Global Macro Investors and Trend Following
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.
Fundamental traders will do a lot of bottom up research looking for good sized mis-pricings and then buy or short when they think the valuation is sufficiently away from the true value in order to maintain a good risk to reward ratio. Fundamental traders many times will sit on a bad position for months and in some cases even years. These traders feel that if X is worth double its current price then at some point the market will bring things into the correct alignment. The main problem with a purely fundamental approach is that you suffer the occasional large drawdown and sometimes you are just plain wrong.
Traders who use pure gut feel tend to also have very volatile results. While they will enjoy the occasional big gain they will also be wrong on a regular basis. The main factor that will separate the winning gut traders from the losing ones is how fast they are at admitting when they are wrong. If you can’t take a loss then you will lose when trading off of pure gut feel.
Check out our reviews:
FAP Turbo Review
Forex Megadroid Review
Forex Autopilot Review
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.
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.
Related Posts
