USDCNY Trading Strategy

USDCNY Trading Strategy – Rules, Backtest, Returns, Code

The influence of the Chinese yuan in the global financial markets is growing, and even though China does not float the currency freely like other major currencies, you may want to have a USDCNY trading strategy. How do you add a USDCNY trading strategy to your portfolio?

A USDCNY trading strategy is your approach to trading the USDCNY currency pair. This refers to your rules to know when to trade the currency pair. These rules must specify the right market conditions that must be met, the entry setup that triggers you into a trade, your position sizing, risk management, and exit criteria. To win in USDCNY trading, you need a robust strategy that works.

In this post, we take a look at the USDCNY currency pair, what it is, the factors that influence its price movements, when and how to trade it, and many more. Read along!

Table of contents:

usdcny trading strategy – backtest, rules, performance, and returns

We go straight to an example of a usdcny trading strategy. This is a 100% quantified trading strategy backtested using Python.

The trading rules read like this (members can unlock the trading rules and get trading rules for hundreds of trading strategies):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 350 ARTICLES WITH TRADING RULES

We backtested by using free historical data from Yahoo Finance. The ticker code is “CNY=X” on Yahoo Finance.

When we apply the trading rules to the dataset, we get the following equity curve:

usdcny trading strategy
usdcny trading strategy

The trading statistics and performance metrics are like this:

  • Total Trades: 92
  • Time Spent In The Market: 15.92%
  • CAGR: 1.23%
  • Risk-adjusted return: 7.77%
  • Win Rate: 53.26%
  • Average Win: 0.73%
  • Average Loss: -0.27%
  • Max Drawdown: -2.48%

Parameter sensibility:

By RSI (using SMA length 200):

usdcny trading strategy optimization
usdcny trading strategy optimization

By SMA (using RSI > 90 and RSI < 10):

usdcny trading strategy trading rules
usdcny trading strategy trading rules

The strategy works better with a lower SMA length.

usdcny trading strategy – Python code

We end the backtest by showing you the complete Python code:

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 350 ARTICLES WITH TRADING RULES

What is USDCNY?

USDCNY is the ticker symbol of the currency pair that indicates the exchange rate of the United States dollar (USD) against the Chinese yuan (CNY). Despite the size and influence of the Chinese economy, this currency pair is classified as an exotic pair because the CNY component is still considered a currency of an emerging nation.

Exotic currency pairs are known for their lower liquidity, lower trading volumes, and higher volatility compared to major pairs. As a result, they often have relatively higher spreads than major currency pairs.

In this currency pair, USDCNY, the USD is the base currency because it is the first currency code in the currency pair and, as such, is the one whose value is quoted in the second currency. The CNY, on the other hand, is the quote or counter currency because it is the second currency in the pair and is used to determine the value of the base currency. In other words, the USDCNY price represents the amount of Chinese yuan it would take to exchange for one US dollar.

What is USDCNY trading?

USDCNY trading is the process of buying the USD with CNY or selling the USD to get CNY. A long USDCNY position means using the CNY to buy the USD, while a short USDCNY position means selling the USD to buy the CNY.

Businesses that are involved in international trade between the US and China may engage in USDCNY trading for business or hedging purposes. For retail and institutional traders, however, USDCNY trading is done for speculating on the exchange rate of the USD against the CNY. Even though China sets the yuan’s value through a daily ‘fix’, there are still some movements for retail traders to profit from.

How does the USDCNY exchange rate impact global markets?

The USD/CNY exchange rate impacts global markets in a significant way, especially by affecting the value of imports and exports from China. When the USDCNY exchange rate is higher, it means that the CNY is weaker against the US dollar, which generally makes Chinese goods cheaper to countries that import from China. The effect is increasing demand for Chinese goods and more money for Chinese exporters. On the other hand, it makes exports to China more expensive, reducing demand from China.

Conversely, when the USDCNY exchange rate is lower, it means that the CNY is strong against the USD. This makes China’s exports to the world more expensive, which can reduce demand for Chinese goods. However, a stronger CNY makes China’s imports, especially energy products, cheaper, and this can potentially help reduce China’s domestic inflation and cost of production.

What factors influence the USDCNY exchange rate?

Not many factors directly influence the USDCNY exchange rate. Unlike the currencies of other major economies whose values are floated and thus determined by market forces, the People’s Bank of China (PBOC), China’s central bank, does not float the USDCNY exchange rate. Instead, it fixes the starting exchange rate level each day, around 9:15 am Beijing time. It then allows the exchange rate to trade within a 2% range above or below the fixed level for the day.

So, it’s within this 4% range of movement that other market forces can affect the currency. Some of those factors are economic data from the US and China, the Fed’s interest rate changes, geopolitical events, trade wars between the US and China, and so on.

How can beginners start trading USDCNY?

It is quite difficult for beginners to start trading USDCNY because the CNY is tightly controlled by the PBOC and it’s only traded in mainland China. Most of the trading in USDCNY is carried out by Chinese exporters and importers who want to exchange CNY against other foreign currencies.

