Global Macro Trading - 3 Step Guide for Forex

Updated: Mar 23


Have you ever wondered how hedge fund managers, asset managers, and your 'average-joe' generate consistent profits from trading?


The answer? Global Macro Trading.



We will be going over...


What is Global Macro Trading?


Global Macro Trading involves understanding the big picture of the forex market.
Global Macro analysis is based on various macro-economic factors and indicators, these aspects of an economy give you a verdict of the strength of a currency (Fundamental analysis).


Macro trades are made using Strong vs Weak currencies!


" If a fund manager believes the United States is headed into a recession, he may short sell stocks and futures contracts on major U.S. indices or the U.S. dollar. He may also see a big opportunity for growth in Singapore, taking long positions in that country's assets." – Investopedia

Global Macro is an investment style that is highly opportunistic and has the potential to generate strong risk-adjusted returns in challenging markets. – JP Morgan

Macro trading is what hedge funds and investment banks use, even though this seems complicated and out of the average traders reach, this article will show and prove to you how this strategy is much more replicable than you first thought…



What Funds use Global Macro?


Nearly all major hedge funds and investment banks use Global Macro Trading investing in their trading activities, just to name a few…


Global Macro Investment Banks (Asset Management Divisions):

  • J.P. Morgan

  • Goldman Sachs

  • Citigroup

  • Bank of America

  • Morgan Stanley

Global Macro Hedge funds:

  • Blackrock

  • Bridgewater Associates - A well known macro hedge fund run by the infamous Ray Dalio

  • HBK Capital management

  • Fortress Investment Group



Global Macro Forex Strategy Framework


The Global macro trading strategy comes in 3 parts displayed below, Value, Optimise and Risk.


To simplify this poster for you, each category is part of a 3 Step Process to macro trading:

  1. Value - Generate Forex Trade Ideas

  2. Optimise - Time The Trades

  3. Risk Management - Maintain Sensible Risk Management Profiles


In each of these categories Macro Traders and Professional Investors will use what we call Leading and Leading indicators to give them data and information in order to for their bias…


What is a Fundamental Indicator?

Fundamental Indicators can be anything from economic data such as: GDP growth, Public Spending, Interest rates or Inflation, to information such as public surveys, employment numbers and public spending.


We will get into the details of what all those things mean soon, but the important thing to take from this is that Fundamental indicators allow traders to see the big picture of the market, giving them accurate readings and when used correctly, they become a very powerful tool.



Step 1: Value - How to Get High Quality Forex Trade Ideas


This section is called the Value section as this is where you will see if the currency pair you picked out to trade has the potential, or in other words: Does it have legs!

First you will determine:

  1. the currency pair that you want to trade,

  2. then you will follow this system and conduct fundamental analysis.

Fundamental analysis is the key component that separates this strategy from the shoddy and uncomprehensive retail trading styles

Fundamental analysis involves looking into macro-economic themes and data to gain a big picture bias on the strength of a currency pair, this means you go in depth into each currency involved in your trade to determine its relative strength.

By determining each individual currency strength you can gain an idea on whether your trade is ready for the next stage.

For example, if I wanted to trade GBP/USD and my fundamental analysis indicators told me that GBP and the UK economy was strong and the USD and the US economy was weak that would be a great trade to take into the next stage and I would determine that I wanted to Buy the pound against the dollar or “Buy GBP/USD”.


If the situation changed and the UK economy became weak the US economy strengthened to a place where it was projected to perform better than the UK economy then I would do the opposite and sell the pound against the dollar or “sell GBP/USD” (meaning that I am Buying the Dollar and selling the pound).


If both economies where very strong or weak I would not take that trade onto the next stage of the process as the price is likely not to move in any significant direction or as I like to say, volatility will be low on that pair.

Now you know how currency strength is used by macro traders to determine what trades to take, but how do they actually calculate this?


Majority use tools like the macro currency strength meter, or have their own internal systems if they're working in a big hedge fund.


Both work in the following way:


  1. The first, is valuing an economy by itself

  2. The second is then comparing the economies

Starting with valuing an economy in a stand-alone fashion there are 3 types of indicators that go into determining currency strength:



leading Economic Indicators


A leading indicator is any measurable or observable piece of data that can predict or indicate a change or shift in the price of a currency or asset, Leading economic indicators are used to forecast changes before the rest of the economy begins to move in a particular direction and help market observers and policymakers predict significant changes in the economy.

It’s all to do with trying to figure out the next trends, we use leading indicators to help us predict future price movements based on a country’s economic situation and the behaviour of the consumers within the economy


Here the Central banks or the government in an economy will react to what’s happening with consumers and use injections or withdrawals of money to stimulate the economy and affect the co-incident indicators.


The 3 Leading indicators that Macro Traders use are...

  1. Surveys

  2. Sovereign Bonds

  3. Yields



Co-incident Economic Indicators


A coincident indicator is an economic statistical indicator that changes (more or less) simultaneously with general economic conditions and therefore reflects the current status of the economy.

A co-efficient or Coincident indicator is analysed in real time and they are used as they occur. These are key numbers that have a substantial impact on the overall economy.

