Global Macro Trading is a very popular form of trading in the investing and trading community. It has also been used by many very wealthy hedge fund managers as an important part of their analysis and trading approach. This list includes people like George Soros, Paul Tudor Jones and Bruce Kovner. Some of the greatest trades ever in the history of the world have been placed using global macro analysis. One such trade was when George Soros “Broke the Bank of England” in 1992 and made over $1 Billion dollars in 24 hours as the British Pound depreciated over 1,000 pips in one day.
Global Macro Trading is a form of order flow trading. It focuses on finding swing trades and long term trades that you can hold for several days, weeks, months, even years. Global Macro Trading attempts to use economic and political forces to justify the placing of their trades. It attempts to find factors that can generate order flow and move the price that can last long enough to form a nice swing trade or long term trade. There are many different potential global macro factors that can generate order flow and move the markets. Such examples can include interest rate differentials, growth differentials, global growth, inflation, recessions, financial crisis, housing market, consumer confidence, natural disasters, political uncertainty, etc. The global macro trader can take a look at the big picture and find the dominant themes in the market place that can take place in the future and cause gradual, sustained order flow over a period of time.
When a currency pair is a trending market and it makes a huge move that is sustained over a long period of time, there are usually macro factors to support the movement. There can be one single macro, or many different macro factors all generating order flow to create the medium term and long term trends. When a currency pair makes a huge move in one direction, say 500 pips or more, usually there are macro factors that caused the order flow, with the market participants pricing in a certain macro event, or outlook into the market.
For example, currently the AUD/USD has been in a strong uptrend for a few years now. The market dropped to around .60 cents during the global financial crisis in 2008. A macro trader looking for an opportunity would play out different scenarios and think of what the macro outlook would be 6 months from now, 1 year from now, 2 years from now. So looking back at AUD/USD at .60 cents, the market was pricing in a financial panic, falling commodity prices, lower interest rates around the world, and the U.S. dollar caught a safe haven bid resulting in the AUD/USD slide in 2008. The macro trader would try to realize whether the drop would be over done and what scenario could play out in the future. If the macro trader could have predicted the eventual stabilization of the global financial system along with renewed global growth and made the determination that the commodity boom and Australia would benefit, then they could have gone long AUD/USD to represent that macro analysis. They would expect global growth to pick up, commodity prices to rise, thus increasing inflation in Australia and eventually the Reserve Bank of Australia increasing interest rates. That would make the currency attractive to investment causing the currency to appreciate in value. And here we are almost 3 years later in the year 2011 and the AUD/USD has appreciated in value from .60 cents to 1.10.
This move was caused by many reasons:
1. Strong Australian economy
2. Interest rate increases in Australia
3. Under performance of the U.S. economy and thus low interest rates in the United States
4. Global Financial system stabilized resulting in outflows from the U.S. as the safe haven bid order flow was removed.
5. Commodity boom increasing Australian economic growth
This would be the type of analysis that a macro trader would have done back in late 2008/ early 2009. Note that such an order flow trader would NOT be looking at moving averages, or technical indicators or anything like that. For they know that those do not generate order flow.
It is also important to think about what types of traders would be providing liquidity to the global macro players. In the AUD/USD situation above, if you were to go long AUD/USD betting on a stabilization of the financial system, improving commodity prices, and increasing Australian interest rates, who would provide liquidity to your long trade? The list can be endless. There may have been other macro traders that took a complete opposite viewpoint from you. They may have been betting on a continuation of the financial meltdown and increase in the U.S. dollar safe haven bid. There may have been technical traders trying to short the market on a retracement higher and they may have used their fibonacci retracements to find a short entry. The list of inefficient traders that can provide liquidity to the astute global macro trader is truly endless.
With global macro trading there are an endless stream of opportunities that occur. An endless stream of opportunities that no supercomputer, quantitative program, algorithm, high frequency trading program can ever take away from you. That is the most alluring aspect of global macro trading. It offers an escape from all the noise and news articles talking about how computers, quants, and high frequency trading are taking over the world, and how if you do not learn it you will be left out in the cold. Global Macro Trading is immune to all those quant trading programs. Why is that so? Because there has never been a computer program, nor will there ever be a computer program that can match the skill of a successful global macro trader that can identify the key order flow drivers and macro themes that can play themselves over the next week, month or year. Analyzing all the economic information, market history, and predicting future macro events is just too complex for a computer algorithm to successfully handle. That is why the global macro trading edge persists even until this day. It existed back in 1970, still exists today and will exist decades into the future.
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