The Trader Skill Stack (part 1)
To the outside world, trading seems deceptively simple. Making money is reduced to two discrete actions: buying and selling. Anyone can place a trade, just like anyone can dribble a basketball. But being a consistently profitable trader is a different game altogether—just as dribbling doesn’t make you a basketball player. Playing basketball requires a stack of skills that include shooting, ball handling, defense, passing and court vision, among many others. Mastery in one doesn’t automatically translate to another. Each skill requires practice and experience, and deficiency in any one skill becomes a limiting factor.
Profitable trading is no different, as it requires a skill stack that must be honed with experience. Novice traders often enter the game with an edge in one or two components of the trading process. However, they lose money in the long run because they are deficient in other components, or are not even aware of the existence of a skill stack and therefore have made no effort to develop the other skills. Once traders understand the need to develop each piece of the skill stack, their performance improves drastically.
In this post I walk through the five main components of the discretionary global macro trader skill stack and why they are all critical to long-term trading success. I’ll suggest ways traders can develop each component, which can be as simple as following a handle of basic principles.
#1 - Fundamental analysis
Most global macro trades begin with a thesis—a differentiated view of where the world is heading and how markets will reflect that view. The biggest, most asymmetric returns come from identifying and riding seismic shifts in capital flows, often triggered by macroeconomic or geopolitical forces. These aren’t trades anyone can make just by following consensus narratives. They require anticipation—understanding how new narratives might form before the market fully prices them in. On any given year, there are only 3-5 major trends taking place in the major liquid markets, and a productive year requires a trader to participate in at least a couple of them.
Wouldn’t it be great if you could make money just by analyzing charts or relying on buy/sell signals from technical indicators? You could skip the hard work of tracking central banks and policymakers. There would be no need to have a view on inflation, growth, or interest rates. The seductive appeal of technical analysis is that it promises profitability without diving into the fundamentals.
After years of experimentation, I’ve found that relying on technicals alone produces inferior results. Charting helps with timing and risk management of trades, and a chart can tell a story of how a narrative has played out from start to finish. But the edge comes from the interaction between fundamentals and price action. Technicals are best used as triggers for entries and exits, not as a standalone edge.
I’ve seen only one trader succeed on technical analysis alone, and that would be Market Wizard Peter Brandt, who has been trading since 1975 and has an impressive record of outsized gains year after year. He uses classical charting techniques that draw on a limited set of patterns, mostly daily and weekly. However, even he professes that his edge comes not from charts and patterns, but from his aggressive risk management and disciplined execution. That level of patience and consistency is rare.
For those who are daunted by developing an edge in fundamental analysis, there is good news and bad news. The good news is that at any given time, there are no more than three things driving a market, and everything else is noise. All you need to do is understand what those drivers are and predict which direction they are going. Once you’ve downloaded the relevant information and built a coherent framework, staying current is just a matter of maintaining and updating that framework daily.
The bad news is that the drivers of a market change over time, and understanding how they change requires a deep understanding of both the market itself and its place in global macro. It also requires a mental map of how different markets are correlated with each other and how those correlations may change under different scenarios.
If you are early in your global macro journey, focus on building a balanced diet of research and analysis that comes from both institutional sources (banks and research houses that cater to institutional investors) and financial social media (reputable Twitter accounts, podcasts, and Substacks). Automate the flow of content to get pushed to your email inbox so that extra effort is not required to seek it out. Spend a few hours every day researching your market and updating your mental model of it. Put in the work and you’ll develop an edge over those who don’t.
#2 - Idea expression
One of the great advantages of global macro is flexibility: you can trade any asset class, any market, anywhere in the world. However, this freedom is a double-edged sword. With so many instruments to choose from, it’s easy to express a thesis in the wrong market—and still lose money despite having the right view.
When I was an FX flow trader at commercial banks, I quickly learned that every position had two sides. If I was bullish on the euro, the trade’s outcome sometimes depended less on the euro itself than on which currency I chose to short against it. A bullish EUR view might warrant being long EUR/JPY in a risk-on environment, or being long EUR/AUD in a risk-off one. The trade expression needed to match both the view and the broader regime.
Global macro traders have even more flexibility. A bullish view on the European economy could be expressed through long EUR/USD, long European equities, or short European bonds. Even within each of those asset classes are dozens of potential expressions. If it’s equities, which sectors or names? If it’s rates, which part of the curve? This is where domain knowledge of each asset class matters. Express your views in the asset class where you have the most experience. Being a tourist in unfamiliar markets is a fast way to lose money.
Nonetheless, there are benefits to being able to choose among multiple asset classes and markets to express a view. You’re more likely to bet on the fastest horse if you have more horses to choose from. If you want to develop your skills trading another asset class, do it with intention, knowing full well that whatever capital and time you deploy in the beginning will be paid as tuition.
