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The power of combining Technical and Macro analysis

Reduce uncertainty and gain trading confidence

Technicians sometimes take pride in their distance from market gossip and the stream of economic releases. Yet nearly all of them love to hear the macroeconomic discourse turning in their favour. And likewise, every Macro Trader, however convinced of his assessment economic conditions, loves to hear of completed chart patterns endorsing his stance.

Then why not find out about both views before entering the market?

All traders have to make decisions in conditions of great uncertainty. The more useful evidence they can gather in favour of a particular trade the better. For a Macro Trader not to know what the charts are saying is a gap in his armoury. For a Technical Trader not to develop a feel for the economy and market sentiment is a weakness.

If both trade on the knowledge that all the available evidence is on his side they gain a massive confidence boost.

Profit from both short-term trades and long-term trades

There are two ways to make money in a market: spotting short-term opportunities or long-term ones. Both can make a great deal of money. To do only one or the other is to leave a great deal of money on the table.

So why not do both?

That’s where combining technical with macro analysis can help again.

  • Technical Traders are opportunists. They enjoy spotting turning points and excel at the timing of entry after the completion of patterns. They also excel at risk management. A trade is wrong when a pattern fails. The weakness of technicians is that they are far less good at following trends, especially those not driven by a pattern with a clear target. One reason is that risk control, so useful for identifying the wrong trade in its early stages, is rarely flexible enough to follow the trend without being stopped out. Another reason is that the faster the trend, the more of a straight line it describes. And straight lines are featureless to chartists. They hate featureless markets because they lack support and resistance levels which they need for their risk control.
  • Macro Traders are good at understanding trends. They identify mismatches between the economic fundamentals and the market. They also watch for changing sentiment to favour their trade. But a weakness can arise from the sheer imprecision of their analysis. Sentiment can switch back and forth around the logic of a position. When is a change in sentiment merely short-term market chatter or a threat to the underlying trend? How can that change be measured? If the Macro dealer is too inflexible, his desire to prove himself right can undermine the need to take money from the market. From this arises a possible weakness at risk control.

Each style of trading addresses the other’s weakness

There is no simple formula for combining both approaches; each trader will do it in a different way. But all traders greatly benefit from an awareness of both techniques.

People are temperamentally inclined to be Technicians or Macro traders so consider each from the standpoint of the other:

  • For the Macro trader, technical analysis can help him time his moves. After all, technical analysis at one level is no more than a visual picture of changing market sentiment. Technical analysis will also help with risk control, particularly in the early stages of a trade. The precision of technical indicators can help the Macro trader get into the market. They will also get him out in the early stages of the wrong trade.
  • For the Technician, knowing the fundamental economic forces at work will help sustain his participation in a trend. Technicians are uncomfortable in featureless markets – those without close support and resistance levels to trade around. Yet those are the very markets that a great deal of money can be made. Fundamental economic analysis helps the Technician stay in those trends. Moreover, the Macro trader’s close attention to market sentiment benefits the Technician. This is because charts make no distinction between ‘good’ and ‘bad’ news but the Macro trader’s careful study of how the market reacts to either is a powerful tool.

Experienced traders in modern markets have long realised that too much information is as dangerous as too little. The solution lies in clear evidence rather than more evidence. Clarity lies in focus: the study of fewer variables with closer attention. But clarity also arises from completeness. Seeing the whole picture. Combining technical with macro analysis addresses the whole picture.


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