However, international currency traders can speculate on the yuan via the offshore yuan, with the ticker symbol CNH. Many CFD brokers offer USDCNH as an exotic currency pair for trading. The CME Group also offers CNH/USD futures for trading. Beginners who wish to trade USDCNY can trade USDCNH through a CFD broker or a futures broker.

What are common USDCNY trading strategies for beginners?

Common USDCNY trading strategies for beginners include:

  1. Mean-reversion strategy: This strategy is very common for trading USDCNY because the pair is tightly controlled within a range around a mean value set by PBOC. You try to buy at levels far below the mean and sell at levels far above the mean.
  2. Momentum strategy: You use momentum strategies to trade breakouts when the pair is reversing from an extreme level. It’s best on a lower timeframe to identify the momentum of reversals.
  3. Trend-following strategy: This strategy may not work very well on USDCNY unless you are trading on a lower timeframe.

How does geopolitical news affect USDCNY trading?

Geopolitical news is likely to have a bullish effect on USDCNY trading. The reason is that traders and investors like to move their funds to safe-haven currencies during periods of uncertainty. Since the USD is considered a safe-haven currency by investors, it stands to gain against the CNY when there is serious geopolitical news.

Although the Chinese economy is very strong, the PBOC’s tight control on the CNY deters investors from investing heavily in CNY during periods of crisis.

What are the risks associated with USDCNY trading?

The risks associated with USDCNY trading are many. First, whether you’re trading the futures product or CFD, both are leveraged instruments, so there is a real risk of overleveraging when trading USDCNY. Leveraged products are double-edged swords: while they can help you make money fast, you can also lose your entire account and more — if the broker doesn’t offer negative balance protection.

Also, there is the specific risk of PBOC intervening in the exchange rate at any time and causing you to lose money.

How do technical indicators help in USDCNY trading?

Technical indicators can help in many ways in USDCNY trading. You can use it to determine the market trend. They can also show you when the trend is about to reverse. Depending on what you want to look for, you can make use of different indicators.

For example, you can use the RSI or Bollinger Bands to formulate a mean-reversion strategy. Similarly, the moving average indicator can be used to formulate a trend-following strategy. Whichever strategy you trade, you find technical indicators that can show you when a price move is about to take place so that you enter the market at the right time.

What role does market sentiment play in USDCNY trading?

Market sentiment plays a significant role in USDCNY trading. It shows how much risk-seeking or risk-averse investors and traders are at any point in time. This determines how they behave in situations of extreme uncertainty.

For instance, when there is a huge global event like war or a pandemic, investors move their funds to safe-haven currencies, such as the USD. This increases the demand for USD and as such, the USDCNY would experience a bullish momentum.

How can traders manage their risk in USDCNY trading?

Traders can manage risk in USDCNY trading by having a clear risk management plan as a part of their day-to-day trading plan. The risk management plan must include your position sizing and the use of hard stop loss. While position sizing helps them reduce how much they risk and the amount of leverage they use, stop-loss orders ensure that their losses are limited to the amount they planned to lose if the trade goes against their positions.

Here is the formula for determining the amount at risk, stop loss level, and position size:

Amount at risk (USD) = Position size (lots) X Stop Loss (in pips) X Pip Value (USD)

What are the advantages of trading USDCNY compared to other currency pairs?

There are not many advantages of trading USDCNY compared to other currency pairs. In fact, you are unlikely to see a broker that offers USDCNY unless you’re inside mainland China, and even at that, you may not have the freedom to speculate on the currency pair as you like.

For USDCNH that are offered by CFD and futures brokers outside of mainland China, the currency pair is considered exotic pair and marred by huge spreads, low liquidity, and erratic volatility. There is no advantage to trading this pair compared to other currency pairs.

What are the best times to trade USDCNY?

If you are a swing trader or position trader, the best time of the day or the trading session to trade this currency pair doesn’t matter because you would hold your position for many days, weeks, or months.

However, for intraday trading, the best times to trade USDCNY are during the Asian and New York sessions. During the Asian session, especially from 01:30 to 07: 00 GMT when the Chinese market is open, there is reasonable liquidity for trading in the currency pair. Similarly, during the New York session (especially from 14:30 to 21:00 GMT), the NYSE is open and provides liquidity for trading in the currency pair.

How does the Chinese economy influence USDCNY trading?

The Chinese economy has minimal influence on USDCNY trading because the PBOC usually fixes the mean price level and specifies the range within which the USDCNY must trade. The PBOC likes to intentionally keep the yuan weaker. So, market forces are not allowed to determine the exchange rate.

Normally, when an economy gets stronger, its currency should also be stronger. Thus, a stronger Chinese economy is expected to give rise to a stronger yuan, leading to a declining USDCNY price chart. On the other hand, a weak Chinese economy is expected to lead to a weaker yuan and a bullish trend on the USDCNY chart.

What are some common mistakes to avoid in USDCNY trading?

The common mistakes to avoid in USDCNY trading include:

  • not getting trading education first before embarking on your trading journey
  • not learning about the Chinese market, government policies, and the PBOC’s ‘fix’ approach to yuan regulation
  • not having a trading strategy or plan
  • trading without an adequate risk management plan
  • risking too much per trade because you think your strategy is great
  • allowing your emotions to rule your trading decisions
  • not keeping a trading journal

How can traders stay updated on USDCNY market trends?