This type of indicator is much easier to understand, these indicators reflect real time movements in price. Coincident indicators occur in real-time and clarify the state of the economy.


Some examples of these indicators are…

  1. Inflation

  2. Employment



Lagging Economic Indicators


A lagging indicator is an observable or measurable factor that changes sometime after the the price trend of a currency changes. Lagging indicators confirm trends and changes in trends.


They can be useful for gauging the trend of the general economy, as tools in business operations and strategy, or as signals to buy or sell assets in financial markets.

Lagging indicators are effectively late to the party... so why do we even pay attention to them

Lagging indicators trail price action, this means that you will see the pound drop and then a few months later the lagging indicators will tell you why.

Macro Traders use Lagging indicators as a conformation of their bias, they will watch for what the data brings back and if the data supports their original idea, they will either take that as a sign to scale into their trade or withdraw their money depending on their situation.


There are 9 Lagging indicators that you need to know before Starting you Macro journey...

  1. Interest rates

  2. Bank Reserves

  3. Balance Sheets

  4. Money Supply

  5. Quantitative Easing

  6. Government Trade Balance

  7. Gov. Debt

  8. Gov. Surplus or Deficits

  9. Gov. Public Spending



Comparative Indicators

Comparative indicators are indicators that Macro Traders use to compare two currencies against each other, the clues in the name, These indicators are the next step in determining which currency is stronger or has more scope of growth.


Macro Traders will analyse Leading and Co-incident comparative indicators to measure each currencies performance against the other.



Comparative Leading

  1. Stock Market Index Performance of base currency vs quote currency

  2. Commodity Market Performance of base currency vs quote currency


Comparative Co-incident

  1. Net GDP Growth Differentials (NGDPGD)

  2. Net Interest Rate Differentials (NIRD)


Once all have been completely analysed, the global macro trader would have a sensible bias (with a decent confidence level) of what trades he wants to take.


So let's learn about how to analyse each factor, to get you up-to-speed!



Surveys

In Global Macro analysis there are 2 surveys that you should use...


The are the Manufacturing ISM Report on Business (PMI) and the Non-manufacturing ISM report on business (Services PMI).


These two surveys are conducted by the Institute of Supply Management (ISM), the ISM survey over 300 purchasing managers from the biggest manufacturers in the US on what their outlook on the US economy, their own business and the general future of the US.


This data is the collected and released on the first day of every month. It is used by investors and politicians to inform their decisions on the economy, for example a hedge fund manager will analyse the ISM reports to give themselves an outlook on the economic trends and future conditions of the market.

Generally when the index is rising investors will expect a bullish stock market so will seek to take long trades.


How to find the ISM reports...



First head to the ISM website but typing in "Institute of Supply Management", then select the report you are interested in, either the Manufacturing or Services report.


Once you have clicked "View report" you will be able to see the % value of the report, this relates to the PMI chart where you can analyse the changes between each release...


If you scroll down on the report you will get to the "WHAT RESPONDENTS ARE SAYING" section. this is where you can see anonymous quotes from different purchase managers in different industries give a short summary of their business and how it is performing and any challenges that they are facing...

If you want a deep dive into how to trade with the ism/pmi report read this article by Matty!


Building permits are another popular leading indicator.


Measuring the number of permits applied for by construction companies can give you insight into the growth or decline in people’s income and whether people are planning to buy homes, as construction companies don’t apply to build homes with no demand.


For more info on Why Forex Traders Need to Understand Building Permits check out this blog



Sovereign Bonds


Another leading indicator that macro traders use are sovereign bonds, Sovereign bonds are debt securities issued by national governments in either local currency or international currency, like the U.S. dollar or euro.

Sovereign bond yields are primarily affected by creditworthiness, country risk, and exchange rates.

Buying yields is seen as a safety net in Investment banks and professional traders’ strategies as they offer low returns over 10-20 years and aren’t hugely volatile. But they provide us useful data on what big institutions plan on doing…

By measuring the amount of sovereign bonds bought or sold over the past 6-12 months you can see how confident investors are in the market, if the amount is lower than the previous year you can see that institutions are more confident in the markets.


And vice versa, if more bonds were bought then hedge funds and investment banks have been sceptical in their future outlook and are protecting themselves.



Yields


Put simply, Yields are a way of measuring the return on an investment.


A common example used is when looking out farmers, If a farmer plants 1,000 seeds the yield will be the amount of crops that grow from those seeds, a low yield will indicate bad performance for example if the farmer only got 200 crops, a good yield on the other hand will be if the farmer got 950 crops when it came to harvest time!


When looking at Yields in a macro trading sense we look at how a countries economy has been invested in (by the central banks) and how much growth the economy has seen as a result of this investment.


This gives us a valuable insight into whether the countries fiscal policy makers are making good decisions and it also gives us a good metric to compare yields of similar economies.


Inflation


Inflation is the decline of purchasing power of a given currency over time.


In simple terms it measures the value of a currency, Inflation is the rate at which the value of a currency is falling compared to the general level that prices for goods and services like food supplies and water bills are rising.


