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.
Directional trading comes in several different styles. Some traders do their fundamental work and then buy or short based solely upon what they think the asset will do. Others trade purely on gut feel. And yet others trade technically looking at charts. Another large class of so-called global macro traders use automatic trading systems. And then finally we have the people that try and incorporate all the different types into one.
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 doesn't work for most that try it.
Chart reading, also known as technical analysis is the study of price action. Coupled with a solid risk management process many traders are successful at using this approach. Looking at charts enables traders to gauge the sentiment of the market and which way the market may move. Like all forms of trading good risk management is crucial.
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.
The last type of trader that we look at is the one who realizes that there is value in all the approaches. They will look at a chart, use fundamentals, their own judgment, and solid risk management. Using all of this they are better able to make consistent out sized gains along with lower drawdowns.
Directional trading comes in several different styles. Some traders do their fundamental work and then buy or short based solely upon what they think the asset will do. Others trade purely on gut feel. And yet others trade technically looking at charts. Another large class of so-called global macro traders use automatic trading systems. And then finally we have the people that try and incorporate all the different types into one.
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 doesn't work for most that try it.
Chart reading, also known as technical analysis is the study of price action. Coupled with a solid risk management process many traders are successful at using this approach. Looking at charts enables traders to gauge the sentiment of the market and which way the market may move. Like all forms of trading good risk management is crucial.
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.
The last type of trader that we look at is the one who realizes that there is value in all the approaches. They will look at a chart, use fundamentals, their own judgment, and solid risk management. Using all of this they are better able to make consistent out sized gains along with lower drawdowns.
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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