To stay up to date with USDCNY market trends, you have to keep an eye on what the Chinese government is doing and the predominant narratives in China. Follow market news channels like Bloomberg, CNBC, and so on, as well as on investing websites like Forexfactory, Investing.com, therobusttrader.com, and quantifiedstrategies.com.

Also, form a habit of checking the news section of your trading platform from time to time to know what is going on in the trading world.

How to invest in Chinese yuan?

There are a few ways to invest in the Chinese yuan. One easy one is holding cash in yuan. If you’re in the US, you can take a position in the Chinese yuan by opening a savings or deposit account with U.S. dollars and have the account denominated in yuan. There are a few Chinese banks in the US that offer such services.

Alternatively, you can buy exchange traded funds (ETFs) that track the performance of the Chinese yuan. This offers you exposure to the currency.

What factors should be considered when developing a renminbi-dollar exchange strategy?

The factors that should be considered when developing a renminbi-dollar exchange strategy include:

  • The PBOC’s fixed price and the upper and lower limits of the range
  • Your trading personality and the trading style that suits your personality — day trading, swing trading, or position trading
  • The strategy that suits the predominant market condition — mean reversion and momentum strategies may be best here.
  • The time to trade
  • How you will identify the trading setup

What are the key elements of a USD-CNY trading approach?

The key elements of a USDCNY trading approach include:

  • Knowing the level fixed by the PBOC for the day
  • The prevailing market condition — whether the market is trending in one direction towards the upper or lower limit of the range, or it’s moving sideways
  • The time to trade — whether it is in a specific trading session like the Asian session or European session
  • Your trading plan and strategy, which should include:
    • The entry criteria
    • The amount to risk and position size
    • Stop loss and profit target
    • The exit criteria

How can USDCNY forex trading tactics be adapted to suit different market conditions?

USDCNY forex trading tactics be adapted to suit different market conditions by formulating a specific strategy suitable for each market condition. If the market is trading within a tight range around the PBOC’s fixed price, you can use a mean-reversion strategy to trade from one end of the range to the other.

On the other hand, if the range is wide, you can step down to a lower timeframe and use a momentum strategy to trade the reversal to the other end of the PBOC’s limit.

What are the implications of a yuan-dollar trading plan on global financial markets?

The implications of a yuan-dollar trading plan on global financial markets are varied. On one hand, the use of the yuan in the global financial markets is growing, and even the International Monetary Fund (IMF) has added the Chinese yuan to its list of reserve currencies to be used, in part, for central bank transactions. Thus, with forex transactions involving the yuan increasing rapidly, the price movement of the yuan-dollar exchange rate is increasingly affecting other currencies, especially in the Asia region.

On the other hand, The PBOC does not float the yuan freely like other major currencies, as it sets the yuan’s value through a daily ‘fix’. So, the yuan-dollar trading rate does not reflect the state of the Chinese economy relative to the global financial markets.

How does the USDCNY currencies arbitrage technique benefit traders in volatile markets?

USDCNY currencies arbitrage technique is available to certain traders because there are two versions of the Chinese yuan — the onshore yuan CNY that is used in mainland China and is tightly controlled by the PBOC, and the offshore yuan CNH that is available to the international markets.

Generally, there is more demand for the Offshore yuan than the supply, and as such, there is often a price difference between the USDCNY and USDCNH, presenting arbitrage opportunities that traders who have access to both markets can benefit from.

What are some effective market maneuvering techniques for trading the renminbi-dollar pair?

Some effective market maneuvering techniques for trading the renminbi-dollar pair are hard to find. One technique that may be profitable during volatile markets is arbitrage between USDCNY and USDCNH.

For those who just want to profit from price movement in USDCNY alone, they have to be mindful of sudden interventions by the PBOC to stabilize the CNY. So, they should closely monitor news and announcements from Chinese authorities. And they should also try to understand the relationship between the CNY and other major currencies, especially as regards interest rate differentials, which can offer opportunities for carry trade.

How can traders speculate on exchange rate movements in USDCNY using specific tactics?

To speculate on exchange rate movements in USDCNY using specific tactics, traders can develop specific strategies to suit different market conditions. If the market is in a narrow range around the PBOC’s ‘fix’ level, they may use a mean-reversion tactic to profit from the range movements in the market.

What are the advantages and risks associated with a Chinese yuan-dollar trading strategy?

There are few (if any) advantages to using a Chinese yuan-dollar trading strategy. The only advantage the USDCNY market may offer is high volatility. However, the huge spreads for trading the market make it difficult to take advantage of the high volatility.

Instead of advantages, what you have are many risks associated with a Chinese yuan-dollar trading strategy. The PBOC’s daily fix of USDCNY value and the frequent interventions make trading the yuan riskier than trading other currencies.

How can traders implement a USD-CNY forex trading method to maximize profitability?

Traders can implement a USD-CNY forex trading method to maximize profitability by first studying the Chinese market and the regulation mechanisms of the PBOC to understand how it affects whatever strategy they want to trade.

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