This way of measuring inflation is called the consumer price index and is one of the most popular measures of inflation used by Macro Traders regularly.

How does this give us insight into the market in real time though?

If inflation is high then it means that consumers will struggle to buy basic everyday products because their dollar or pound is growing at a much slower rate than the price of those goods is increasing meaning that that economy is weak.


One more interesting way to measure is the BIG Mac index, this measures the price of a big mac over different economies and although it seems fairly stupid, it works, the more expensive the big mac (which is a fairly essential purchase for me) the lower inflation in that country is!!



Employment


Employment numbers kind of speak for themselves when you are wondering how they affect an economy, high amounts of employment are very good for an economy.

This indicates a strong labour market and the people living within that economy are able to buy essential products and contribute to the economy in forms of labour.

High levels of unemployment can spell disaster for a currency this means more people on government benefit schemes and also more people in poverty and unable to contribute to the economy, weakening that countries currency.



Interest rates


In The global Macro trader will analyse interest rates charged by a county's banks to it's government. Interest rates are determined by a number of factors, such as the state of the economy.

A country's central bank sets the interest rate, which each bank use to determine the interest they will offer on their savings accounts and charge on their loans.

When the central bank sets interest rates at a high level, the cost of debt rises and the benefits of saving rise. When the cost of debt is high, it discourages people from borrowing and slows consumer demand. Also, interest rates tend to rise with inflation.


With rates on the floor in 2021 due to the pandemic this is a fairly relevant way to measure an economy past performance.


For example if an economy has lowered its interest rates this means that the economy is under stress and the Central Banks can’t afford to pay you interest on your savings.



Bank Reserves


Bank reserves are a good indicator into the confidence of a Government and its risk management, just like an individual if a central bank is holding a lot of cash or cash equivalents that could indicate fear

This would indicate that they are saving up for emergencies or they are expecting the economy to take a downturn.

Inversely If a central bank ahs a small level of cash reserves this should be worrying for the citizens of that county, this implies that they are not prepared to manage risks if something bad happens to the economy and they will not be able to support themselves. a perfect example of this is the COVID pandemic.

This really put a strain on governments and in the end we where able to see the benefits of having reserves in the central banks in case of a rainy day.

The ability to allocate funds quickly is a good measure of how prepared a country is for a disaster, however there is always a balance to strike, having a good mixture of putting their money to work with public spending, investments, lending and trade are all necessary for an economy.


Holding cash and sometimes even gold reserves are very useful as it allows for the quick allocation of funds in case of a disaster...

Global Macro Investors will look at a countries bank reserves and evaluate how healthy they are, if they believe that the reserves are too thin or the country is hoarding money and not growing then they will see the currency as potentially weak and if the Balance is strong and a countries reserves are healthy then this will be a sign of a strong economy.



Balance Sheets


Just like if you wanted to asses whether a company like Apple or Facebook had performed well you can do the same with most governments.

Looking at a countries balance sheet can give you easy insight into what they are spending their money on and where their revenue is coming from, if these are sustainable.

Combined with other factors such as whether citizens are financially stable enough to pay the taxes they are charged, then the country has a good outlook. Just the same if a company has a poor and unsustainable balance sheet, if a country has one it can indicate poor past performance and could spell trouble in the economy for the future.



Money Supply


Money supply (AKA: M2) is the measurement of how much money is being injected and withdrawn from a countries economy by the Government. The more money that is invested into the economy the more inflation there will be in the price of goods and services.

Adding to bank reserves is what global macro traders call the "classic" or "money printing mechanism".

An increase in money supply indicates that the money already in the economy looses its purchasing power or value, this is seen as a loosening policy my macro traders and leads to a belief the the currency is not very strong.

The opposite is also true.

We use M2 to figure out how much a country actually needs to prop up its economy and how well the economy is doing at generating revenue and creating wealth itself, a strong economy will not need a lot of support from its government (It will need some).


A weak economy however, will need lots of M2 injected into it, as a result of this the governments intervention will cause inflation and for weaker economies this is the impossible problem!!



Quantitative Easing


Quantitative easing is how M2 actually gets injected into the economy through a central bank.


Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves central banks creating digital money.


They then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE’ or ‘asset purchase’ – these are the same thing.


Central Banks need to keep inflation fairly low and stable, The normal way Central banks meet their inflation targets is by changing Bank Rate, a key interest rate in the economy.

Lower interest rates mean it’s cheaper for households and businesses to borrow money which encourages them to spend and invest, whether that’s a family buying a new car or a company wanting to build a new plant.

There's a limit to how low interest rates can go. As a result of this when economies need extra stimulus CB's turn to quantitative easing to help!

The Central Banks will buy government bonds from hedge funds or investment banks using this digital currency, this means that these institutions now have real cash through the sale of the bonds and they can invest this cash back into the economy in the form of...

  • Creating shares

  • Buying land to expand

  • Creating jobs



Government Trade Balance


This aspect of the Global Macro strategy looks at whether a country is a net Exporter or Importer and what that means for a currency.


This is where we see how the country we are analysing contributes to the world economy and what its government are prioritising.


