flash Manufacturing PMI (22 Mar 2012) FIGURE 9.26 News Release FIGURE 9.27 Set Stop Loss and Profit Targets

6 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 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.

This strategy is suitable for all currency pairs listed on the broker s platform, especially the seven major currency pairs of:

This strategy is suitable for all currency pairs listed on the broker s platform, especially the seven major currency pairs of: STRATEGY 6: BALK THE TALK Fear is a greater driving force than pleasure. Humans tend to react more drastically in times of fear, or when they are presented with bad news. Fear is also the emotion that