When it comes to investing or trading I am sure you want to be on the winning side. However, the reality is that for there to be a winner there needs to be a loser on the other side. To increase your odds of winning you can leverage micro and macro perspectives. In this post, I’ll be sharing how you can use micro and macro perspectives to increase your odds of winning.
Image by Gerd Altmann from Pixabay
Disclaimer: None of what I’m talking about should be considered as financial advice. It is only for entertainment and educational purpose only.
What Is Macro and Micro?
First off let’s go over what exactly is macro and micro. Micro is zooming into a short-term time frame and thinking about how an event can impact a single or group of companies. Over time the event becomes less and less significant. Macro is taking a birds-eye view of what is going on in the world and trends that are happening or will happen. These are long-term and tend to impact an entire industry or more.
Using Macro and Micro in Investing
Investing can be sum up with buy and hold. You dollar cost average and hold forever (ideally). This strategy works fine for the majority of people who put their capital into an index fund. However, if you pick individual companies then simply buy and hold can cause you to get burnt.
So, when picking individual companies you want to avoid getting caught on the wrong side. You buy and hold until the tides turn then you get out. To be able to have an idea that the tides are turning you can make use of micro and macro views.
For example when the stock of a company tank from some news determine if it’s a short-term blip (micro) or long-term damage (macro) to the company. If it is short-term then it is a buying opportunity, while if it is long-term then the risk increases. It might be a sign to consider taking your capital and walk away unless you believe the company can turn things around.
Another example is to consider if there are new innovations that came out recently that can displace the companies that you own. If something out there is better, faster, and cheaper than the products or services a company you own provides then it is a sign there will be trouble ahead. You don’t want to wait until the company says they are in trouble before getting out. By looking at the macro view and understanding the impacts of new innovations out there you can get a sense if companies you own are in danger. It is important to note, this won’t happen overnight; the company can still be doing well in the short-term, but the long-term outlook is where the trouble is.
Using Macro and Micro in Trading
When it comes to trading you’ll use micro views much more than macro views. For example, bad news that doesn’t have a long-term impact on a company opens up a great entry for the stock. Once the price recovers from the effect of the news you can exit.
From a macro perspective, you can utilize trends that are starting to happen. For example, a certain sector or industry is starting to take off. In this case, any company involved in that space will have capital pouring into there. This hype is only temporary but creates some great opportunities for trading. It’ll be volatile with big moves up and down, which is great for trading.
To conclude, utilizing micro and macro views can increase your odds of being on the winning side, but that doesn’t mean other factors don’t apply. A company can be part of a new trend and have great news going for it, but if the fundamentals and valuation diverge too much from reality it will eventually come back to match the fundamentals. This is to say, it might seem like the fundamentals of a company don’t matter in the short term, but in the long-term it does.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success. I also have a post about beginner mistakes to avoid in the stock market.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.