A net exporting country is a country that exports more than they import, they are like a creditor to the rest of the world.


Selling their goods to buyers and creating wealth that way, whether its cars or microchips net exporter tend to have high levels of growth in their economies as they are selling more than they are buying.


On the other Hand if a country is a net importer that tells us that the country is buying more than it is selling, countries like the UK are a prime example of this.


The UK import well over 50% of all their goods from the EU and other countries, these economies do not produce much. These economies tend to see slow levels of growth as they are buying more than they are selling.


A country needs a healthy balance between buying and selling, just like any company. there is always context to apply to countries, for example India is a huge exporter of services and this sector is still very much growing, as a result the Indian Economy has seen astronomical growth over the past decade, They also can produce a lot of their own produce, even though there are still high numbers of poverty.


The UK on the other hand has seen much more stagnant growth, being one of the centres for big companies has meant the UK economy isn't in any kind of crisis but there have been increasing calls since Brexit for the UK to start producing more goods, not just for their own citizens but also due to the fact that without the cheap prices of the EU, importing is going to get a lot more expensive.


So how do we know whether a country is a net exporter or importer?


To do this we use the Balance of Payments (BoP)

To find this information you will need to do a bit of digging in the respective countries Central banks. For the UK you can go to the office of national statistics website and find the BoP there...

Once you scroll down you will be able to see the latest report released (quarterly) and some basic information such as the actual balance, and whether exports and imports grew or shrunk (highlighted).



Gov. Debt


Debt is a very common factor when it comes to Global Macro analysis, Debt is the total amount owed by the government which has accumulated over multiple years.


Countries constantly borrow money from each other and also some institutions in order to cover their costs, just like a loan.


These number can often be HUGE!


For example in the UK at the end of 2019/20 public sector net debt was £1,801 billion (i.e. £1.8 trillion), or 86% of GDP. This is equivalent to around £27,000 per person in the UK.


And this is not uncommon, most countries have debt bills in and around the same as the UK's bill, so why is Government debt part of Macro Analysis?


Governments constantly borrow money from each other, and just like if you where to ask your bank for a loan, the entity supplying the money will charge interest on this loan. This is an extra charge, added on to the debt at the end of each year and the cost of this extra charge can be exponential!


Macro traders will look at a country and see if its level of debt is sustainable, this is where context is key, The UK, even though having a huge debt bill, is fairly capable of paying off its debts due to the strength and growth of the UK economy, however if a less economically developed country was strapped with even just 60% of this debt it could spell disaster for them.


With the compounding affect of interest payments these smaller countries that borrow lots of money often have their economies strangled, meaning that they have little money to spend on infrastructure and developing the economy as they are trying to pay off their debts.


The level of debt and interest that governments have to pay can give us great insight as to how strong the countries economy is and the overall health of their finances.



Gov. Surplus or Deficits


Like Businesses, Governments should aim to create surpluses and try and avoid huge deficits, its effectively like profit and loss...


But what does this mean in the Macro trading strategy?


A deficit is created when the revenue the Government receives from taxes is smaller than what they earn through currency spending. This creates a deficit, an even simpler way of visualising this is in a basic profit and loss scenario …

A surplus is simply the opposite of this.

Remember when we spoke about inflation, well I hope you were paying attention then as It's a key factor in this section of analysis...

Too much inflation is bad, as it destroys the purchasing power of a currency, this means that countries constantly look for ways to lower inflation, withdrawing debt or creating a surplus is one way that governments can do this.


Withdrawing debt means that a country is receiving more in tax revenue than they are spending in currency, this allows them to pay off debt and "deflate" the economy, if we turn this back around we can see that a country that is running a deficit will have to inject in money to keep the economy afloat, causing inflation.


Macro Traders will measure Debt against GDP to gain an outlook on whether an economy can support itself and pay off debt and how it affects the everyday citizen.



Government Public Spending


This is fairly simple but a very telling indicator...


Traders will look at the level of investment that governments are doing in their own countries Public services. Things like upgrading roads and improving infrastructure.


The theory behind this is that if the government has money left over from tax revenue that they haven’t spent on essentials for their economy like basic maintenance such as paying government employees and keeping the NHS running (for the UK) then the economy of that country is a strong position as Public spending is as close to making a ‘profit’ and re-investing it as governments actually get.



Stock Market Index


We use stock market returns to compare the wealth between two countries, this is a great way to see how rich people are as most peoples money is involved with the stock market, whether its in a pension fund or a savings account in the ban, someone, somewhere is trading with YOUR MONEY!!


Macro traders evaluate the performance of a countries economy (normally priced in USD) against the pair that they are trying to trade. This allows them to see how the performance of the countries top companies and industries affects or is affected by the exchange rate,.

What you can see above is an example of what I mean, the Global Macro trader that created this table wanted to evaluate the Aussie dollar and its relationship to the price of AUD/USD (the pair he wants to trade)


Global Macro traders will collate the performance of the top 200 Australian companies (ASX200) and compared the price of that index with the price of AUD/USD, we can then evaluate the price actin (Blue and Gold lines) and begin to study the relationship between the two and what this may tell us about what the currency will do next



Commodity Market


This Leading Indicator is very similar to the example above, however, instead of comparing the stock markets of different countries global macro traders will compare how a commodities price affects, or is affected by, the exchange rate.


