Stay One Hit Ahead of the Flock With These Trading Strategies
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Trading strategies are a vital part of a trader’s journey and help ensure steady growth. If you have hit your stride and feel ready to learn more about different strategies that can help you identify new opportunities, then you have come to the right place. We will go through event-driven trading, fundamental analysis, and global macro strategies for trading sharpshooters that are ready to take their business to the next level.
Event-Driven Trading Strategy
The event-driven trading strategy is a trading style that focuses solely on market news and events. Anything news-related that can contribute to the development of a market, this strategy wants to exploit it. The event-driven strategy aims to seize any move of the market by acting upon the release of market-moving data.
The market inefficiencies are most visible by indicators such as news, events, and data. They will define where the market currently stands in terms of value and is this current stand adequate in relation to market expectations. For example, the announcement that the unemployment rate has risen from 7.5% to 10.5% indicates a slowing economy. It is not up to the expectations for growth, so it acts as a signal that the treasury yields will most likely depreciate. Therefore, a trader may use this data as a sell signal in the treasury yield. In other words, traders who employ an event-driven trading strategy will rely on economic news to make their decisions.
What Should you Trade with an Event-Driven Strategy?
A trader can apply an event-driven trading strategy on any liquid market such as currencies, equities, fixed income, and derivatives. Every asset class has its focus points that are closely monitored by event-driven traders. These may include mergers and acquisitions in corporate and business, earnings reports, restructuring, share buybacks, special events such as product reveals, and any other action that may impact the stock price. Negative turn of events such as revelations of a company’s fraudulent practices or misconduct are also catalysts that can influence the worth of a company.
On a larger scale, economic indicators that may impact the broad markets include unemployment rates, interest rate changes, quantitative easing, etc. They are a crucial measurement of the health of the overall global economy, or any local economy, and thus closely observed by traders and investors who employ the event-driven strategy. Other examples of macroeconomic indicators are elections, regulations, government changes, referendum results such as the Brexit decision, etc.
It’s also important to note that natural disasters and unforeseen events in politics, the economy, and the overall global environment also fall under the category of events that directly affect the markets.
The event-driven trading strategy requires a heavy dose of focus and concentration due to the large volumes of data and news to digest. While this strategy certainly presents trading opportunities that can lead to financial success, the challenges lay in closely following developments and interpreting data correctly, followed by prompt action at the right time.
The Fundamental Analysis Trading Strategy
Fundamental analysis represents the analysis of economic and financial data and its impact on a given asset. Fundamental analysis aims to measure how essential economic data, for example, non-farm payrolls, will affect a specific market.
Fundamental analysis can be applied to any market, from the broad global market to a single stock. In terms of impact, it varies respectively to the news or data related to the chosen asset. Let’s take the EURUSD pair, for example. Fundamental analysts assess everything that can affect the value of the pair. From the gradually changing global economic state and outlook to an impromptu speech by the Chairman of the Federal Reserve in which they might disclose new and unexpected information.
The analyst needs to assess every factor that can drive the price of the asset up or down. Fundamental analysis can be as broad as the macroeconomic environment to the way the management behaves during an earnings call with investors. The goal here would be to determine whether the current valuation of the stock represents its real or “fair market” value.
Investors who employ the fundamental analysis, such as Warren Buffett, seek to find stocks with market valuations below their book valuations. Is the company currently worth less than what people will be willing to pay in 5 to 10 years? In other words, if the company is underperforming by the current financial statements and has the potential to grow and appreciate over time, then it could be a worthy choice.
Fundamental analysis can go in the other direction, too. Short-sellers, traders, and investors who sell an asset and profit from its depreciation seek to find companies that are priced higher than their fair market value. It would mean that the market has priced a certain asset above its real value for whatever reason, and, according to fundamentals, the asset should drop in order to be valued at a fair market price.
Fundamental Analysis: Qualitative and Quantitative Analysis
You can divide fundamental analysis strategies into two broad categories. The first, qualitative analysis, will estimate the quality of a company or organization. It considers the business model, competitive advantages, management, or corporate governance.
Quantitative analysis, on the other hand, estimates the performance of a company or organization by the numbers. It takes into consideration financial data such as the balance sheet, cash flow statement, and the profit and loss statement.
There are also two different processes of fundamental analysis: top-down and bottom-up. The top-down approach investigates macroeconomic factors and indicators first and then digs into specific company details. The bottom-up approach is the reverse. The analyst evaluates the company first and then expands the analysis by including macroeconomic factors concerning the company.
Global Macro Trading Strategy
The global macro strategy aims to cover the development of the markets from the broadest perspective. This trading strategy is based on the inclusion of macroeconomic events from all over the world down to a regional scale. Macro traders work with sophisticated data coming in from various sources to analyze and forecast global trends for the long-term.
A global macro strategy is perhaps the most comprehensive and inclusive strategy in the market. Macro traders rely a great deal on diversifying their portfolio so that it will have exposure to a large number of markets to provide stability and growth while minimizing risk. Some macro traders, however, will look anywhere to find a few stocks or currencies that will deliver the return they need.
Trading Macro is to Trade Actively
It revolves around the idea of trying to figure out what the market will look like in a certain period, usually years ahead. It is a long-term approach to the market, and before taking a position, traders need to look at least a few months in the future to predict and project how the trend will form. This trading style requires almost constant connection and involvement with the markets as they are constantly moving, and there are always developments to follow.
Traders and investors who want to trade global macro need to focus on the four main asset classes: equities, currencies, fixed income, and commodities. Because these assets have their own nature, behavior, and style of trading, the global macro trader needs to be equipped with a diverse set of skills if they are to read the market correctly and make proper investment decisions. To do that, macro traders need to design a multi-asset class strategy that consists of portfolio construction, risk assessment, a well-defined business model, and a disciplined investment process.
Global macro trading takes into consideration both technical and fundamental analysis. The combination of both factors allows for a better understanding of the current state and projected growth of any market or asset. For example, macro traders pay close attention to interest rates, politics, currency rates, monetary policies, and economic development, and they try to figure out how all these factors will play out in the future. More precisely, macro traders believe that the present is already baked into the price, and they try to think ahead and visualize, say 18-24 months from now, where the world is going to be and the level of what assets or markets may trade.
Being a macro trader is a demanding and responsible task that requires the trader to develop a global perspective while remaining independent in their thinking. As global macro trader and hedge fund manager Ray Dalio says, “to make money in the markets, you have to think independently and be humble.”
The path to success is exciting, yet it poses its share of challenges to the trader, so understanding risk management is key. Your profitability depends largely on your market knowledge, level of discipline, and the strategies that you employ. Developing a strategy that works takes time and patience and requires you to evaluate your losses and adapt accordingly. Whether you choose to use fundamental analysis regularly, test global macro strategies, or try out event-driven trading strategies, the choice is yours. There is never a dull moment in the trading world and there’s always something to learn!
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