If you are a global macro trader you trade anything and everything as long as you can find an exploitable edge. The majority of your trades are across asset classes trading stocks, bonds, commodities, and currencies. You are looking for uncorrelated returns from multiple asset classes.
You trade not only different asset classes but also different strategies within the different asset classes. Aside from straight directional trading you likely do some relative value trading where you put pairs together and trade on their convergence or divergences. You might try some merger arbitrage, pairs trading, etc. Basically you are looking for great risk to reward opportunities and you don't care where you find them.
One of the best places for macro traders to really differentiate themselves from other categories is in the currency carry trade. While most people understand what a directional bet is, one in which you buy or short something and if it goes up or down you make money, many do not understand carry.
To make money in the carry trade you go long a high yielding currency and go short a low yielding currency. By doing this you are able to earn the interest rate differential which is simply the difference between the two currencies interest rates. You can also of course earn money by being right on the trade and the direction.
Using leverage you can really juice your returns in the carry trade. For instance if you are earning a three percent yield from the differential then you can earn thirty by being levered up ten times. If you lever up twenty times you will earn sixty percent. While these gains sound great they do come with great risk. You knew this couldn't be that easy.
No, it is not that easy. If volatility picks up and the carry trade loses favor then the carry will not be enough to make up for the huge loss in capital on the directional side of the trade. If you use too much leverage you will go kaboom and lose all your money.
There are several ways to measure volatility. Some traders just look at several pairs and use an internal barometer of what is happening but most successful traders use at least some type of quantitative measure. We have the VIX which is used to look at equity volatility but happens to be a decent barometer of all volatility. There are also several newer currency volatility gauges like the JP Morgan currency volatility tools and the other investment banks volatility tools.
If you are an active macro trader that is using the carry trade then you should incorporate a volatility filter. If you are not using the carry trade then you are missing out on a great way to diversify as well as deliver more consistent returns. - 26221
You trade not only different asset classes but also different strategies within the different asset classes. Aside from straight directional trading you likely do some relative value trading where you put pairs together and trade on their convergence or divergences. You might try some merger arbitrage, pairs trading, etc. Basically you are looking for great risk to reward opportunities and you don't care where you find them.
One of the best places for macro traders to really differentiate themselves from other categories is in the currency carry trade. While most people understand what a directional bet is, one in which you buy or short something and if it goes up or down you make money, many do not understand carry.
To make money in the carry trade you go long a high yielding currency and go short a low yielding currency. By doing this you are able to earn the interest rate differential which is simply the difference between the two currencies interest rates. You can also of course earn money by being right on the trade and the direction.
Using leverage you can really juice your returns in the carry trade. For instance if you are earning a three percent yield from the differential then you can earn thirty by being levered up ten times. If you lever up twenty times you will earn sixty percent. While these gains sound great they do come with great risk. You knew this couldn't be that easy.
No, it is not that easy. If volatility picks up and the carry trade loses favor then the carry will not be enough to make up for the huge loss in capital on the directional side of the trade. If you use too much leverage you will go kaboom and lose all your money.
There are several ways to measure volatility. Some traders just look at several pairs and use an internal barometer of what is happening but most successful traders use at least some type of quantitative measure. We have the VIX which is used to look at equity volatility but happens to be a decent barometer of all volatility. There are also several newer currency volatility gauges like the JP Morgan currency volatility tools and the other investment banks volatility tools.
If you are an active macro trader that is using the carry trade then you should incorporate a volatility filter. If you are not using the carry trade then you are missing out on a great way to diversify as well as deliver more consistent returns. - 26221
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If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro trading advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
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