Global Macro Trading Styles by Anthony David, Relative value trading and directional trading are the two main global macro investing strategies. Directional is when you take a position thinking you know which way it is going. Relative value or rv trades are when you think that an asset is mis-priced relative to another asset. There are multiple categories of directional traders. Some are technically oriented and deemed technicians and look at charts and other price action based studies. Other macro traders use fundamental analysis thinking that they can determine if an asset is under or over valued. Gut feel is a style as well. Most of the time gut traders lose their money but there are a few that can trade successfully solely of off their feelings. The next large category of traders are the CTA long term trend followers. They use technical analysis and risk management to build automated trading systems. Then we have the true global macro traders who use a bit from all of these styles in order to have lower drawdowns and higher returns. Those traders that trade based solely off of fundamentals typically will have good long term results but have what some would deem excessive short term volatility due to their lack of respect of the actual price. Typically id they think something is undervalued they will keep buying more and more which makes a lot when you are right but can really hurt when you are wrong. Trading from the seat of your pants is typically a bad way to go about trading. That being said if you are good at risk management it can be one way to trade. If you like watching fed announcements and trading off of them then good luck. It doesnâ€™t work for most that try it. Some traders look only at technical analysis and as long as they use proper risk management they can be very successful. In fact one famous fund manager says that at the end of the day he is a slave to the tape and proud of it. Technical analysis doesnâ€™t tell us if a position is under or overvalued but only tells us what the price has done. Long term trend following is occasionally lumped into the macro category because they trade markets across the globe. They use an automated process that buys when markets trend one way and get out and go the other direction when they turn. Most of the success depends upon the risk management and not so much on the entry rules. Finally we get to the trader who tries to incorporate all the different methods into one. It makes sense that if you combine fundamental analysis, what the asset is worth and where it is likely to go, along with technicals, what the asset is actually doing and where it has been, you should get a better end result. Yes, occasionally you will be wrong but over time your hit rate should be higher and your drawdowns should be smaller. Over time a trader that really learns what drives the particular market should do better then any of the other traders over the long haul. About the Author: Dave helps people find different Global Macro Trading opportunities. The Macro Trader focuses on finding actionable trading ideas and publishes them in a weekly newsletter.
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Published on Nov 13, 2009
Long term trend following is occasionally lumped into the macro category because they trade markets across the globe. They use an automated...