What is Macro Trading?
Capture the big moves by studying the long-term economic forces behind the market
Macro Traders look for patterns in the underlying fundamental economic data and those that to anticipate moves in related financial markets.
- Because economic data is full of misleading data (‘noisy’), Macro Traders are forced to look for broad trends. A trend of rising unemployment, other things being equal, will create a trend of rising Bond futures. So if Bond prices are falling while growth is stalling then there is a disparity - a trading opportunity.
- In practice, traders need to spot the contradictions between a mix of economic data and a mix of markets. This is easier than it sounds. The Macro Trader doesn’t need to be an economist. There is an enormous amount of macroeconomic discourse in the media to do the thinking for the trader. His problem is to restrict the amount of information he has rather than increase it. He needs clarity.
- Macro Traders need to understand and anticipate the actions of big players like Governments, the World Trade Organisation and OPEC. These big players have access to economic levers which they can pull to directly affect trading markets. This ranges from raising or lowering interest rates to restricting the supply of a scarce commodity over which they have control like oil or gold or aid. Big players are driven by social economic and political forces which the dealer needs to understand.
Use market sentiment to time your trades
Having found a mismatch between the economy and the markets, the trader needs a change in sentiment or market expectations to realise his profit.
- Market sentiment can change instantly with the publication of a critical economic release. But often it takes a long time for entrenched conventional wisdom to change direction. So contradictions between the real world and the market can be long lasting. Trading without reference to sentiment is ‘trading over the hill’: anticipating the bear move while the market is still going up. The true skill of the Macro trader is anticipating the change in market sentiment bringing that mismatch into line. If he thinks a bull market is ahead of the economic trend, the trader strives to sell just ahead of a general perception that that is so by the market as a whole.
- Maynard Keynes took this even further in relation to some markets where ‘we devote our intelligence to anticipating what average opinion expects the average opinion to be’. What he meant was that for the most part the market chases from one conventional wisdom about the future to another and only rarely does economic ‘reality’ intrude. That might be because the underlying market mechanisms don’t work or are impossible to know. So market expectations govern.
- The truth differs from market to market. In some, like the short end of the interest rate markets, there are clear predictable relationships with economic fundamentals giving rise to trading opportunities. But the general point remains that in a free market the successful macro trader must anticipate the next concern of the mass of other traders. In uncompetitive markets, he anticipates the next concern of the dominant player – be it a Government or OPEC or the WTO.
How is a change in sentiment to be anticipated?
- Watch for new themes emerging within the ‘noise’ of daily economic discourse
- Study price action as economic data is released. The average opinion of the market’s prospects is never more clearly revealed than when a ‘bad’ statistic hits the market and it stays still or rises. Or when a ‘good’ statistic is released and the market remains unchanged or falls. This close attention to the psychology of the market over time is vital to understanding how sentiment is changing.
So Macro trading is a study of the economy and a study of the market’s psychology. It is suited to the medium and long-term since once economies begin to trend they typically take months and years to complete.
Having established his position, the Macro Trader may need to do very little.As Jesse Livermore said:
‘It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!’
But Livermore was trading stocks, where bull sentiment, once established, can last for many years without changing. And you may be sure that he constantly monitored it. In many other markets, sentiment is much more volatile even though the underlying economics remain the same. Then the Macro Trader must take profit and adjust his stance until sentiment moves back in line with the underlying trend. The Macro Trader must always be closely in touch with market sentiment.