There are a few key principles I employ when deciding on which market I want to express a trade in:
1. Favor trades that benefit from both first- and second-order effects.
Last August, after a weak US jobs report and a yen carry trade unwind, the market started to price in a more dovish Fed going into the September FOMC. Whether you profited depended on how you expressed that view. September SOFR futures rallied and held their gains after the surprise 50bp cut. Ten-year Treasury futures, on the other hand, rallied briefly but then sold off hard post-Fed. Same view, very different outcomes for different parts of the curve. Choosing the right part of the curve was the difference between a winner and a loser.
2. Understand regime-dependent expression.
Say you're bullish on U.S. growth and inflation. Should you go long equities or short bonds? It depends on what regime the market is in. During a stagflation regime, the market will not be rewarding the equity market when strong data comes out, whereas short bond positions would get rewarded handsomely. During a quad 4 regime where the market is concerned about weak growth, strong data would provide relief to the equity market.
3. Beware of conditionality.
If your trade profits only if several things go right, you may be too far removed from the core driver. For example, shorting equities on the expectation of a hot CPI print is actually a second-order trade. You're really betting the CPI will push bonds lower, which will in turn drag equities down. If the bond market shrugs, equities likely will too. When a trade’s payoff is conditional on another market’s reaction, you’re taking an indirect bet—with less certainty.
4. Watch for relative strength.
One thing I look out for when selecting among different markets for expressing a view is the relative performance of each one with respect to my thesis. For example, if I am a long-only crypto portfolio manager looking to outperform bitcoin, I might be on the lookout for alt coins that are already outperforming the rest of the market as that might be a sign of accumulation or a sign that it’s benefiting from some fundamental tailwinds or positive narratives. In equities trading, the concept of betting on the sectors and stocks that are outperforming is a well-known strategy. When I’m trading rates and I’m deciding which part of the curve to participate in, I often go with the part of the curve where the market is already rewarding traders betting on my view. Markets often telegraph where conviction is highest. Lean into that signal, but always check that it aligns with your fundamentals.
5. Seek asymmetry.
The ideal trade setup offers limited downside and large upside—and has a high probability of playing out. In March 2020, as China started locking cities down due to COVID, I positioned early for a Fed policy pivot. Buying June eurodollar (the precursor to SOFR futures) or April Fed funds futures—with the Fed still at 1.5%—was highly asymmetric. Rate hikes were off the table, while cuts to zero were likely. The risk/reward profile ranged from 15:1 to 75:1, depending on the contract. That’s what you want: a cheap option on a high-probability shift.
Timing
Those who have been following the paid version of my blog (where I send alerts of the trades I’m doing in real time and track my historical performance) have probably noticed that some of the trades I put on have impeccable timing. More often than not, I manage to buy local bottoms/sell local tops, or my trades spend very little time out underwater. While part of this skill comes from two decades of trading experience and thousands of reps, a big part of it also comes from a set of principles that any trader—regardless of experience—can start to apply.
Your grasp of fundamentals may help you develop a strong thesis, and your decision on which market to express the trade in may be correct. However, if your timing is off, then you might turn a great idea into a losing trade. Or worse, you may suffer psychological damage that leads you to cut the trade prematurely, miss the re-entry, or double down in frustration. The upside of superior timing is that it allows you to capture more profit with larger size and less risk.
The timing of entering and exiting trades is where reading charts and price action becomes useful. Once I’ve developed a view on a market, the next decision is under what conditions or at what price to put on the position. Usually my time horizon is to hold the trade for multiple weeks - if everything goes according to plan. I’ll start by scanning the daily chart for potential setups - support levels where I can buy (if going long) or resistance levels where I should buy a breakout. I’ll look for classical chart patterns that have the potential to complete - basic stuff like horizontal bases, double bottoms, head and shoulder bottoms, etc.
I then repeat the process on the 4-hour chart, and then zoom in further on a 30-min chart. The shorter the time frame, the more clarity I get on how the trade is setting up in the near term. This multi-timeframe approach allows me to align a long-term view with near-term market conditions and use tighter stops based on recent price structure.
I’ve learned over time that buying into an overbought market or selling into an oversold one increases the chances of getting whipsawed on a trade. RSI is my favorite technical indicator for judging how overbought or oversold a market is, and I check it on all time frames before entering a trade. If going long, I avoid buying when the 4 hour RSI is in overbought territory.
Beyond indicators, I also look for signs of exhaustion in price action itself. Examples can be a failed breakout that immediately reverses or a series of lower highs forming after a parabolic run.
Improving the timing on your trades comes from having a strong process and superior pattern recognition. Improving your pattern recognition takes years of experience, but improving your process can be immediate. Scan through your charts and RSI indicators on multiple time frames before acting, and you may find an improvement in results.
In part 2, I’ll cover the two other components of global macro discretionary trading - Structure and Sizing, and Managing Open Positions.
Love this piece, thanks!
Appreciate the sharing, Geo. Very useful!