Wed. Oct 27th, 2021

global macro trading strategies

Learn how to profit from global macro trading strategies with a few simple tricks. Even the world’s biggest hedge fund, Ray Dalio’s Bridgewater Associates with $140 billion in AUM focuses on the macro strategy. Now it’s the time to learn what is global macro and follow the lead of smart money.

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Did you know that global macro trading performs really well especially in times of distress and during a financial crisis like the 2008 subprime mortgage crisis or the Covid-19 financial crisis?

Now, if you’re interested to learn how to trade stock during the coronavirus crisis, check our guide here: How to Trade Stocks in a Recession.

“I love trading macro. If trading is like chess, then macro trading is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities.” Paul Tudor Jones- Trading Quote.

If you want to master macro trading the same way as PT Jones or Ray Dalio you landed in the right place. We’re going to help you with some global macro tips, but first, let’s see what the global macro-finance theory is.

See below:

global macro investor

The global macro strategies are investment strategies that take a top-down view across different asset classes and the economy. A global macro investor will actively look for different patterns in fundamental economic data, macroeconomics, geopolitical events, and news releases, etc. and profit from their impact on the broad market.

The focus of global macro includes all markets from commodities, equities, currencies, bonds or futures markets.

There are a variety of global best macro trade factors that can impact the price of your market.

The success of macro trading relies on the interpretation of these global macro factors (interest rates, central bank monetary policy, GDP, inflation, global growth, political unrest, natural disasters, etc.).

There are many hedge funds that use macro investing. But all of them can be put in one of the two categories:

  1. Discretionary macro investing
  2. Systematic macro investing

Discretionary global macro strategies focus more on macroeconomics and political events. This macro strategy gives you more flexibility and the ability to profit more when markets are falling apart.

On the other hand, systematic global macro strategies focus on short-term and long-term trends in economic data. This macro strategy is used more by quant hedge funds.

The goal with both global macro investing strategies is to make trades based on the overall economic developments. With global macro, you can still do well even if the markets are crashing or the markets move sideways.

Let’s now look at a notorious global macro paly.

See below:

global macro trading

One of the most notorious global macro trades was when George Soros crashed the Bank of England in 1992 and pocketed $1 billion in profits by shorting the British Pound.

The day the British Pound crashed remained in history as the Black Wednesday.

global macro trading strategies

After the UK joined the ERM system, they pegged the British Pound to the Deutsche Mark. However, 2 years later due to high inflation and interest rates combined with unsustainable growth, set the stage for the boom and bust cycle to complete.

This macro theme of the boom and bust cycle allowed George Soros to predict the future and crash the British Pound.

Next…

Let’s explore some of the advantages of macro trading.

See below:

macro strategy

There are many advantages of global macro analysis.

Below, we’ll outline some of the most important benefits of diversifying with global macro.

#1 Advantage – Helps Identify Long-Term Trends

The main advantage of using macro analysis is that it helps you define the long-term trends in the currency market. Once you have established a directional bias trading should become much easier as you only want to be trading in the direction of the main trend.

#2 Advantage – Assess Market Sentiment

Another advantage of macro trading is that it provides you with the necessary tools to assert the risk sentiment in the market. If you have been trading long enough, you must have heard of terms like risk appetite, risk aversion, risk-on and risk of being tossed around a lot. Basically, this just reflects investors’ willingness to take on market risk and in essence, it tells us what investors believe the world looks like.

Is the picture positive, or is the picture negative?

Looking at investors’ willingness to take on market risk we can learn about the current trading environment and how the market is going to respond.

The market can either be in a risk-on mode where investors seek higher returns and the stocks go up while the US dollar goes down. Top currencies that tend to respond positively in the risk-on environment are those that yield the most, such as the Australian Dollar, Canadian Dollar or the New Zealand Dollar.

The market can also be in a risk-off mode where investors seek safety and sell stocks and buy the US dollar. The safe-haven currencies in a risk-off environment are the US dollar, the Japanese Yen, and the Swiss Franc.

#3 Advantages – Gives you Confidence

Above all macro analysis should give you confidence in executing your trades. Once you have a clear understanding of the catalyst behind currency trends it should come much easier to execute those trades. Confidence comes from knowledge and knowledge comes from analyzing the catalysts behind currency exchange trends.

#4 Advantages – Flexibility

One of the other main advantages of using macro analysis is the flexibility to take broad views on the currency market and only trade when all market conditions align and signal the beginning of a new trend. This will ensure long-term success and profitability. This flexibility will also allow you to use technical analysis as well in order to properly time your entries.

