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Global Macro Traders and Trend Following by Anthony David, For the global macro trader there are essentially two different kinds of trades: relative value and directional. Relative value is essentially when you are looking at two different instruments that have reliable historical relationships and trading off that relationship. Directional trading, as the name implies, is when you place a bet saying that you think oil, gold, etc is going up or down. 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. Some are technically oriented and deemed technicians and look at charts and other price action based studies. 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. 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. Then we come to the so called macro traders. We say so called because in actuality they are just an automatic version of the technicians. CTA or commodity trading advisers typically program automatic long term trend following models with built in risk management systems. A typical system might buy an asset when it hits a new 40 day high and then places a protective stop it it falls 3 ATR’s below it. While the systems vary the underlying results are good. Historically CTA trend following systems have been quite profitable. Traders who use the best of all these forms of trading typically will have better long term results and lower drawdowns. If you use good risk management along with a measure of what the market is telling you, and then couple that with the fundamentals of the actual market you are bound to have better long term results. 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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