In most cases, I would argue strong fundamentals will be also seen in price action and therefore technical indicators. Therefore, saying techni-fundamental may be redundant but this article will describe the fundamental reason and look for technicals to provide the timing.

Beginning with the fundamentals, two weeks ago the Swiss National Bank (SNB) announced that they would be using "quantitative easing" to help the Swiss economy. Quantitative easing is the process of increasing money supply, in most cases, by simply printing un-backed currency. Quantitative easing could also be called, measured weakening. The increase of supply in a measurable and consistent way weakens the value of the currency while the intent is to relax tight credit and improve exports due to the weakened currency, all of which in theory stimulates economic growth.

A commonly known correlation exists between the British pound and oil. British Petroleum accounts for nearly 10% of the Gross Domestic Product (GDP) of Great Britain. When oil prices rise, in turn British Petroleum does better and consequently so does the GDP and economy of Great Britain. Oil has been rising over the past two months and with the concern of inflation looming, oil's assent could be more dramatic.

Combining both the potential of a stronger pound with higher oil prices and the potential of a weaker franc due to quantitative easing, the GBP/CHF trade has fundamentals supporting a bullish move.

The technicals, or timing, of the fundamentals is fairly straight forward. The pair has consolidated as the SNB announced their change in monetary policy. When the consolidation ends, price action could run for 1,500 pips and potentially more.

Though this is not a text book wedge, the price action has consolidated in a wedge-time pattern. When a wedge occurs, the breakout of the wedge usually runs the distance of the base of the wedge. The base of the wedge is often times calculated as the second bounce in the consolidation. The base here measures 1,500 pips. If the pair was to break above resistance in the next week, the target would be approximately 1.80 (see Figure 1). Our target price coincides with a previous, multi-year down trend as well, adding strength to the target as potential resistance. Additional confirmation can be obtained if the stochastics turns positive as the price action breaks through the resistance trend line. A support has been established near 1.5900. If a stop loss is placed near 1.5900 at the time of a breakout, the risk-to-reward of this set up is nearly 2.5 to 1.

Figure 1 -- Wedge Formation with a Target of 1,500 Pips.

If the breakout occurs, a stop could be trailed as price rose and as higher near term support levels were created. This trade could be exacted using the spot market or by using the futures by buying the pound futures (/6b) and selling the franc futures(/6s).

Copyright 2009  Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.
The security used in this example is used for illustrative purposes only. Investools is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance.

Trading spot currency contracts can involve high risk and the significant loss of any funds invested. Spot currency contracts are highly leveraged. This means that significant losses can be created quickly and unexpectedly.

Options trading is generally more complex than stock trading and may not be suitable for some investors. Granting options and some other options strategies can result in the loss of more than the original amount invested. Before trading options a person should review the document Characteristics and Risks of Standardized Options, available from your broker or any exchange on which options are traded.

This article is going is going to get a little more political than I generally care to go, but it will affect the market so it needs to be addressed. In times of turmoil, the ability of the government to implement sweeping changes becomes easier, as people are so eager to look for quick financial and political solutions. I understand that tighter regulation would have been- and will be- beneficial for the markets, but we need to be careful not to stifle the Industry. An early warning sign is the growing number of firms balking at the TALF and TARP moneys as they come to realize the growing number of strings attached. They just watched Rick Wagoner get shown the door for running a business unsuccessfully and not adhering to a budget (sound familiar, Congress??). They ask themselves, why him and not one of the many other CEO's whose firms contributed to the mess we are in? Wall Street Brass gets spared, but not Detroit? What if that changes? The one thing investors and traders hate more than bad news is uncertainty. We can deal with the bleak picture but it cannot be a moving picture. We need to establish a plan and stick with it so that firms can feel safe knowing they understand what the investing landscaping will look like. As it stands now folks are apprehensive in a number of ways. A better deal could be had shortly as the picture changes daily, or a worse deal could be coming so they don't want to get in. Traders will adjust and move forward; that's what we do. Just establish the plan and live with it. It doesn't and will not be perfect but what is?

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Think outside the box... Most retail costumers buy butterfly's dirt cheap hand over fist trying to hit it big on these low cost trades. The real question most should inquire about is why are butterfly's so inexpensive?? They have very low probabilities of success!! The standard butterfly is simply "taking a shot" and should be utilized and viewed this way. So what now for the butterfly?? Do we abandon our long shot altogether?? Not likely. The butterfly can be used quite readily but we just need to tweak it to create some positive theta decay while taking a shot. A butterfly for a credit?? Enter the Monkey-fly (and yes we could not think of a better name for it, but we are amused). Take the traditional butterfly, seemingly harmless and easy to define the total risk. Step it up a notch and let us examine selling a vertical spread to finance the purchase of our butterfly. Take a look at the example below with the SPY trading at $82.65 we have created a define risk Monkey-fly with an embedded $1.00 wide vertical spread.