We use this for economies that export large amounts of commodities such as Gold or Oil as it is a big part of their countries economy and therefore will have an affect on a countries price.


As we can see from the chart above this trader has analysed the relationship between coal and the currency pair AUD/CHF, as Coal is one of Australia's biggest exports it is logical for us to look at how it affects price.



Net GDP Growth Differentials (NGDPD)


The Net GDP Growth Differential is the difference between two distinct national economies growth in Gross Domestic Product, per year.

If the change in differential from the previous year is positive, this generally indicates the money flow will be towards the base currency (the first currency in the pair), and vice versa.

Here is an example of when a negative GDP differential would mean for a currency pair, using the LITA tech we can see that the negative GDP growth rate indicates that we should sell or "short" the currency pair.



Net Interest Rate Differentials (NIRD)


The Net Interest Rate Differential (NIRD), in the international currency (forex) markets, is the total difference in the interest rates of two distinct national economies. Generally, it's considered investors will hold currencies that pay the highest interest as this indicates that the economy is healthy.

We can see above an example of how global macro traders use the Interest rate differentials for their comparative analysis, as the UK economy currently has higher interest rates that the Japanese economy at the time of writing, this would suggest that the UK economy is healthier and therefore, Stronger!


I know, that’s a lot of things to consider, no one said fundamental analysis was easy, there are places you can go to make it easier for yourself however, automated software is probably the best of all the options out there.


researching all the information you’ve seen here into a bias will take you AGESS!!! however there is a way you can cut this right down a few seconds and clicks, for some of the best software solutions, click here!




Step 2: Optimisation - when to "enter" forex trades


Timing your trades is the next step in global macro trading, most retail investors use either news or flashy complicated indicators to time their trades to perfection!!


But all the flash and noise that that creates results in some pretty poorly timed trades that miss out on huge opportunity, just like the recent wallstreetbets fiasco an old rule that CEO here at logikfx Marcus Raiyat told me became almost creepily true…

So how do Global Macro Traders time their trades?


There are 3 separate areas that any trader can use to effectively time their trades:

  1. Commitments of Traders Report

  2. Technical Analysis

  3. Price Action

So let's go right into all of them!



Commitments of Traders Report


The Commitment of Traders report, also known as the COT report, is a weekly sentiment indicator that tracks and provides Forex traders with important information on the positioning of currency pairs.


Most importantly, the COT report lets Forex traders know the positions of big players in the markets like hedge funds (leveraged funds).


The COT report is issued by the Commodities Futures Trading Commission (CFTC) and it’s used in many profitable trading strategies. - Logikfx

This report is great for global macro traders who do not have millions of dollars to play around with as it shows you what the big investment banks and hedge funds are doing in the markets, therefore by using this report you can emulate their trades and therefore their success.


If I was going to trade GBP/USD and through my relative and currency strength analysis I decided I wanted to buy the pair I would then turn to the COT report to guide me on when hedge funds are net long (buying) the Pound and net short (selling) the US dollar.


That way I know for sure that professionals share my bias, giving me great confidence in my bias.


Read the best guide out there on how to use the COT here!



Technical Analysis


The 2nd way that global macro traders time their trades is through simple yet effective technical analysis, for most normal trader’s technical analysis accounts for 100% of the reasoning behind each of their trades, in fact this is where most retail traders fail!

Most Macro traders use simple chart patterns or RSI indicators to determine when to enter the market, technical analysis is only 10% of the journey for them.


The most affective tool for timing your trades is what all successful traders need, a trading journal, this is where you keep your winners and your losers, your watchlists and record you active trades and your progress.


Being able to manage all the different ideas you have and selecting the best ones is the absolute key when it comes to organising a profitable portfolio and luckily for you by reading this article you have access to our free trading journal template for 50% off.



Price Action


Price action is a valuable part of Macro Technical analysis, looking back at price action can give us valuable entry points, popular trading patterns and strategies like support and resistance areas can give us a valuable gateway into our trades.


Price action literally refers to the lines that you see on all of your forex charts, To learn more about chart patterns and how to use them properly check out this article




Step 3: Risk Management - How to reduce risk and "exit" trades


Risk management is the main aspect that separates normal retail strategies from the professional winning strategies, and I’m about to show you what you need to get started!


Risk Management is not as simple as risking "2% of your trading account and fire away!"... contrary to popular belief, it's a lot more nuanced and can be split into the following categories:


  1. Volatility Assessment for Stop-Losses and Targets

  2. Gross Exposure Limits

  3. Single Asset Limits

  4. Kelly Criterion

  5. Sharpe Ratio

  6. Sortino Ratio

  7. Calmar Ratio

  8. Alpha and Beta

  9. Overall Wealth Plan


The first think you will need is $1,000,000 provided to you by an investment bank and a degree in economics from Harvard…


No, of course you need none of that, the first step to having a great risk management strategy is a well formatted trading journal.


