Trading: how to use Macroeconomic Data?

Macroeconomic data is the one that certifies the changes that occur within the economic system and on which many investors base their investment decisions and develop their trading ideas. In this period we see that macro data have become very relevant in terms of investment decisions, therefore it is essential to establish how we can use this data and contextualize it within the decision-making process that involves investing one’s own resources within the financial markets.

Obviously there is macro data with different weight within the economy, therefore the investor/trader must be able to assess the importance of data and its possible direct influence on market trends. This historical period is the moment of macro data and after years in which these data were not very influential we have returned to seeing how decisive their release can be in the short and in the long term.

What is a given macro

A macroeconomic data represents the trend of a given sector of the economy. For example, data related to the industrial production of a country, an economic area, the unemployment rate, the interest rate established by a central bank, the inflation rate, in short, data that must be put into within a "larger" analysis to compose a picture that will be fundamental for what we define precisely as "macro analysis".

Each macro data has its own weight, above all if related to the macroeconomic context in which the system is located. Let’s give an example right away with the current context where central banks are in the spotlight: central banks move interest rates based on inflation trends, therefore in this context inflation will be the given that we can define "market mover", i.e. the data that moves the market. However, we cannot stop at inflation alone since the latter moves on the basis of consumption and production, as well as the trend of the labor market. Basically we find a fundamental macro datum and consequently we find other data that move and could predict the trend of the most important macro datum.

As we can see, there are periods in which macro data does not have much weight and then there are periods, like the current one, in which macro data acts as a "market mover". The evaluation of macro data is therefore complex, especially if one does not have a macroeconomic preparation that allows contextualizing the data within a complete picture which includes, in addition to forecasts on the general trend of the economy, also a technical preparation. The macro data itself has no value if not contextualized within the entire economic-financial system.

Macro data in short-term trading

In short-term trading there is usually a very technical approach where the trader mainly focuses on short-term price movements in relation to the general trend of the market. So what good is macro data analysis to a short-term trader? First of all we must point out that the release of an important macro datum, a datum expected by the entire market, generates volatility at the time of its release as it influences investment decisions both in the short and long term.

In these conditions of increased volatility the trader usually has the concern to significantly reduce his risk or even exit the market and then re-enter it at a later time. Being in position within a trade during the exit of a given macro represents a huge risk for a trader, therefore it will be preferable to act by reducing the risk consistently. Usually a professional trader knows how to weigh macro data and moreover knows how to manage the risk related to such an event.

Macro data in long-term trading

Here we enter the field of multi-day trading, i.e. the type of trading that most closely resembles real investment. Here the approach tends to be more macroeconomic and at the same time technical. The multiday trader, in addition to having a technical difficulty in managing volatility during the release of the macro data, will have to understand whether that data will actually be influential or irrelevant. To understand this, the trader will have to try to understand the outcome of the macro data even before its release, what we could define as the "consensus".

The consensus is nothing more than the operators’ estimate on the outcome of the release of a datum, therefore if the data is in line with the consensus, the market will probably have already taken it into account, if instead the data deviates much from the consensus then we could probably see a market that will tend to change the nature of its movements over the longer term. In practice, the long-term trader’s job will be to anticipate the data so as to be able to better manage his operational strategy, usually based on both technical and macroeconomic parameters.

How to use macro data for operation

Obviously it depends on the type of operation. As we have seen, in short-term trading the approach is more technical, therefore the exit of a given macro increases volatility, a condition in which the trader must reduce his operational risk and this usually leads to a partial or total exit from the market. As far as the multiday trader is concerned, his job is to anticipate the outcome of data and, based on the final outcome, decide whether to hold his positions or liquidate them, also in this case totally or partially. As we can see, the release of macro data always involves a risk adjustment given that usually the outcome of a macro data, especially if it is important, involves a substantial change within the macroeconomic reading.

As we have noted, to evaluate the outcome of a piece of data and contextualize it within the performance of the economic system, one must have adequate preparation and paradoxically most amateur traders are absolutely not prepared for this type of event , i.e. the release of important data, precisely because it lacks macroeconomic training, therefore it will always see the release of macro data as a dangerous event and will sometimes see the market as "manipulated by strong hands", an expression that indicates the (untruthful) manipulation by large institutional operators.

Original article published on Money.it Italy 2022-12-13 08:57:00. Original title: Trading: come utilizzare i dati macro?