Macro Trading

Macro trading, often called global macro, is a strategy that trades broad markets, such as currencies, government bonds, stock indices and commodities, based on views about economies, interest rates, inflation and policy. A macro trader might buy a currency because its central bank is likely to raise rates, short bonds because inflation is accelerating or buy commodities because global growth is picking up. Some of the most famous trades in history were macro trades.

How macro traders think#

Macro trading starts with a view about how the economy and policy will change, then asks which markets will react most, and which are not yet pricing the change.

1. Assess the cycle: is growth accelerating or slowing? Is inflation rising or falling? See Business and Economic Cycles and Inflation.
2. Anticipate policy: how will central banks and governments respond? See Central Banks Explained and Monetary vs Fiscal Policy.
3. Compare with market pricing: what do futures, yield curves and currencies already imply? See Yield Curves.
4. Choose the best expression: the instrument with the most upside and least cost if you are right.
5. Size and manage risk: with clear points at which the view is wrong.

Common macro themes and trades#

Discretionary and systematic macro#

• Discretionary macro relies on the trader's judgement about economies, policy and politics.
• Systematic macro uses rules, often trend following, carry and value signals across many markets. Managed futures funds are a common example. See Trend Following.

Many funds blend both.

Famous macro trades#

• George Soros and the pound, 1992: Soros's Quantum Fund bet heavily against sterling, believing the UK could not keep it within the European Exchange Rate Mechanism. On Black Wednesday, the UK left the mechanism and the fund reportedly made about $1 billion. See Famous Trades in History.
• Housing and credit, 2007 to 2008: several macro and credit investors profited by betting against the US housing market. See The 2008 Financial Crisis.

These successes are well known; many macro bets that failed are not. See Survivorship and Selection Bias.

Key data macro traders watch#

• Inflation: CPI and PCE
• Jobs: Employment Data and Non-Farm Payrolls
• Activity: PMI, GDP, Retail Sales
• Policy meetings: The Federal Reserve and the FOMC, The ECB and the BOJ

Risks#

• Being right on the economy but wrong on timing. Markets can ignore a theme for months.
• Policy surprises and political events.
• Leverage: macro instruments such as futures and FX are often highly leveraged.
• Crowded consensus trades that reverse sharply.
• Correlation shifts: relationships between assets can change, for example stocks and bonds falling together in 2022.

Managing macro risk#

1. Define what would prove you wrong and size accordingly. See Position Sizing.
2. Diversify themes rather than putting everything on one view.
3. Use options for asymmetric exposure to big moves. See What Is an Option?.
4. Watch correlations between positions. See Correlation Management.

Frequently asked questions#

What is macro trading?#

A strategy that trades broad markets, such as currencies, bonds, stock indices and commodities, based on views about economies and policy.

What is the difference between discretionary and systematic macro?#

Discretionary macro relies on the trader's judgement; systematic macro follows rules such as trend, carry and value signals across many markets.

What markets do macro traders use?#

Mainly liquid futures and currencies: interest rate futures, government bonds, stock index futures, FX and commodities.

You have finished the Strategies track. Many of these strategies use options; continue with How Options Work.