If you want an in-depth guide on how to use this great piece of tech then make sure to watch the quick video below…



The 4 key aspects of your trading journal are…


· Your watchlist

· Performance tracker

· Trade log (Kelly Criterion)

· Exposure limits


So, without further ado lets get into it.


The first aspect of a winning journal is the watchlist, A forex watchlist is a place where you list all of your trade ideas before you actually enter them.

This list is something you're always adding to as market conditions change and new information becomes available. Generally, this should be updated at least once per week.

You can’t just select pairs willy nilly though, using the system we have outlined above all the pairs on your watchlist should have solid reasoning backed by fundamental analysis to be WORTHY of a spot on your watch list!

The second aspect is the performance tracker…


A performance tracker allows you to log your active trades and track your performance over time, this will help you massively when we get into figuring out how much of your money you can invests and how much you should keep free.


The third part of your trading journal is the trade log, This is where you track the performance of all your trading activity. This is super important if you want to increase how profitable you are as a trader!


But how does it do this?


The trading journal we provide has 5 key mathematical formulas built in, these formulas are…

  • Sharpe Ratio

  • Sortino Ratio

  • Calmar Ratio

  • Alpha

  • Beta


These 5 formulas are used by professionals to asses their performance, by doing this you can determine how well you are performing against the market and gauge how much you should risk on your next trade.


If you want to know what each of the above means then read this blog where we explain these formulas and what they mean!


The Trade log is the third aspect of the Trading journal, this is where you record each trade after it is closed and work out how well you did, and if your strategy is working, this is where you keep track of each trade individually, and the returns you make on them. It can be used in stocks or currencies, to determine how much RISK you should be taking on your trades.


For professional traders they get this information given to them from their manager, either telling them they should risk more or less based on their performance, you don’t have this, but we have the solution to this, and its name is Kelly!


The Kelly criterion essentially tells you the optimal position size (as a % of your account) you should enter on your next trade, based on the historical performance of previous trades. A very powerful formula:

  • W = The probability that a trade will be winning... the historical success rate of your trades

  • (1-W) = The probability that a trade will be losing... the historical loss rate of your trades

  • R = The ratio of gain versus losses

For more info on how the Kelly criterion is used by traders read this article!

Professional risk management in forex is key, but how do you invest like a professional without the same funds as them.


The answer to this is simple, a great position size calculator and the ability to understand leverage properly are the keys to this, watch below to gain some more insight into this…

Applying Professional risk management will be your edge over everyone else in the markets, being able to outlive any retail trader and having a proper strategy and system emulating the success of the big institutions in the forex market.



Behavioural Finance in Macro Trading


One often overlooked part of Trading is the phycological element to becoming successful in the forex market, too many people focus on big profits and fancy indicators but the truth is; 90% of retail investors fail within the first 90 days, so how do you separate yourself from these people?


Your mindset, it's one thing to trade like a professional, but being able to think like one is a whole different ball game...


Biases affect how we perceive things and how we interpret hat we perceive, I'm going to show you the biases that humans have developed over the years and how they will affect your trading...


The survivorship bias

This is probably the most common out of all the ones we will talk about in this article, people love profit, and why shouldn't they!


However, Macro traders do not focus on their winning trades, they instead analyse and scrutinise their losers, this allows them to learn from their mistakes and improve rather than ignore them and continue making those mistakes.


Read Hedge fund market wizards if you want a deep insight into how to change your mindset into one of a macro trader!!



Confirmation bias

People often choose to ignore facts that disagree with their opinions, as they desperately want to be right!


This can often happen subconsciously, information that doesn't agree with what you opinion can be automatically filtered out by your brain.


A lot of traders will make excuses for their trades failing, and never take the criticism on themselves, this a critical mistake and one macro traders do not make.



Authority Bias

We are all primed with authority from a very young age, this means that we respect authority during school, however when doing something independently like trading this can come back to bite you.


A lot of traders fall into the trap of accepting what big news corporations or flashy forex gurus say in webinars and on the news, they automatically believe that the other person is better than them.


Macro traders do not fall into the same traps, if you blindly follow what people are saying on social media or more specifically...REDDIT!! you will lose out.


as a macro trader you must back your own analysis, follow your strategy that you believe in and conduct you own analysis before you listen to anyone else!



Availability Bias

As humans we naturally prefer a wrong map to no map at all! It sounds crazy but its true...


Your average retail investors normally weigh their decisions towards the most recent and updated information, this causes most new opinions to based off of recent news.


As a macro investor it is important that you do not fall into this same trap, Macro investors make sure to look at situations in terms of probabilities rather than the most recent Bloomberg piece!



Hindsight Bias

This is extremely relevant in this day and age, people think that they are way better at predicting than they really are!


For example take the reddit mayhem, everyone is an expert in the "STONK" market after the fact and not before! We see a lot of retail traders loosing money even now due to intuitive trading.


Macro traders use tools such as trading journals to record their predictions and analysis to determine whether their wins are systematic or flukes.



Outcome Bias

You should never judge a decision based on its outcome, sounds weird right? let me explain...


