Macro Trading Strategy Defined

It’s possible that you may have heard about micro-trading when discussing investment strategies. Another strategy that is commonplace is ‘macro trading,’ which is as intricate as it is extensive in its technique. This article will dive into what it is, what sets it apart from micro-trading, and why macroeconomic trends matter.

What is it?

For starters, we need to define ‘systematic trading’. This is a method pertaining to the specification of trade goals, risk controls, and rules. All of which have the capacity to execute investment and trading decisions in a methodical manner. Systematic trading typically includes manual trading of systems, as well as automation using computers. This automation can either be full or partial.

Connected to systematic trading is ‘macros trading.’ This strategy occurs when an individual attempts to make a profit by taking advantage of patterns in economic data. Such patterns include certain changes like growth, unemployment, and inflation.

Global macro is an investment plan stemming from the interpretation and forecast of large-scale events. To elaborate, these are events that pertain to national economies, history, and relations of the international variety. This strategy will usually employ predictions and analyses of the following factors:

  • Interest rate trends
  • Trades and payments on an international scale
  • Changes in the world of politics
  • Government policies
  • Inter-government relations
  • Various other broad systemic factors

For the most part, trading strategies draw from educated guesses concerning the macroeconomic developments of the world.

Global Macro Strategy

A ‘global macro strategy’ is a hedge fund or mutual fund strategy. It generally bases its holdings predominantly on the overall economic and political views of several countries. Alternatively, they draw from their macroeconomic principles. Holdings will typically include long and short positions in a variety of equity, fixed income, currency, commodities, and futures markets.

Suppose that a manager is of the belief that the U.S. is not too far away from experiencing a recession. In this case, the manager may short sell stocks and futures contracts on major U.S. indices. Or, perhaps, the U.S. dollar. There is a chance that they might also see an alluring opportunity for growth in Singapore. In other words, taking long positions in the assets belonging to that country.

Global macro funds create portfolios around predictions and projections of large-scale events on a large scale. Country-wide, continental, global, you name it. It implements opportunistic investment methods to capitalize on macroeconomic and geopolitical trends. They often use a combination of trading strategies that connect to currency, interest rate, and stock index.

In the context of currency strategies, the funds will actively seek the right opportunities. Specifically, those that derive from the relative strength of one currency to another. Funds monitor and project policies worldwide that relate to the economy and money. Furthermore, they make highly leveraged currency trades by utilizing futures, forwards, options, and spot transactions.

Many consider global macro funds to be among the least-restrictive funds. The reason for this being that they typically place any trade type they choose using almost any form of security.

Micro-trading: what’s the difference?

If the term “macro” implies a larger scale, “micro” would of course suggest a smaller scale. Indeed, that is sort of the case, but there is much more to this difference than that.

First, you have macro traders, who look for patterns in the underlying fundamental economic data. There are also those that anticipate potential movements in similar financial markets.

‘Micro-trading’, on the other hand, is basically trading on the Forex with the use of a micro-account. These Forex micro-accounts provide investors with a certain number of advantages, as well as a number of disadvantages. One of the many advantages is the fact it is particularly appropriate to individual investors. To be precise, those who do not know about the basics of the foreign exchange market and online trading.

Micro-trading, of course, has its fair share of disadvantages. For example, the brokers usually pay a certain rate if your positions remain open apart beyond the market opening times. This will no doubt have a direct impact on your profits and, by extension, your performance.

In essence, the Forex micro-accounts and the mini-trading accounts are one and the same. They are both accounts that allow investors to trade in small amounts. That is to say, smaller amounts than is possible in a conventional manner

As a matter of fact, micro-trading enables you to make speculations on currencies and their exchange rate. The additional bonus is that it is with lower transaction volumes. That is to say, it is a small part of what would normally be possible through traditional Forex trading accounts. An important thing to remember is that the profits are also smaller, too.

Macroeconomic trends

Macroeconomic trends are very powerful asset return factors. They get this reputation for being able to affect risk aversion and risk-neutral valuations of securities simultaneously. Generally speaking, the influence of macroeconomics appears to be at its strongest when applied to longer horizons.

It’s easy to define a macro trend indicator as being an updatable time series. One that represents a significant economic trend and that is capable of being mapped to the performance of tradable assets. Alternatively, the performance of derivatives positions. Its foundation can draw from three complementary types of information: economic data, financial market data, and expert judgment.

Economic data typically establishes a direct link between investment and economic reality. Market data informs on the overall state of financial markets and economic trends that have yet to be incorporated in economic data. Last but not least, expert judgment is crucial for stable theory formulation and data set selection.

Why they matter

The purpose of macroeconomic trends is to move asset prices, and they do so for two reasons. One is that they influence the attitudes of investors towards risk. The other is that they have an effect on the risk-neutral anticipated payoff of securities.

Let’s use examples to better illustrate these two reasons. In the case of the first, we have an increase in risk aversion concerning economic recessions. Specifically, when cash flows and incomes suddenly drop to critical thresholds. Now, for the second, there are various examples one could apply. These include the following:

  • The inflation impact on the real return on nominal fixed income securities
  • Influence of economic growth and relative price-wage trends pertaining to stocks’ earning prospects
  • The noticeable effect of financial conditions when it comes to the default risk of credit
  • The connection between external balances and exchange rate dynamics

Thanks to the heavy influence of macroeconomic trends, a lot of investors are watching economic data releases. What’s more, they are starting to employ several economists in order to analyze them. Empirical studies reveal that bond and equity markets typically post large moves on days of key data releases. Moreover, they are most likely to do so on those particular days than they would on any other day.

There is a catch, though. The influence of economic data on changes in market price is stronger the longer the time horizon that we consider is. This primarily due to economic changes being, for the most part, more persistent than factors of the non-fundamental variety. In this sense, they are a vital explanatory variable of medium pertaining to long-term price trends.