What Macro Trading Strategies Are There?

By Caroline Banton on June 24, 2022

Macro traders are less mired in objective mathematical algorithms and more focused on subjective predictions. That’s because macro trading uses fundamental analysis on a global scale rather than an individual company or industry sector scale, and technical analysis on a global scale is complex to say the least.

What Is Macro Trading?

An investor who macro trades forms an opinion about the direction of a country’s economy. This is based on its macro-economic outlook. For example, a trader might focus on India and the nation’s economic indicators. These will include GDP, employment, sector trends, and the geopolitical climate in the region before placing investments in that country. Some macro traders take a global stance and do not limit their investments to just one country.

Macro and global macro investors may buy or short stocks, bonds, currencies, commodities, and exchange-traded funds (ETFs) in certain countries. Suppose a global macro investor, who studies economic indicators, believes that the US economy is going to fall into recession and stocks will decline. They may short stocks or stock index ETFs.

How do they do it?

Hedge funds and mutual funds primarily use a long/short trading strategy, with the fund types being typically actively managed. An example of a global macro fund is a discretionary global macro fund. Other include commodity trading advisor global macro funds, and systemic global macro funds.

Macro trading strategy calls for analysis of economic indicators for a country. This is instead of growth indicators for an individual corporation and usually with a much longer time horizon. Think GDP (gross domestic product) and CPI (consumer price index) rather than ROI (return on income) and ROA (return on assets). While there is room for technical analysis when deciding on specific trades, overall, the approaches are fundamental in nature.

Macro trading: Fundamental Vs. Technical Analysis

Technical traders are interested in the growth trajectory and corresponding prices of individual companies’ stocks. They use technical analysis to study the price trends of individual stocks. Macro traders, on the other hand, look more at industry-specific companies in a country. They also focus on macro trend indicators to determine whether a country is thriving or not. This is called fundamental analysis.

What Are Macro Trading Strategies?

Fundamental analysis is one macro trading strategy, but there are more. Here’s a look at popular macro trading strategies.

Fundamental Analysis

As already discussed, fundamental analysis looks at key economic indicators. These will include GDP, inflation or price indices, employment rates, the housing market, manufacturing, and interest rate changes. Macro traders look at these economic data at the country level and make comparisons at the country level. No one indicator is considered in isolation. Rather, investors look at all datapoints to develop an overall picture of the economic future of a company, sector, or country.

Technical Analysis and Trends

While macro investors don’t focus on technical or trend analysis of individual company stocks, they will examine a nation’s stock market and look for trends that indicate volatility. The stock market moves up and down rapidly, and a macro investor will try to apply those movements to determine what will occur in an economy over the long term. Price movements and black swan events are notable events a macro investor will pay attention to.

Price Movements (Bubbles and Crashes) – Price changes in asset classes tend to occur when market prices move away from intrinsic norms. For example, recent bubbles have been seen in the crypto and housing markets. Bubbles usually result in an asset crash and extremely low asset prices.

Black Swan Events – Black swan events take everybody by surprise. They cannot be anticipated, but a macro investor might want to see how a black swan event historically affected an economy to gauge future risk. These events have an extreme effect on affected countries’ stock markets. The housing crash in the United States that occurred in 2008 was a black swan event that precipitated the 2008 global financial crisis.

Monetary and Fiscal Policy

Macro traders will look at the actions of central banks and governments and how their policies are influencing the economy.

For example, in the United States, the Fed controls the money supply in the economy and adjusts the interest rates. If the Fed lowers interest rates and increases the money supply, this is a good indicator of expected economic growth that could drive up asset prices. If the Fed increases interest rates and decreases the money supply, this could indicate that the Fed is fighting inflation and a slowdown in the economy.

Other indicators of interest to macro investors are consumer spending and taxation. If the U.S. government fears a recession, it might lower taxes to encourage consumers to spend more and stimulate the economy. Conversely, the government might raise taxes to slow down consumer spending and economic growth. All these indicators influence the investment decisions of macro traders.

Stability and Geopolitics

Wars and political events cause instability, which devalues a country’s assets. When a country experiences instability, economic growth is unlikely, and investors will exacerbate the situation by parking their assets in other countries. They may turn to safe havens or alternative assets such as crypto, precious metals, and luxury assets like jewelry, watches, etc. Instability is a critical indicator for macro investors’ trading strategies.

Demographics

The demographic changes in a country are of interest to macro investors because consumer behavior among different groups affect the economy. For example, the United States has an aging population that requires a robust healthcare system. A country that has a large young population may have a greater demand for new technology.

How to Start Macro Trading

If you are interested in macro trading, here are some steps to take.

Get a PH.D. in macroeconomics —just kidding! Learn as much as you can about macro trading. Read books, engage in discussion boards, and listen to reliable podcasts. Be discerning in the content you consume, there are plenty of pundits and gurus on YouTube, happy to take your money in return for a poor-quality webinar or course on macro trading.

Next, define your strategy and do not deviate from it.

• Define what assets you will trade (stocks, ETFs, bonds, currency pairs, and/or commodities) and what data you will source.
• Choose which countries’ assets you will trade based on their macroeconomic performance.
• Do your homework and note past asset price changes occurring after government and central bank interventions. For example, interest rate changes, tax policy changes.
• Set buy and sell rules for the assets you’ve chosen to trade. Determine what data points will initiate a buy or sell in an asset class. Consider technical buy and sell signals based on price charts.
• Practice risk management by placing stop-loss orders and limiting how much you invest. Only invest as much as you can afford to lose.
• Open a trading account on a reliable platform. For example, Merrill, TD Ameritrade, and SOFI.

Conclusion

Macro trading appeals to the more measured and subjective personality type, as opposed to the more reactive day trader. To be successful, a trader needs an in-depth appreciation of macroeconomics and how the discipline relates to financial markets.

Macro trader strategies examine trends in popular indicators. These will include GDP, consumer price trends, central bank and government fiscal policy. They will also have to pay attention to the geopolitical landscape to guide their market moves. It is a lot to get your head around, but if economics and finance is your thing, you are probably much more suited to macro investing than day trading.

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Caroline Banton

Caroline Banton is a freelance writer of business and finance articles that have featured in The Huffington Post, The Motley Fool, LendingTree.com, Time, MSN, PYMNTS.com, GOBankingrates.com, SaleMove, and other media outlets. Before becoming a writer, she worked for the international development organization, The World Bank. Caroline earned a Bachelor of Science in business administration from Washington Adventist University and her MBA from Johns Hopkins University.

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