Our Basic Approach To Finding Investment Ideas

As you probably know Macro-Traders typically take a top-down approach when looking for potential investment ideas. Specifically we look for the best risk to reward opportunities we can across all asset classes, countries, and trading strategies. So we basically trade anything anywhere that we can find an edge.

Our investment approach takes a multi-step process to generate investments for our portfolios.

This is a flowchart showing our basic process.


Macro Flowchart

What follows is an explanation of each step.


We have two ways to come up with investment ideas. We have our quantitative methods and our traditional research. Our quantitative methods vary from all out trading models that give actual buy and sell signals to scanners that look for favorable conditions in different asset classes, to a few tools we have that just look for unusual activity. One of the best things about using quantitative tools is that we miss fewer opportunities due to a computer being able to scan more asset classes in more markets than we could ever do.

As much as technology helps us to catch things we wouldn’t otherwise find. We also rely heavily on traditional research. We are always reading magazines, newspapers, books, trade publications, research reports, etc. We read anything that might help us find new investment opportunities or more information for our current positions and themes. We also try to listen to smart people and watch news and other television that might help us find anything helpful. Basically we are information junkies.

Our next step after getting some investment ideas is to research them further to validate them. Most of the time we hit dead ends, but occasionally we come across something good. If we decide that it makes sense we start looking to see if there is a past model that goes with it. For instance as of this writing we are bullish emerging market telecom and have been for some time. When we first came across this theme we liked the idea because it was logical. So looking for a model we found VIP and MBT both Russian telecoms. They both had outstanding growth rates and the stocks were definitely outperforming the market. Well since then we have traded them and have found several other good telecoms riding that theme like TKC, TMX, TEF, and ETF.

After deciding that what we have found is a solid theme that works out fundamentally, we look at the risks and rewards. Risk management is the most important part of what we do. We look at risk on several levels. At the individual security level we look to see what the best instrument to trade is. For instance if we are bullish on a country do we play it using equities, debt, or currency? We then look to see if we can cut off risk by using options. We like options for their flexibility. Many times we will find an idea that we like but due to the risk profile we can’t get in using the typical security, but we are able to manage the risk by using options. Another risk we really look at is portfolio risk. How does it correlate to our other positions, how does it correlate to the overall portfolio, are we actually just playing another version of a theme we already have on? We look at geographic, political, and any other type of risk we can. The final thing we look at is at what point do we admit that we are wrong? Or in other words where do we place our stop. Our stops are based off of the chart, volatility, potential reward, and size of our position. With risk there are not too many absolute rules. But one that we do always abide by is to never risk more than 2% of the portfolio on any position. Many times we will risk less but we will never risk more. So we size our positions accordingly.

Once all of this has been done we can finally add it to our portfolio. In future posts we will go into more depth on each part of this process. But this should give you an idea as to what we do and how we go about doing it.

Happy Trading,
The Macro Trader

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Some Of Our Current Trading Themes

As mentioned in previous posts we run a variety of automatic as well as discretionary trading systems. Running them alongside each other helps us to spot market trends that we might not otherwise see. Well here are a few macro themes that we have found and currently are tracking for good entry points with relatively low risk.

Energy and Raw Materials-Yes, we know that this isn’t exactly a novel idea. But the fact remains that if the world is to continue expanding we are going to need more energy. If more people in third and second world countries are buying cars guess what they need? Yeah you guessed right. They need gasoline and the car companies need steel. If the BRIC’s and friends are to continue growing at their current pace or even half of the current rate then they need raw materials and energy to build. So we are for the most part energy and hard asset (commodity) bulls. While an index probably isn’t a bad way to go we feel that we can get better risk adjusted returns by looking for our own trades and scaling in and out of different securities. So we track a lot of different individual stocks, ETF’s, and commodities.

Housing-We are housing bears. While we don’t see this trend continuing forever or even for ten years we do see it going for at least another year. Does that mean we are shorting everything in housing? No, in fact we currently only have one short position in housing (HOV). But it is a theme we will continue to monitor.

Healthcare-Ultimately the outcome of the health-care industry is probably going to end up with politicians deciding if it is allowed to win or not. For the next 40 years we see several reasons to be long healthcare. Unfortunately we see a reason to be very hesitant. Because of the aging populations in the western world the bulk of the voting population will probably favor government controls on the health system. That being said we still see many potential opportunities in healthcare and bio-tech.

Global Telecom-This is a theme that has been good to us off and on for some time now. We have found that in a lot areas of the world some of the best stocks have been in the telecom industry. Off and on we have been long VIP, MBT, AMX, CHL, SKM, and TKC. In fact last week we re entered TKC. Basically telecom is one of our favorite emerging market industries and whenever a country meets our other criteria it is usually one of the first areas we look at.

