Saturday, January 24, 2009

Macro Perspectives for Short-Term Traders

An enduring theme in this blog, reflected in my recent post, is that it is important for traders to know how large participants are thinking and behaving in the marketplace. Markets are not moved by shapes on charts or patterns among indicators. Rather, the supply and demand for equities is a function of many macroeconomic factors, from central bank policies (and perceptions/anticipations of shifts in those) to interest rates, relative currency movements, and expectations regarding inflation and economic growth.

The challenge for the short-term trader is to understand the trees--the moment to moment shifts in buying and selling sentiment among participants--and also the forests: the factors that ultimately lead to important market trends. My experience working as a trading coach at prop firms and hedge funds finds that this dual perspective is rare. It is common to find prop traders who understand order flow in their instruments, only to get run over by shifts in trend that they don't comprehend. Similarly, it's common to find portfolio managers who have sound long-term macro views, but who are essentially tone-deaf with respect to executing these ideas on a day-to-day basis.

Many of the links that I pass along via Twitter are selected for their big picture value. Taken together, they provide a taste of themes that are top of the mind among money managers. For instance, while the mainstream media was trumpeting the optimism of a new year and a new presidential administration, the commentary from wise macro observers suggested that many fresh signs of economic trouble were brewing. Traders who understood the concerns over bank nationalization emanating from the UK were ready to see the relevance for US bank shares and their preferred stock. Those themes have significant relevance for the broad stock market.

As an example of excellent macro thinking, I want to call attention to the insights of The Baseline Scenario blog. (See also their beginner's guide to the financial crisis). This is the kind of analysis that can aid you as an investor as well as trader. If you take a look at the top 25 blogs cited by 24/7 Wall St., you'll see a number of sources that do a great job of highlighting broad themes that influence the movement of capital. A good football quarterback has an overarching game plan, but also the flexibility to call plays at the line of scrimmage. Traders are not so different: some of the best profits come from good trading that is aligned with investment trends.


Jorge said...

Dr. Steenbarger,

Yes, it's easy to lose sight of the big picture when you''re trading for a few points at a time.

That's why I like to keep track of the Commitment of Traders Report (particularly regarding open interest), which, even though I find absolutely untradable, gives you a heads-up for big shifts in trends and forces you to think about the global perspective.

Apart from the source...

... there's also a good page for those of us with a visual bias :) that plots them in charts:

On top of the evolution of the commitment of different groups of traders, you can also see what kind of market you're trading in by looking at the percentage of open interest held by the largest 4 and 8 traders (I'm sending you 3 pictures that show this more clearly).

Best trading,


Brett Steenbarger, Ph.D. said...

Thanks for the links, Jorge. I'll be looking into COT--


GlobalMacroSpeculator said...

I try to post some macro perspectives in my blog once a week. Tell me what you think