Ok so there is risk in the vertical spread we are embedding but as with any out of the money short vertical there is also a high probability of success along with a positive theta. Now let's break this Monkey-fly into its synthetic components. The butterfly component of the trade is long 1 x 84 calls, short 2 x May 85 calls, long 1 x May 86 calls. The embedded vertical spread is the May short 1 x May 86 calls and long 1 x May 87 calls. These two trades placed separately would result in 5 separate legs whereby increasing transaction costs. Combining the spreads has reduced the trade to 3 legs but as with all multi-legged spreads you must factor in the increased transaction costs associated with each trade. Furthermore, placing the Monkey-fly as one spread rather then legging also reduces "leg risk" in what has been an extremely volatile market. What it imperative to understand about this convoluted butterfly is again there is a vertical spread embedded and the trade carries risk. This Monkey-fly example with its embedded short call spread also carries with it negative deltas and therefore a bearish market sentiment.

Let's look at the facts: We have embedded a short May 86 call/87 call vertical for a +.35 credit. The spread is $1.00 wide vertical of which we have already received a +$0.35 credit therefore, the maximum potential risk in the trade is -$0.65. Our break-even point in the trade is the short May 86 calls plus the +$0.35 credit received or $86.35. (Remember we are embedding a short vertical spread therefore we are synthetically short the 86 call strike.) Maximum profit potential on the trade is achieved at or near expiration if the underlying SPY shares fall directly in the central 85 strike of the Monkey-fly. This would produce a $1.00 profit plus the +$0.35 credit received for placing the spread totaling +$1.35. The ideal landing spot for the SPY come May expiration is obviously $85.00 but if the SPY's fall anywhere under $86.00 we are still profitable. Based on currently May implied volatility there is approximately a 65% probability of the SPY's falling under $86.00 by May expiration. Stay tuned because there is more to come on embedding spreads to finance our trades.

thinkorswim, Inc. and its registered employee, Don Kaufman, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Most equity markets have had a 20+% gain in less then a month. You may have been left with, or accumulated, many stocks and/or options positions over the last year. You may have been holding on to these positions for sometime now, without knowing what your overall market risk is. How can you look at a portfolio of many different stock/option products and compare them to one product? Beta weight your portfolio my friends! Beta-weighted deltas simply let you compare the delta risk across different positions and with "one click" sum them to see the delta risk of your entire portfolio! For example, 100 shares of POT and 100 shares of GE each have a delta of 100, but you can't just add them together to get a portfolio delta of 200. You have to convert the deltas to beta-weighted deltas. The TOS platform will do that for you automatically, making it easier for you to evaluate your risk. As you can see in this account, we have a delta of -2135.12. We also have a positive theta of 547.28, so there are many option positions too!

To use this feature, click on the gray box next to the word "Beta Weighting NOT WEIGHTED" in the middle right hand corner of the Position Statement section of the Monitor page.



Then click on the small check box that says "Beta Weighting." You will see a blank box open up. You can put a symbol in there, such as SPX, and hit the enter button.



If you type in SPX to beta weight the deltas in terms of the SPX, you will see a beta weighted delta on this account of about -114. That means that theoretically, this total portfolio position would make or lose $114.00 if the SPX moved $1.00. What beta-weighted portfolio deltas let you do is see the risk of all your stock and option positions in terms of a single index. As you can see, this portfolio has a beta-weighted position of -113.98, significantly different from the -2135.12 non-weighted deltas. You may want to make sure that you entire portfolio does not exceed a certain delta parameter. For example, if you don't want your portfolio risk to exceed +/- 200 SPX deltas, or +/- 1000 QQQQ deltas, you can use the beta weighting tool to see your risk based on whatever index you want. The risk of this tool is that betas are not necessarily stable or absolute. That is, if a stock has a beta of 1.50, there is no guarantee that the stock will move 1.50 as much as the SPX over the next day, or week, or month. But for me it is the best indicator of your portfolio risk, allowing you to think about hedging or reducing positions if that risk exceeds what you are comfortable with. If you want to switch back to non-beta weighted deltas, just click on the blue arrow and uncheck "Beta Weighting." Happy trading!

thinkorswim, Inc. and its registered employee, Tony Battista, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

The Hardest Thing about Trading is . . .

So you sell a vertical spread, you sell a spread far out of the money above a near term resistance. Everything is on your side, price and probabilities. Then, without warning, the stock jumps right through resistance and through your short strike. You start sweating, your palms get clammy . . . and you say to yourself, among other things . . . "Now what do I do??!!!"