These are some of our major trading themes right now. We have other themes we monitor but these should give you an idea as to where we are looking and what we look for. Basically we look for areas that should have long lasting trends and real fundamentals. We then look for entries that present a good risk to reward scenario. We aren’t in the business of risking a dollar to try and make a dollar. We are looking to risk a dollar to make three or four and sometimes even ten.

If you have any questions feel free to contact us here. And if you like what you have read you will want to add us to your RSS reader and consider subscribing to our newsletter.

Happy Trading,
The Macro Trader

If you would like to receive our new FREE course “Macro Trading 101” put your e-mail in the box below.

Systematic Investing and Trading

Here at we use several different strategies across several asset classes. Why do we do this? For several reasons not the least of which is so that we can find and exploit as many of the best risk to reward situations as possible. If you tie yourself to one strategy or one asset class you are limiting your potential opportunites.

In this article we will focus on using systems. As we have already mentioned we use several systems. Some are purely automatic. If they say buy we will go and buy if they say to sell we will sell. We also have several systems that leave us a lot of discretion as to what we do. We look at many different variables depending on the asset class and time horizon. For instance in some of our short term systems we only use prices of the actual instrument to determine buys and sells. On some of our longer term systems we use economic data such as interest rates, market valuations, technical studies, inflation, competing yields, etc.

Right now we have several systems for domestic and foreign equities, domestic bonds (treasuries, corporates, and junk), precious metals, currencies, commodities, volatility trading, and asset allocation. All of the systems we use have historically beaten their benchmarks with less risk. So over time we can expect to outperform.

As noted earlier we also have systems that leave us with varying amounts of discretion. Some of the systems are only used to alert us of a potential trade. We then go in and look to see if we feel it is worth doing. For instance one of our systems is designed to highlight potential option trades across several different indexes. Its main variable is volatility. While we could possibly use it as a stand alone system at this point in time we think it is better used to highlight potential opportunities.

So how do we use it? We update it every week and most weeks it will show us a few different areas worth looking at. We than go in and research those potential trades to assess the situation. If the right conditions are present and we can see a catalyst we will then go in and put on the trade. If not we will continue monitoring the situation in case it changes. While we only put on about a third of the trades that it presents us we feel it is an invaluable tool because it highlights many situations that we would otherwise miss. To sum it up in one sentence it highlights promising situations. That is but one example of using a systematic process in our trading.

In summary using systematic processes in trading allow us to cover more asset classes and more countries. It allows us to spot more opportunities and to more consistently achieve above average and less correlated returns.

Happy Trading,

The Macro Trader

Macro Trading Versus The SP500

Macro Trading has many benefits versus equities. As mentioned before a global macro trader can trade in any asset class, in any country, using any strategy. So what are the benefits of these freedoms? Well there are many but here we will focus on two of them. First is that using multiple asset classes, countries, and strategies we are able to get a more consistent stream of returns. When one asset class zigs one is zagging. If we blend them together well we can end up with a very steady stream of returns.

This chart shows $1000 invested in the Barclays Group Global Macro Index versus $1000 invested in the SP500 from the beginning of 1997 to the end of September 2007.

The other major benefit we will discuss here is that our risk profile is much better. The worst drawdown in the SP500 since 1997 was -46.28%. Now compare that to the Barclays Group Global Macro Index where your worst drawdown was only -5.22%.

Charts showing drawdowns for Macro Index and SP500 1997-September 2007

You can see that there is more than just a slight difference. Where the SP500 is more or less at breakeven for the past seven years the Macro Index has never taken longer than eight months to make a new high.

If you are only trading or investing in one asset class or if you are only trading in the United States please look at some of the benefits of adding some asset classes, countries, and trading strategies to your portfolio. Long term we think you will be happy you did.

Happy Trading,

The Macro Trader

What is Macro Trading?

At we view macro trading as a process of finding the best risk to reward situations on the planet. Instead of being put into a style box we are free to go to where the money is. Many money managers whether they run a mutual fund, hedge fund, are a proprietary trader, or even a retail investor box themselves into a corner by only looking at one or to asset classes and even than only looking at a segment of that.

For instance look at the Mutual Fund industry. Most funds have such a strict mandate that they can’t invest out of the United States and many even have limitations on the capitalization of the stocks they can buy. And then on top of all that most are not allowed to short or use derivatives. While doing all of this may help Morningstar put you in a style box we here at think that it limits yourself to potential opportunities and forces you to allocate your money to less than optimal risk to reward opportunities.

So in conclusion to us macro trading is being able to go anywhere in the world, trade any instrument, using any strategy. The objective of a global macro trader is to find the absolute best risk to reward situations on the globe.

Happy Trading,

The Macro Trader