Most people will evaluate their decisions based on the results rather than the process that led to the results, failed trades don't necessarily mean a bad strategy and vice versa, Macro traders evaluate how they get to their trade ideas rather than the actual results of the trade.



Action bias

The action bias makes us feel like we are in control when we really aren't, we naturally like to be seen doing something rather than nothing.


Patience is key, the most successful traders sit out the market and are patient with making their trades, you may feel unproductive but this is a common error that most traders fall into when starting out.



Self-Serving Bias

Do you have a big ego? the self-serving bias causes people to associate their winning trades with aspects of their character (their knowledge or mindset) but they will brush off loosing trades as nothing to do with them. when it more than likely is :|



Association Bias

This occurs in the human brain, its all about learning for certain situations. If you ate a strawberry when you where a child and got sick you would associate that fruit with a bad experience and likely not eat it again.


Wins and losses in fore are the same, strings of losses or winds are randomly distributed, and neither actually indicates a good or bad strategy.


Contagion Bias

This bias relates to how we attach emotions to certain experiences, most people are unable to ignore the way they feel towards certain things, emotional connections to trading experiences are very dangerous and can cause very rash decisions.


Emotions are not part of the macro trading plan, they are dangerous and they go against the logic of using a tried and tested system!



Information Bias

This bias causes people to believe that more information means and creates better decisions, this is actually wrong...


traders that have 7 different overlapping indicators covering their screen believe that they are making better decisions because of this, information bias causes fear, anxiety and frustration.


The key to take away from this is that macro traders know that anything can happen in the markets, you do not need tons of information and to know what happens next to make money.



In-Group-Out-Group Bias

As human beings we are social animals, we used to move in groups to survive and group biases are formed within these groups still today...


Macro traders do not follow this basic trend, macro trading allows you to stay objective and follow a logical system rather than just agree with what ALL other retail traders think.



Fallacies

Psychological fallacies are hidden errors that we all have in our logical thinking, these can hinder you when trading and they are essential to understand for the Global Macro strategy.




The Conjunction Fallacy

This fallacy deals with the idea that the more indicators traders have working on their screens the more trades they think they will win, this way they overload their screens and their brains with information that they don't need. your intuition is more powerful than you think...



The Sunk Cost Fallacy

Sunk costs are costs that have already been incurred and they cant b recovered at all, human nature means that we form an attachment to past losses, however, past costs are not an indication of any future costs.


An example of sunk costs are if your last two trades have been losers, and you risk $20 on each, you really want to recover your lost money with your next trade s what should you do?

  • Risk $20 in line with your strategy?

  • Risk $40 to recover those losses?

Macro traders need to stick with their strategies and use logic not emotions when trading.



It Will Get Worse Before It Gets Better

This error tells us that you cant assume success after failure, macro traders avoid this fallacy by following their tried and tested strategies, always using risk management tools such as stop losses as part of that.



The Gamblers Fallacy

This is the belief that if something happens more frequently than normal during a period of time it will happen less frequently in the future and vice-versa, we should remember that there is a random distribution of wins and losses.


macro traders know that just because you lose 3 trades in a row it doesn't mean the next one will be a win!



Self Awareness

Self awareness is a massively overlooked factor, being able to identify your behaviour and adjust it t make your trading AND your life easier is a powerful tool...


Knowing when to stop is a key aspect of macro trading, burning yourself out is good for no one, and definitely not good if you making important decisions with your money.


Thankfully macro-analysis allows you to trade in small amounts during the week but knowing when you need to take a break is a powerful tool that you should use to keep yourself sharp and fresh.


Getting caught up in your own success when trading is one of the most dangerous things you can do, it causes you to take unnecessary risks and you will keep taking these risk, and getting more extreme, as long as you keep winning!


Overconfidence will cause you to fail BIG TIME! Macro traders make sure that they stick to their plan for risk management and they do not waver from this, this allows them to be objective when entering the markets and leads to more long-term success.


Beginners luck is a key part of self awareness, knowing why your trades are working is a key factor in macro analysis and you need to be aware of why your trades are performing well, is it your system?


Overthinking can hold you back when trying to enter trades, fear can paralyze you and cause you not to enter at the right time, making your trade and all the work you've done before useless, when it comes to entering a trade, if all your fundamentals agree enter the trade, there's no need to overthink.


Similar to this, making excuses can also hold you back, if its a case not not wanting to do some analysis or some of the grind work associated with macro trading then my advice would be to

Ego, we all have one, and a lot of the time it can be the downfall of traders with potential. The main thing is being willing to learn from other people, just because you have a winning strategy doesn't mean that other people don't now more than you.


Taking in information will only help you improve, especially if they are an experienced macro trader.



Motivation

Finding motivation can be difficult sometimes, especially if your trading isn't going as well as you feel it should. this can often be very demoralising, once you have a comprehensive and tested strategy under your belt, motivation is not hard to come by.


Procrastination is the tendency to delay an unpleasant or important task, no task will ever finish itself, it requires you to tap into your mental strength to pull yourself through doing the task, this can be extremely difficult if you aren't aware of your own procrastination.


