Trading systems can be many things. You can have a methodology that you use to pick stocks or you can build an automated computer program that once programmed does everything for you and everything in between. So how can any of this help a global macro trader? Simply put it can help every trader. If you are a day trader with a 300 millisecond time horizon to a value investor trying to buy the stock “you never need to sell” systems are not only useful but invaluable.
Think about the last time you went to the doctor for the flu. If you had gone in and he said well lets see whats wrong and then started doing random stuff like hitting your knee, checking the size of your foot, doing rain dances in the middle of the room, sacrificing small animals in a fire, and checking your temperature you would think the dude was absolutely nuts. Luckily over the centuries medicine has improved significantly and there are many systems in place. No more do doctors rain dance or sacrifice animals. Nor do doctors check the size of you foot when you have a flu. No, instead they have a list of things that they need to check and assuming things line up they an diagnose you. If things dont line up then they move on to a broader diagnostic test to narrow down the problem.
Using the same concepts that a doctor uses can drastically improve your investment results. If you are a value investor you likely have a list of things to check such as price to earnings, price to book, the size of the moat, the return on equity, management, etc. The more systematic you have these the better as it allows you to look at more companies and therefore improve your risk to reward. If you only look at ten stocks and pick the most undervalued one you may still end up with a drastically overvalued stock. If on the other hand you look at 1000 stocks, quickly narrow your list down to 50, and then further narrow it down to one or two you will likely have a great buy on your hands that will make you money. You want to cast a wide net and quickly and efficiently narrow it down to a more manageable number.
For a global macro trader you want several different trading systems in place. You want an asset allocation model that helps you to determine how much to put in each asset class as well as to tell you which assets are overvalued and undervalued. You want systems in place for each asset class as well as sub classes so that you can quickly see what is moving, why, and if there is a good trade there. In addition a good model or system will enable you to better value on an absolute and relative basis the value of the different asset classes. If you dont have models in place then it becomes very hard to see great trades like shorting the Euro against the Krona or buying Asian currencies while shorting Japanese Government Bonds. Yeah relationships like these can really add to your returns but not if your dont see them.
Another way to use trading systems in a global macro trading portfolio is to set up automatic trades not unlike the typical commodity trading advisor or CTA. These traders will build mechanical models that tell them to buy or sell this or that commodity and build portfolios based on their statistical expectations. Typically these models only trade the large and extremely liquid markets but you can also build models hat trade more specialized markets. At The Macro Trader, a global macro research firm they use different models to do all of the above as well as trade specific asset classes like gold and gold mining stocks. These models have helped them to outperform on both a relative and absolute basis. Yes, they still use traditional research but to really outperform and do the most efficient research you need to be using both. If you are a day trader who scalps the same stock all day every day then you may have less of a need but anyone else needs to be systematically attacking the markets each and every day if they really want to outperform.
Macro trading can also apply to forex investing, but that will be the subject of another article!
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