The Macrodesiac Framework

I've written this so you understand EXACTLY how I trade and come up with trade ideas for Macrodesiacs.

I don't want you to be left behind.

But anyway, let's get into it.

Step One: Understand Risk Sentiment

In current markets, I shall not tell a fib, this is bloody difficult.

There is a reason why I have stayed away from equity indices.

I do not have a read on them, because they SHOULD be going down.

All data points that way, however central bank liquidity provisions and share buybacks are allowing people to sit on the bid of markets such as ES, NQ, F_DAX, and pretty much all other global indices of the top firms in each economy...

I want to highlight 'the top firms in each industry', because when you start looking at the mid-smaller listed businesses, they are not doing so well.

Just take a look at the Russell, FTSE 250 and MSCI World Index for proof.

But anyway, as Macrodesiacs, we take a view initially on risk.

That is, we look at the sentiment behind geopolitics, capital flows to/from risk assets and macroeconomic data.

You should be able to have a quick glance at these each day to establish whether we are deteriorating or improving, and over a month or so, we can get a full picture of global data.

Step Two: Look For Hysteria

This part is very much discretionary.

The example that I always like to use is the example of the Gilet Jaunes last year.

In August, everyone was focusing on Italy.

Without noticing that the French budget deficit was at 3.5% - .5% over the deficit spending limit.

We also had Macron acting as a EU superstatist, rather than a French leader.

As well as this, we had, and still have, an overinflated French financial sector with large systemic risks inherent in it.

So whilst the hysteria was over Italy, that had pretty much been priced in.

Think of journalists and economists as not being traders and simply spouting off about what they see right now - not having the ability to piece certain things together to create an actionable trade idea...

We have to be imagining here a bell curve...

And our ideas want to be sitting in the tails of the bell curve and eventually have our exit at somewhere near the middle of it.

Here's a perfect example of this.

Let's think of the market being 'priced in' a little differently.

Let's consider it as being where it's balanced, where people really don't know what is going on.

But the volume profile pretty much identifies how a bell curve works.

Extremes trend back to the mean.

When we traded down at 1.20, I recall many calling for 1.10 and even parity to the dollar.

We can consider this hysteria in this case.

The bell curve, however, would tell us something else.

It would tell us that actually, UK data was remaining firm whilst the world was experiencing some serious declines, not necessarily in the US, but globally.

UK data was actually (and still is) standing out as some of the best, but the Brexit hysteria was what was causing pessimism.

All notion of thought flew out of the window.

As I always say, look for where data doesn't match the narrative.

Step 3: Entering The Trade

Once you've identified the above two elements, look to the asset classes that complement your view in the best way possible.

I like to express my views mainly in FX - the reason being is that FX is the medium in which capital flows must move into in order for moves to make themselves apparent.

It's also highly liquid, and there is of course the leverage aspect.

So execution...

Start with an amount that is tiny.

We want to execute in ranges of 50-75 pips initially, whilst selling or buying into the extremes of the range we pick...

We can decide ranges based on charts, sure.

I tend to be pretty loose with the accuracy on initial entry...

I simply want to allow my position to be caressed into the right direction.

Remember, we are entering in the tails of the market, if we are wrong, we will know quickly if we're wrong and with minimal loss.

But if we are right, we will likely know quickly too...

And this is key.

Step four: Newsflow Determines How We Scale Into The Market

Let's pretend that we don't have computers in front of us to look at charts.

How would you trade then?

I mean, some may choose to start drawing candles based on the tape...

But that's bloody long.

Who can be arsed?

Are you going to sit there and continually watch the tape?

More plausible, perhaps.

That's what pit traders did, I guess.

But my thoughts are, we would be listening.

We'd be trying to glean as much information as possible.

We'd be observing.

Too little observing and constant thinking is done in my view.

We have to be asking constantly, 'how will this event affect my position? Will it allow me to add more or will I have to reduce my risk?'        

News flow is paramount for us, since we are excluding the noise from our views and looking at having our theses realised, days, weeks, months maybe even years later...

But remember, our interpretation of news flow must have the first three elements included in it, otherwise we just start trading outside of a framework.

Ensure you note increases in volatility and be aggressive when volatility picks up.

Conversely, be less aggressive when volatility is more subdued.

We are systematically discretionary here at Macrodesiac.

That's the best way to describe it...

I'm putting that on the website as the new tagline.

Step five: Getting Out Of The Trade

I said honestly the other day...

'When you're happy with the amount you've made, take 25-50% off and run a trailing stop, or have a series of stops that then get you out of the trade without impacting the potential upside.'

Profit targets are limiting.

Having a fixed price to take money at is a weird one for me.

I'd much rather get out on downside moves, because we all know the market retraces and finds new buyers or sellers along the way.

No one knows where the market will go, so base your profit taking on what is already known, rather than what you profess to know!

A good way to begin exiting a market is if volatility begins to flatten out - similar to how you should be aggressive when it's higher and you have good reasoning to be positioned in a specific direction.

I hope this has cleared up a couple of things for you if you were slightly confused.

At the end of the day, what we are doing is highly discretionary...

However, we can still work with it within a framework.