Incentives are a very affective way to motivate yourselves, a lot of people use monetary incentives to motivate themselves, especially retail traders, to think like a macro trader your goal should be to become a profitable trader, not just make monetary gains.



Fear & Greed

The biggest fear in the forex industry is the fear of being wrong and the fear of losing money, there is never a guaranteed outcome with any trade so the possibility of losing is always there, if you've hesitated to enter a trade you've experienced this fear of being wrong.


This can cripple people who need constant re-assurance, no matter what strategy they use, one way to control your fear and not let it hinder your performance like a macro trader is having an edge on the market that gives you confidence.


also investing amounts of money that you can afford to lose, we call this an 'investible amount' and you should approach the market with no agenda.


This should be your strategy and when you stick to a proven strategy you have nothing to fear, even if you lose money, you are fine and you continue with your plan.


Greed is never a good thing, as I've spoken about above greed can come from overconfidence and EGO, greed will always come back to bite, no matter how much you may be making if you are ignoring your system or risking too much it is only an amount of time before you crash out and regret it, this leads us nicely on to our last point...



Patience

Patience in the Forex industry is rare, I'm sure we've all experienced that feeling of FOMO before, where we feel like we are missing out on opportunities by not taking action RIGHT NOW!


This causes too many traders to make the wrong decisions on how to analyse and spend their time in the markets.


FOMO is very common in most retail circles (think back to the wallstreetbets//r era) this impatience normally causes many small investors to crash out of the markets, having ignored their own analysis or key points from their indicators because they 'want to get in on the action'.


Investing and trading for macro investors is a marathon not a sprint, following a tried and tested system and using that to your advantage, taking trades for the long run and above all gaining a big picture outlook on the world economy (while all requiring patience) offer you a unique opportunity to be successful in the Markets!!




The benefits of Macro Trading in Forex


If you couldn’t tell I think that Macro trading is the absolute best trading strategy out there, however, if your still unconvinced let’s weigh the pros against the cons…


One of the most obvious pros of this strategy is the consistency it provides you with, not just the ability to follow a tried and tested strategy but it also allows you to follow how the biggest market speculators (the hedge funds) trade through the COT report.

It provides you with the blueprint to trade exactly how these professionals who have gone through years of university and thousands in fees without having to do either.

This is an underrated pro of Macro Trading, most retail traders are scared of the institutional traders, and ironically its because they always lose to them, so why not trade like them?


Why would you trade with a tiny stop loss, risking your money to try and jump on a price trend when if you use the macro strategy you could sit back and predict where the market is going to go with the analysts and professional traders!!


The seconds biggest pro of Global Macro trading is the small-time commitment compared to any other type of trading, running a macro portfolio where your trades move over a matter of weeks and months means that maintenance is very easy once your portfolio is running.

No more sitting down for 10-12 hours a day staring at a screen, macro portfolios can be run with weekend management, taking 3-4 hours A WEEK!! to update portfolios and check up on trades, with automation tools this time is slashed to just a matter of 1-2 hours if you want to do the bare minimum.

This is a no brainer right!! Being able to trade with spare time for your job or anything you can think of.


Drawbacks of Global Macro Trading


Even though only a small fraction of the institutional level of funds is needed for this type of investing, it is recommended that a macro portfolio should start with 2,000 - 4,000 to give yourself the best possible start.


This is obviously not attainable for everyone but if you have the funds available, its definitely worth it.


The initial learning curve is fairly steep with macro trading, it can take a number of weeks and even months to get up to speed with all the different aspects and how to analyse all the relevant data.

After the learning curve it is plain sailing, but the learning curve has defeated people in the past, it requires the right character to grind and the reap the rewards.


Learn Global Macro Strategy


The most accessible way to learn global macro trading is probably through courses like the one taught at Logikfx, the benefit from learning from industry experts and automated tools means that you get the same benefits (apart from the salary) as the professionals.


There are a number of Macro trading books available including:

  • What you need to know before trading Forex and Stocks - By Marcus Raiyat

  • Global Macro Trading: Profiting in a New World Economy - By Greg Gliner

If you are studying for a degree in economics or thinking of on-the-job training is another way to learn global macro, learning from industry experts and getting to live and breathe macro trading is a very, very good way to get familiar with the way that institutions trade.


And the salaries aren’t bad either!


Conclusion


Global Macro Trading is an incredibly effective strategy when executed well, with automation tools and good teaching anyone can learn how to trade like a professional, for that reason I believe that it is the best trading strategy.


The ability to trade like a hedge funds and emulate their success is a NO BRAINER!!


Still learning how to trade? Learn through Logikfx Investment and Trading Academy (LITA) and take the first steps into growing your value as a trader with our free online courses, webinars, seminars. All from a small team of highly skilled traders with over 15 years’ experience in the financial markets. Learn how to make money trading forex, alongside the best ways to manage your risk through a proper trading journal, and sensible approaches to setting a stop loss (that doesn't get hit)!


Already know how to trade? Save hundreds of hours each month on trading technology, analysis and research using Logikfx's Macro Technology in the LITA Portal. Computing thousands of fundamental reports for over 23 economic regions, you'll know accurate currency strength at the click of a button.

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