Moving on…

Let’s see how global macro trading works.

See below:

Implementing global macro trading is not necessarily about market timing, but more so learning how to capture the larger trends. Ultimately, macro trading comes down to having a systematic approach that tracks and follows different market themes.

As a global macro investor, your job is to track these market themes.

The way these market themes develop and evolve over time will likely give us potential good trade ideas. You can also check out our blog on good trade algorithms!

Secondly, macro trading is also about looking for new market themes and assesses their potential market impact.

For example, global macro traders are the Doomsday Preppers of the trading world that look for potential dislocating events where things can go wrong and impact the market.

Capitalizing on the mismatches between what the markets are doing and the reality out there is the job of a true global macro investor.

Moving on…

We’re going to help you with different global macro trading strategies and tricks you’re not going to find anywhere else.

See below:

While all global macro strategies fall under the two categories (discretionary and systematic) there are other types of strategies like directional, relative value, arbitrage, top-down approach and so many others.

Now, instead of going through your typical global macro trading strategies, what if we’re going to share with you some more practical approaches.

If you want to learn how to become a top global macro investor this is for you.

See below:

Global Macro Tip #1

Macro volatility is your friend.

Actually, when volatility is on the rise, that’s when macro trading shines the most.

The way we track volatility in the equity market is through the VIX index.

Find here the complete guide on How to Trade VIX Strategies – Wall Street’s Fear Index.

As a general rule when VIX goes at 20 and 25, that’s when we look for macro trading opportunities.

However, due to the coronavirus uncertainties, we have seen VIX holding around 25-30 range.

The chart below shows what happens every time we have a surge in volatility.

It’s foretelling!

macro strategy

Next…

Let’s learn how to prepare for unexpected macro events.

See below:

How to Deal with External Shocks

An external shock is a type of risk event that we’re always going to have to deal with in the market. The main characteristic of these types of macro themes is that they are unexpected and have the potential to impact the financial markets.

An example of an external shock would be an unexpected statement from policymakers or a presidential tweet.

The impact on the stock market of Trump’s tweets is very notorious.

When US President Donald Trump tweets, the stock market pays attention.

See the example below how the US equity market moves around Trump tweets.

global macro strategy pdf

Now, you can see how Trump’s tweets can drive the stock market, so it’s important to pay close attention if you really want to capitalize on these trading opportunities.

Next…

We’re going to share with you a secret index that only macro hedge funds use.

See below:

How to Use the Economic Surprise Index

The economic surprise index is developed by Citi Group.

The index measures the pace at which economic data is coming above or below market expectation.

quantitative global macro

If you really think about it, global macro is all about expectation.

Are the markets doing better than expected?

Or…

Are the markets doing worse than expected?

When things are going well, better than the market expects the economic surprise index will turn positive.

“A positive reading of the Economic Surprise Index suggests that economic releases have on balance [been] beating consensus.” Quote from Bloomberg.

Last year in the aftermath of the COVID-19 crisis the economic surprise index by Citi Group reached a new all-time high and has been a powerful contrarian indicator that predicted the bottom in the US stock market. Check out our blog on the US stock market technical analysis.

Moving on…

We’re going to examine how you can exploit price discrepancies between similar assets.

See below:

Relative Value Strategy

The relative value strategy is a type of investment strategy that seeks to capitalize on the price difference of two assets. Basically relative value it involves buying one asset while at the same time selling another asset, betting on the direction of this spread bet.

The main idea is that the asset you bought needs to outperform the asset you have sold and capture the profit difference.

For example, you can buy a stock from the best performing sector and sell a stock from the worst-performing sector.

For more information on this macro strategy check our full guide here: Quantitative Trading – Relative Value Strategy.

Macro trading is often associated with the hedge fund sector so if a good majority of these hedge funds employ macro trading it does mean that it has some merits in predicting future currency trends. The key to macro trading success like with any type of good trading strategy is to have a sound risk management strategy.

The main benefit of using a macro trading strategy is the conviction to execute your trades and it can give you a map as to where the market is heading next.

In summary, if you want to reach your financial goals as a global macro investor there is hope for you, simply use these four global macro trading strategies and global macro tips:

  • Volatility is your friend
  • Pay attention to external shocks
  • Use the Economic Surprise Index as a contrarian indicator
  • Relative value strategy

Thank you for reading!

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