Fortescue Momentum Strategy

Fortescue has high beta (it moves more than the market), high operating leverage (small iron ore price moves create large earnings swings), and clear catalysts (iron ore prices, Chinese demand, the green-energy theme). It trends well during catalyst-driven periods, and the iron ore complex generates frequent news flow. The 100-share options/LEPO contract is accessible while the volatility creates significant profit opportunities.

Iron ore is roughly 85%+ of Fortescue's revenue, so the iron ore price (the 62% Fe CFR China benchmark) is critical. Because the company runs a low, relatively stable cost base, operating leverage means a rising iron ore price flows almost entirely into earnings - and a falling price is just as brutal in reverse. Note this is the opposite of a manufacturer: here the commodity is the product, not an input cost. Watch SGX/Dalian iron ore futures and the 62% Fe index as key signals.

EMA crossover (9 crossing 21) identifies trend changes - when short-term momentum shifts direction. MACD confirms the quality of that momentum through histogram expansion/contraction. EMA says 'momentum has changed,' MACD says 'momentum is strong/weak.' Both should align for high-probability trades.

Volume shows conviction. Rising prices with high volume means many participants are buying - institutions committing capital. This provides 'fuel' for continuation. Rising prices with low volume lack conviction - few participants are driving the move. These often fail or reverse quickly.

Iron ore is priced in USD while Fortescue reports in AUD, so a weaker AUD lifts AUD-denominated revenue (a tailwind) and a stronger AUD is a headwind. On the cost side, C1 cash costs and energy/diesel prices determine the margin captured at any given iron ore price, and FMG's lower-grade ore attracts a discount to the 62% benchmark - so the realised price (after the grade discount) and the cost base both matter for earnings.

Weekly sets the bias - only trade in the weekly momentum direction. Daily generates signals - EMA crossovers, MACD, and RSI provide entry triggers. Hourly refines timing - wait for an hourly pullback in a daily uptrend for a better entry. The best trades occur when all three align. Never take daily signals against the weekly trend.

Use options when you want defined risk (as a buyer), expect big moves (gamma benefit), when IV is low (potential expansion), or around events for protection. Use LEPOs when you have high conviction and want near-full delta on margin in a futures-like vehicle, or shares when you prefer simple linear exposure without expiry. For most momentum trades, bull/bear call spreads offer the best risk-reward; LEPOs suit high-conviction directional plays where you want full participation.

Iron ore price prints are continuous and Chinese macro data (steel PMI, property, stimulus) lands throughout the month and can trigger 3-5% moves. If holding a momentum position: either reduce to 50% before a major scheduled release to protect profits, or hold if the trend is strong and accept the volatility. For new entries, trading after a clear iron ore/China move is often safer - direction is known and momentum can be traded more confidently.

Enter 50% on the signal, add 50% on confirmation (a 1x ATR move or a 9 EMA pullback that holds). Scale out: 25% at 1.5x ATR (move stop to breakeven), 25% at 2.5x ATR, trail the remaining 50% with the 9 EMA. Add to winners on pullbacks if momentum remains strong, to a maximum of 150% of the base position.

Fortescue's green energy and hydrogen ambitions (Fortescue Energy, its 'Real Zero' decarbonisation target) and its copper/critical-minerals diversification provide an optionality narrative on top of the iron ore core. Positive news (green hydrogen project decisions, supportive policy like Future Made in Australia or overseas incentives, copper strength) creates sentiment tailwinds during energy-transition-focused market phases. It is more a sentiment/optionality driver than a current-earnings driver, so weight it below the iron ore price.

Create a composite from: EMA score (0-3: alignment, slope, crossover recency), MACD score (0-2: line position, histogram direction), RSI score (0-2: level, direction), Volume score (0-2: ratio, trend). Add ROC acceleration (shorter > longer periods = positive). Sector-adjust for relative strength vs the Metals & Mining index. The total scale determines position sizing and confidence.

Use ML as an ensemble layer. Agreement (both positive or both skeptical) = trade with confidence in that direction. Disagreement (traditional strong, ML weak) = investigate what ML detected (often sector divergence or an iron-ore/China headwind). Use ML to filter signals and refine position sizing, not to replace traditional analysis entirely.

SGX/Dalian iron ore futures and the 62% Fe benchmark (the leading indicator for revenue). The global iron ore majors (BHP, Rio Tinto, Vale) for sector beta. AUD/USD for revenue translation (a weaker AUD helps). Chinese steel mill margins, credit impulse, and port inventories for demand. Copper and green-energy sentiment for the transition theme. Create an environment score (+1/0/-1 for each) to adjust position sizing. Perfect environment (5/5) = full size. Mixed (2-3) = half size.

Target delta by conviction: high (0.65-0.75), moderate (0.45-0.55). Use ATM for gamma benefit in the first few days expecting quick follow-through. Manage vega: prefer low-IV entries, use spreads in high IV (pre-results). Calculate theta impact on expected profit - use spreads, ITM options, or LEPOs to reduce theta drag on swing trades.

Base allocation 5-8%, increasing to 10-12% in a strong regime. Manage resources sector correlation (FMG + BHP = double iron-ore exposure). Risk budget using VaR: if the strategy VaR is 12% and the portfolio target is 5%, the max allocation is ~40% (but is constrained by sector limits to ~12%). Set a strategy drawdown limit (-15%) and pause if breached for regime evaluation.