I firmly believe that it's easy to enter a trade but hard to manage it over time. If you have been trading in the market for 20 years or 20 days and whether it's long stock or a Double Diagonal, the statement holds true.

Below are four things to consider if a trade doesn't go your way:

1- Close it out and take the loss. Admit you're wrong, take the loss and move on. If you position size appropriately, plan for the worst as far as risk goes; this shouldn't be a big deal.

2- Hold on and play the probabilities. If you enter the trade as a High Probability trade and you position size correctly, just sit back relax and see what happens. Too often people exit trades early only to have the spread come right back into the profitability zone. Relax, kick your feet up and find a good ball game to watch!

3- Adjust with other trades or instruments. I posted an article here on the Daily Swim entitled "Why you Have to Love Being a Trader" (March 9th). In that post there are a few ideas of types of adjustments/hedges you can make. As you do adjust with another trade or instrument, follow these guidelines:

a. Adjust only 30 - 40% of your position so you don't lose on the original trade, and the new trade. The whole idea of adjusting is to reduce your risk, not to change a losing trade into a winning trade.
b. Would you enter the trade today independent of the trade you're adjusting against? If the answer is yes, proceed, if not consider something else.

4- Adjust the trade into a trade with a better chance of winning. This is the one that traders covet the most, taking a loser and turning it into a winner. This is also the hardest thing to do. Here are some questions to ask as you embark on turning a loser into a winner

a. Would I enter this new trade independent today of what I have on?
b. What kind of risk am I adding to the position?
c. Does it actually increase my probability of making money?

If you answer "yes" to any of the questions above, then go for it; if not, consider another option.

Trade Smart, Trade Profitable.

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

With the global economic crises continuing, central banks worldwide are attempting to stimulate growth and loosen credit through monetary policy. The monetary policies being used currently weaken each country's currency. Weakening currencies equates to lower purchasing power and, in turn, inflation. Inflation, by definition, is an increase in costs usually defined by the Consumer Price Index (CPI) and Purchasing Price Index (PPI). Although CPI and PPI vary by country, there is a core or commodity-based items in all CPI and PPI numbers including energy.

Because pressure on commodities to rise is growing and concern of global inflation is increasing, commodities and commodity-based currencies are attractive. For the purpose of this report, the Great Britain pound (GBP) and Australian aussie (AUD) represent the commodity currencies and the euro (EUR) and Japanese yen (JPY) are the two counter currencies.

The British pound has a historical correlation to oil prices. When oil prices and oil companies' prices rise, British Petroleum (BP) and the British pound follow suit. Last month's article discussed the GBP/CHF's potential bullish sentiment as it formed a wedge. The EUR/GBP has shown increased demand for the British pound and decreased demand for the euro, similar to what was expected on the GBP/CHF (see Figure 1). Over the past few weeks, price continued to edge lower and may continue in this direction if the fundamentals at play remain consistent. The pullback could find resistance near 90.75 and then fall further. If the pair breaks support near 87, the next support level is near 82.50 - a potential move of 825 pips. Not only is this a significant move, this pair's pips are currently worth $1.45 per mini contract, making the potential move worth $1,196.00.

Figure 1 -- EUR/GBP Moving Lower, Experiencing a Potential Pullback

The AUD/JPY pair has a similar scenario. If inflation is manifest in the markets, investors often run to gold first. Japan currently has the worst fundamentals in the world. Just two days ago, I was talking to a friend from Australia and he said we don't hear a lot of bad news out of Australia because there isn't any. He felt the economy and housing are stable and employment is solid. If all of this is true, then this pair's fundamentals should be bullish. As shown in Figure 2, price reflected this bullish sentiment with a significant sell-off back to support. If support holds and the trend continues, a move back to recent resistance near 73 would provide a 440-pip move. Both of these scenarios need commodities to remain stable or rise with recent trend lines holding.


Figure 2 -- AUD/JPY Testing Support in a Strong Uptrend

Both of the above can be traded using the forex spot market or combing futures properly via futures by buying the pound futures (/6B) and selling the euro futures (/6E) for the EUR/GBP pair and by buying Australian dollar futures (/6A) and selling yen futures (/6J) for the AUD/JPY pair.

Copyright 2009 Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

The security used in this example is used for illustrative purposes only. Investools is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance.

Trading spot currency contracts can involve high risk and the significant loss of any funds invested. Spot currency contracts are highly leveraged. This means that significant losses can be created quickly and unexpectedly.

Options trading is generally more complex than stock trading and may not be suitable for some investors. Granting options and some other options strategies can result in the loss of more than the original amount invested. Before trading options a person should review the document Characteristics and Risks of Standardized Options, available from your broker or any exchange on which options are traded.